Indv. Income Tax s.1231 Question (Firepot & Hotchpot) Forum

[OklahomasOK]

I understand the mechanics of the firepot/ hotchpot applications but I don't understand a couple inherent policy/ design questions.

1. How could you have a gain in the firepot? Insurance settlement? I don't understand how you can have an act of god that results in a gain in the firepot.

2. What is the rationale behind not including firepot losses in the hotchpot? Is it to prevent potentially catastrophic losses from offsetting any main hotchpot gains? I can't figure out any better rationale.

Thanks.

[ilovesf]

I have Fed. Income final later this week and I don't even understand your question. Fuck my life.

[OklahomasOK]

No, you're not alone. It has taken me days and days to get a general grasp of what the hell is going on. Capital Asset treatment is easily the most difficult discrete topic in income tax. I simply have no idea why I took this course. The E&E has been pretty helpful at getting an overview and figuring out how to structure an essay exam answer.

What casebook are you using? I stumbled upon some textbook question answers to a recent edition to Freeland, Lathrope, Lind, and Stephen's Federal Income Taxation. Needless to say, they have been very helpful in figuring out how to work though problems.

[nealric]

I am a tax lawyer with two years of practice experience and an LLM, and I have no idea what a firepot or a hotchpot is. Sounds like one of those terms that only exists in certain law school classes.

[Riles246]

Same here - NYU tax LLM student with a few years in Big 4 tax and soon to be biglaw tax associate and I've never heard either of the terms (except that there is a tax blog called the "Hotchpot"). Your prof is making things unnecessarily difficult by using the terms "firepot" and "hotchpot". Definitely not used in practice.

[presh]

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[OklahomasOK]

Same here - NYU tax LLM student with a few years in Big 4 tax and soon to be biglaw tax associate and I've never heard either of the terms (except that there is a tax blog called the "Hotchpot"). Your prof is making things unnecessarily difficult by using the terms "firepot" and "hotchpot". Definitely not used in practice.

I am a tax lawyer with two years of practice experience and an LLM, and I have no idea what a firepot or a hotchpot is. Sounds like one of those terms that only exists in certain law school classes.

Great. I figured as much... It took me a couple hours to figure out my professor was saying "hotchpot" rather than Hodgepodge.

[lawyerdown27]

I am a tax lawyer with two years of practice experience and an LLM, and I have no idea what a firepot or a hotchpot is. Sounds like one of those terms that only exists in certain law school classes.

Same here - NYU tax LLM student with a few years in Big 4 tax and soon to be biglaw tax associate and I've never heard either of the terms (except that there is a tax blog called the "Hotchpot"). Your prof is making things unnecessarily difficult by using the terms "firepot" and "hotchpot". Definitely not used in practice.

I LOL'd. My tax prof swore everybody called 1231 "hotchpot" and "firepot."

[3|ink]

My professor has never referred to 1231 as hotchpot or firepot. But based on your wording and the context of 1231 it seems that hotchpot = ordinary income and firepot = capital income.

So are you asking why quasi-capital assets receive such favorable treatment? If so, I'd say its just a business-friendly accommodation.

I think that one of the reasons 1221 prohibits depreciable property from capital gains treatment was the fear of converting ordinary income into capital gains by 1) using an accelerated depreciation method, and 2) selling the asset when tax depreciation > economic depreciation. But the recapture provision of 1231 prevents taxpayers from exploiting this.

[kingofdara]

Is it the thing where sometimes you have capital gains greater than losses, and other times losses greater than gains, like basketing and netting rules? Because my professor said we didn't need to worry about firepots and hotchpots but then used the word when we did a problem. That's what I need to review today before my exam tomorrow.

[lawyerdown27]

Is it the thing where sometimes you have capital gains greater than losses, and other times losses greater than gains, like basketing and netting rules? Because my professor said we didn't need to worry about firepots and hotchpots but then used the word when we did a problem. That's what I need to review today before my exam tomorrow.

This is my understanding of it:

"Firepot" refers to the basket where you net gains and losses in the taxable year of certain involuntary conversions of 1231 property. If losses exceed gains there, those gains and losses don't go into the "Hotchpot." If losses don't exceed gains there, those gains and losses both go into the "Hotchpot."

"Hotchpot" refers to the basket where you net all gains and losses on 1231 property in the taxable year. If 1231 gains exceed 1231 losses, then those gains and losses are treated as capital gains. If 1231 gains don't exceed 1231 losses, then those gains and losses are treated as ordinary losses.

Caveat: 2L that's only taken Basic Tax, so grain of salt and all that.

[OklahomasOK]

I figured it out, but way overstudied this crap for my exam.