ITT: Federal Income Tax Forum

[brotherdarkness]

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[echooo23]

If anyone is looking for something to help see the "big picture" of the material, I highly recommend this:

http://www.amazon.com/Birds-Eye-Taxatio ... 0314275967

My school library has the 2005 version available. Should I Amazon the most recent one anyway?

[brotherdarkness]

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[Tiago Splitter]

Aww shit casualty floor is 20%? Did not know.

[brotherdarkness]

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[SuperCerealBrah]

If anyone is looking for something to help see the "big picture" of the material, I highly recommend this:

http://www.amazon.com/Birds-Eye-Taxatio ... 0314275967

My school library has the 2005 version available. Should I Amazon the most recent one anyway?

Not sure how accurate the 2005 one is. I was able to get the 2011 one on Amazon for a couple bucks, so it was worthwhile.

Even the difference between 2012 and 2013 can be pretty significant. 2005 as far as tax is concerned is ancient. Shit changes really fast and often.

Edit: Although basic concepts are pretty consistent at least.

[thelawyerguy]

Does anyone know where to find multiple choice problems for tax? Thanks.

[brotherdarkness]

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[Hutz_and_Goodman]

I commission a statue of my dog for $25,000. I do this because I love her. A year later she is cast in a tv show, and becomes a huge star. The FMV of the statue is now $15,000 (when I paid $25k it was worth $5,000 to another person, now it has increased due to her fame). I sell it to a buyer for $15,000.

Question: Can I take a loss of $10,000 on this transaction under 26 USC 1001 (basis of $25k - realization of $15k)? Or is this not allowed because I didn't purchase the statue for a business purpose.

Thanks in advance to whoever can answer this hypo (I'm trying to learn fed tax)

[Tiago Splitter]

I commission a statue of my dog for $25,000. I do this because I love her. A year later she is cast in a tv show, and becomes a huge star. The FMV of the statue is now $15,000 (when I paid $25k it was worth $5,000 to another person, now it has increased due to her fame). I sell it to a buyer for $15,000.

Question: Can I take a loss of $10,000 on this transaction under 26 USC 1001 (basis of $25k - realization of $15k)? Or is this not allowed because I didn't purchase the statue for a business purpose.

Thanks in advance to whoever can answer this hypo (I'm trying to learn fed tax)

Sounds like a personal loss, which can only be taken for casualty losses under 165(c)(3). In order to get the deduction under the circumstances described you'd need to have entered into the transaction for profit 165(c)(2), which it doesn't seem like was the case.

[schweitziro]

Taking this P/F - still concerned that I am fucked. Have done 5% of the reading. Have requested a week off of work to cram for it.

[Hutz_and_Goodman]

Thanks Tiago.

Another question open to everyone:

under 26 U.S.C. 1041 in a transfer between spouses or incident to divorce, the recipient gets the basis of the other party. So A and B are married. A writes a poem, and the copyright is worth $15,000. They divorce and A gives the poem to B as a part of the agreement. What is B's basis in the poem? Is it fair market value at the time of transfer? Is it $0?

Basically: what is the transferred basis in a self-created work?

[brotherdarkness]

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[NonTradHealthLaw]

Thanks Tiago.

Another question open to everyone:

under 26 U.S.C. 1041 in a transfer between spouses or incident to divorce, the recipient gets the basis of the other party. So A and B are married. A writes a poem, and the copyright is worth $15,000. They divorce and A gives the poem to B as a part of the agreement. What is B's basis in the poem? Is it fair market value at the time of transfer? Is it $0?

Basically: what is the transferred basis in a self-created work?

Had a nearly identical question on a worksheet last week. Basis in created work is the expenses used to procure that item, i.e. filing fees, legal costs, etc. Beyond that, it's considered the equivalent of inventory, which has no basis. This is common law, however, not statutory per my instructor.

[Hutz_and_Goodman]

If a taxpayer travels for a temporary work assignment (i.e., the taxpayer reasonably believes that the assignment will last for < 1 year), the taxpayer may deduct the the cost of the travel, meals (subject to the 50% limitation), lodging, etc. I think this is §162. What if the taxpayer brings his/her spouse and/or dependent child along with? Are their expenses also deductible by the taxpayer who is traveling on business?

No they aren't. See §274(m)(3). If the TP rents a 2-bedroom because wife and kids are with him instead of a 1-bedroom, he can deduct rent for a one bedroom and not a 2 bedroom. Their meals are not deductible unless they serve a business purpose (ex. wife accompanies TP to dinner with client and his wife, the entire meal is for business purposes).

[Hutz_and_Goodman]

Thanks Tiago.

Another question open to everyone:

under 26 U.S.C. 1041 in a transfer between spouses or incident to divorce, the recipient gets the basis of the other party. So A and B are married. A writes a poem, and the copyright is worth $15,000. They divorce and A gives the poem to B as a part of the agreement. What is B's basis in the poem? Is it fair market value at the time of transfer? Is it $0?

Basically: what is the transferred basis in a self-created work?

Had a nearly identical question on a worksheet last week. Basis in created work is the expenses used to procure that item, i.e. filing fees, legal costs, etc. Beyond that, it's considered the equivalent of inventory, which has no basis. This is common law, however, not statutory per my instructor.

Thanks. Another question I have is as follows:

A owes a debt of $100,000 to B
A offers to give B a painting with a FMV of $90,000 for the debt, and B accepts the painting
In general the discharge of indebtedness is income under 26 USC 108
In this case it's not clear what has happened
So do you just argue both ways: 1. A has taxable income of $10,000 under 26 USC 108 2. A has no income because B has accepted the painting in exchange for the full face value of the debt (because he really likes it)?

[Tiago Splitter]

A owes a debt of $100,000 to B
A offers to give B a painting with a FMV of $90,000 for the debt, and B accepts the painting
In general the discharge of indebtedness is income under 26 USC 108
In this case it's not clear what has happened
So do you just argue both ways: 1. A has taxable income of $10,000 under 26 USC 108 2. A has no income because B has accepted the painting in exchange for the full face value of the debt (because he really likes it)?

It's 10k of income. There are two possible exceptions:

1) Purchase money debt under 108(e)(5). Here A would have sold B something on credit and simply lowered the price afterward. This is not discharge of indebtedness.

2) Contested liability. If the borrower and lender disagree on the amount owed and the lender accepts less than what seemed to be the full amount the difference won't be considered income. The case we read for this principle is called Zarin.

B could also avoid liability if he is insolvent, but that seems unlikely given these facts.

[Hutz_and_Goodman]

A owes a debt of $100,000 to B
A offers to give B a painting with a FMV of $90,000 for the debt, and B accepts the painting
In general the discharge of indebtedness is income under 26 USC 108
In this case it's not clear what has happened
So do you just argue both ways: 1. A has taxable income of $10,000 under 26 USC 108 2. A has no income because B has accepted the painting in exchange for the full face value of the debt (because he really likes it)?

It's 10k of income. There are two possible exceptions:

1) Purchase money debt under 108(e)(5). Here A would have sold B something on credit and simply lowered the price afterward. This is not discharge of indebtedness.

2) Contested liability. If the borrower and lender disagree on the amount owed and the lender accepts less than what seemed to be the full amount the difference won't be considered income. The case we read for this principle is called Zarin.

B could also avoid liability if he is insolvent, but that seems unlikely given these facts.

We read Zarin too, but I think this isn't a contested liability because there is no dispute about the amount that's owed or whether A is liable for the debt. What I'm thinking is if the FMV of an item is $90,000 but B values the item in good faith at $100,000, then A could argue that he has no income on the transaction. But I don't know whether that could work. Imagine a more extreme example: the same scenario as above, except B is an art collector and the painting in question is the only one by a particular artist that he doesn't own. In that case, it seems crazy that A would have income because probably the value to B exceeds $100k.

[Tiago Splitter]

1.61-2(d)(1) says property is always valued at FMV. I guess you could argue that the FMV is 100k since someone would pay 100k, but if the facts on the question say the FMV is just 90k then it's 10k of income unless an exception applies.

[Hutz_and_Goodman]

Thanks a lot Tiago

Here's another question:

A is a novelist who writes political thrillers. His recent book sold very well, and the value of the rights to that work are $110,000.
This year A attempted to run for Congress. He hired a political consultant and paid him $80,000. A's run was unsuccessful and he lost the race.
In general non-profit activities are not deductible as specified in 26 U.S.C. 183.
However, A attempts to take a deduction under 26 U.S.C. 212 for the $80,000 paid to the consultant on the grounds that this is an ordinary and necessary business expense for the production of income, because it raised his profile within the political arena, and many of his readers also follow politics.
He hasn't written any additional books this year, but is working on a new political thriller for next year.

What result? (i.e. will IRS allow the deduction under 212)

[brotherdarkness]

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[echooo23]

Cannot for the life of me understand discharge of indebtedness, and the entire Diedrich/Crane/Tufts line of cases. Please help. Is this correct?

1. Discharge of indebtedness is gross income - §61(a)(12)
2. Discharge of tax liability (such as a gift tax) when property is transferred to another is gross income - Diedrich
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?!?!?!?!

[Tiago Splitter]

1. Discharge of indebtedness is gross income - §61(a)(12)

Correct

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.

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

[brotherdarkness]

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[echooo23]

1. Discharge of indebtedness is gross income - §61(a)(12)

Correct

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.

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

Thank you! Ugh, tax, how I hate thee.