taxation of individual income - gbv · taxation of individual income ninth edition ... chapter 1...

TAXATION OFINDIVIDUALINCOME

Ninth Edition

J. Martin BurkeProfessor of LawUniversity of MontanaSchool of Law

Michael K. FrielProfessor of Law and DirectorGraduate Tax ProgramUniversity of FloridaCollege of Law

LexisNexis*

TABLE OF CONTENTSChapter 1 INTRODUCTION TO FEDERAL INCOME TAXATION . . 1

I. PROBLEM . 1

II. VOCABULARY 2

III. OBJECTIVES 3

IV. OVERVIEW 4

A. A Brief History of Federal Income Tax 4

B. The Tax Practice 5

C. Resolution of Tax Issues Through the Judicial Process 6

1. Trial Courts 6

a. The Tax Court 6

b. Federal District Courts 7

c. The United States Court of Federal Claims 7

2. Appeals 7

3. Selection of Forum 8V. ANALYSIS OF THE COMPUTATION OF TAX LIABILITY OF TOM

AND CAROLINE TAXPAYER 8A. Basic Questions Addressed by an Income Tax System 8

B. Evaluating the Taxpayers' Tax Liability 81. Gross Income : 9

2. Adjusted Gross Income 113. Deductions 124. Calculating Adjusted Gross Income 15

5. Taxable Income 166. Tax Rates •:•••. 1 7

Chapter 2 GROSS INCOME: CONCEPTS AND LIMITATIONS . . . 21

I. PROBLEMS 21II. VOCABULARY '. ; '. - 22III. OBJECTIVES 22IV. OVERVIEW 24

A. The Search for a Definition of Income 24B. Income Realized in Any Form 26

C. Realization, Imputed Income and Bargain Purchases 27Commissioner v. Glenshaw Glass Co 33Cesarini v. United States 35Old Colony Trust Company v. Commissioner 38REVENUE RULING 79-24 40

McCann v. United States 41

ix

TABLE OF CONTENTSPellar v. Commissioner 44

AUTHORS' NOTE . 47

Roco v. Commissioner 47

Chapter 3 THE EFFECT OF AN OBLIGATION TO REPAY 51

I. PROBLEMS . •....'.-' 51

II. VOCABULARY 53

III. OBJECTIVES . ; , 53

IV. OVERVIEW , 54

A. Loans ; 54

B. Claim of Right , 55

C. Illegal Income 57

D. Deposits 58

North American Oil Consolidated v. Burnet 61

James v. United States '. .': : 62

Commissioner v. Indianapolis Power & Light Company 66

Chapter 4 GAINS DERIVED FROM DEALINGS IN PROPERTY . . 73

L PROBLEMS : 73II. VOCABULARY 75

III. OBJECTIVES 75IV. OVERVIEW 76

A. Tax Cost Basis 79

B. Impact of Liabilities 801. Impact on Basis 80

2. Impact on Amount Realized .' 81C. Basis of Property Acquired in Taxable Exchange 82

Philadelphia Park Amusement Co. v. United States 84

Chapter 5 GIFTS, BEQUESTS AND INHERITANCE 87

I. PROBLEMS •;...: 87II. VOCABULARY 88III. OBJECTIVES 89IV. OVERVIEW 90

A. What Is Excluded by § 102? : 901. The Nature of a Gift • 902. The Nature of a Bequest or Inheritance > 913. Statutory Limitations on the Exclusion — § 102(b) 92

B. Basis of Property Received by Gift, Bequest or Inheritance 941. Gifts of Appreciated Property . . . . . . . ' 94

x

TABLE OF CONTENTS2. Gifts of Property — Basis in Excess of Fair Market Value . 95

3. Basis of Property Received by Bequest or Inheritance . . . ' - . 96

C. Part-Gift, Part-Sale 98

Commissioner v. Duberstein 99

Wolder v. Commissioner 103

Oik v. United States . 104

Goodwin v. United States 107

Chapter 6 SALE OF A PRINCIPAL RESIDENCE I l l

I. PROBLEMS I l l

II. VOCABULARY 112

III. OBJECTIVES 112

IV. OVERVIEW 114

A. Ownership and Use Requirements of Section 121 114

B. Amounts Excludable Under Section 121 118

C. Principal Residence '. " 122

Guinan v. United States 124

Chapter 7 SCHOLARSHIPS AND PRIZES . . . . 127

I. PROBLEMS 127

II. VOCABULARY 128

III. OBJECTIVES 128

IV. OVERVIEW 129

A. Prizes and Awards . '.' 129

B. Qualified Scholarships .;'. .. 130

McCoy v. Commissioner 132

Binglery. Johnson 134

Chapter 8 LIFE INSURANCE AND ANNUITIES 141Part A: Life Insurance 141

I. PROBLEMS : ; 141II. VOCABULARY .....: ; 142III. OBJECTIVES •. 142IV. OVERVIEW 143

Part B: Annuities 148I. PROBLEMS : 148II. VOCABULARY 148III. OBJECTIVES 148IV. OVERVIEW : 150Part C: Individual Retirement Accounts 153

xi

TABLE OF CONTENTSI. PROBLEMS 153

II. VOCABULARY 153

III. OBJECTIVES 154

IV. OVERVIEW 155

Chapter 9 DISCHARGE OF INDEBTEDNESS 159

I. PROBLEMS 159II. VOCABULARY . . ^ 161

III. OBJECTIVES ~ 161IV. OVERVIEW 163

A. Specific Rules Governing Exclusion 1641. Discharge of Indebtedness When Taxpayer Is Insolvent 1642. Disputed or Contested Debts 1683. Purchase-Money Debt Reduction for Solvent Debtors 169

4. Acquisition of Indebtedness by Person Related to Debtor 1705. Discharge of Deductible Debt 1706. Discharge of Certain Student Loans 170

7. Discharge of Qualified Principal Residence Indebtedness 1718. Other Exclusion Provisions 172

B. Discharge of Indebtedness as Gift, Compensation, Etc 172United States v. Kirby Lumber Co 173

Revenue Ruling 84-176 174Gehl v. Commissioner 176

Chapter 10 COMPENSATION FOR PERSONAL INJURY ANDSICKNESS 179

I. PROBLEMS 179II. VOCABULARY 181III. OBJECTIVES 181IV. OVERVIEW 182

A. Damages 182

1. Business or Property Damages 1822. Damages Received on Account of Personal Physical Injuries or

Sickness 183

3. Supreme Court Limitations on the Pre-1996 Version of§ 104(a)(2) 185

4. The 1996 Amendments to § 104 1865. Punitive Damages 1886. Allocation of Awards 188

7. Periodic Payments 190

B. Accident and Health Insurance 190

xii

TABLE OF CONTENTSC. Previously Deducted Medical Expenses . 191

D. Workers' Compensation 192

E. Certain Disability Pensions 192

Commissioner v. Schleier 192

Chapter 11 FRINGE BENEFITS 197

I. PROBLEMS : 197II. VOCABULARY 199III. OBJECTIVES 200IV. OVERVIEW 201

A. Meals and Lodging 202B. Fringe Benefits and Section 132 204

1. No-Additional-Cost Service 205

2. Qualified Employee Discount ; • . . . . 208

3. Working Condition Fringe Benefits 2104. De Minimis Fringe Benefits . ; 2115. Qualified Transportation Fringe Benefits • 211

C. Valuation . 211Benaglia v. Commissioner . . . . ; . . . 212United States v. Gotcher : 214Statement by DonaldC. Lubick, Assistant Secretary of Treasury forTax Policy to House Ways and Means Committee Task Force on

Fringe Benefits 217Staff of the Joint Committee on Internal Revenue Taxation,Examination of President Nixon's Tax Returns for 1969-72 219

NOTE ON MISCELLANEOUS EXCLUSIONS . . . . . 223

Chapter 12 BUSINESS AND PROFIT SEEKING EXPENSES 229

I. PROBLEMS '.'.' 229II. VOCABULARY 231

III. OBJECTIVES 231IV. OVERVIEW : :. 232

A. Business Deductions —Section 162 2321. The Expense Must Be "Ordinary and Necessary" . ' . : . . . . 233

a. Is the Expense "Ordinary"? 233b. Is the Expense "Necessary"? 239

2. "Carrying On a Trade or Business" 247

a. What Constitutes a "Trade or a Business"? 247b. The "Carrying On" Requirement 248c. Section 195 and the Amortization of Certain Pre-Operational or

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TABLE OF CONTENTSStar t-Up Costs 249

d. Applicat ion of the "Carrying O n " Requirement to Employees . . . . 250

B . Section 212 Deduct ions ' 253Welch v. Helvering 254

Higgins v. Commissioner 256Commissioner v. Groetzinger 257

Revenue Ruling 75-120 ' . . . . ' 260Pevsner v. Commissioner 261

Chapter 13 CAPITAL EXPENDITURES 265

I. PROBLEMS 265II. VOCABULARY 266

III. OBJECTIVES : 267IV. OVERVIEW 268

A. Deductible Expense or Capital Expenditure? 268B. Defining Capital Expenditure — INDOPCO . . . 269C. Selected Categories of Capital Expenditures 272

1. Cost of Acquisition and Costs Incurred in Perfecting and DefendingTitle 272

2. Repair or Improvement 274a. Historic Rules ; 274

b. Proposed Regulations: Improvements and Repairs 275

' 3. Intangible Assets 2784. Expansion Costs ...' 2815. Advertising Expenses . . .'.<. . •. 282

D. Purchase or Lease 283

Commissioner v . Idaho P o w e r Co: . . . . . / : . . . . . . . . . . ' 2 8 3Midland Empire Packing Company v. Commissioner 288Mt. Morris Drive-ih.Theatre Co. v. Commissioner . 291Revenue Ruling 2001-4 "...'.'. ". . . ."". .". 294

Chapter 14 DEPRECIATION 299

I. PROBLEMS 299II. VOCABULARY 300

III. . OBJECTIVES 301IV. OVERVIEW . .• . 302

A. Depreciation , 3021. Depreciable Property 3032. Recovery Period — The Useful Life Concept . 305

3. Depreciation Methods . .; 3074. Conventions 308

xiv

TABLE OF CONTENTSB. Computing the Depreciation Deduction 309

C. Amortization of Intangibles — Section 197 312

D. Relationship Between Basis and Depreciation 313

E. Section 179 — Expensing Tangible Personal Property 313F. The Relationship of Debt to Depreciation 315G. Conclusion 316

Revenue Ruling 68-232 316AUTHORS' NOTE . . . : . '. . 316

Simon v. Commissioner ....'. ' 316

Liddle v. Commissioner : 325Revenue Procedure 87-56 (Excerpt) 328Revenue Procedure 87-57 (Excerpt) 333

Chapter 15 LOSSES AND BAD DEBTS 341

I. PROBLEMS 341

II. VOCABULARY 343HI. OBJECTIVES , 343IV. OVERVIEW .-. 345

A. Losses : . . . . 3451. The Business or Profit Requirement for Individuals 3452. When is aLoss Sustained? - i - 3493. Amount of the Deduction : : 349

4. Disallowed Losses ' 350B. Bad Debts • 350

1. Bona Fide Debt Requirement 350

2. Worthlessness '.': 3503. Business or Nonbusiness Debts . . 3514. Amount Deductible 353

5. Guarantees 353C. Bad Debts and Losses: The Interplay Between §§ 166 and 165 353

Cowles v. Commissioner , 354

Revenue Ruling 2009-9 355AUTHORS' NOTE 359United States v. Generes 359

Chapter 16 TRAVEL EXPENSES _.; 365

I. PROBLEMS 365II. VOCABULARY •..:.-. 367III. OBJECTIVES 367

IV. OVERVIEW 368A. Commuting . . 368

xv

TABLE OF CONTENTSB. Other Transportation Expenses 372

C. Expenses for Meals and Lodging While in Travel Status 373

D. "Away from Home" 374E. Travel Expenses of Spouse 378

F. Reimbursed Employee Expenses 378G. Business-Related Meals 379H. Relationship to Section 212 379

I. Substantiation Requirements 380United States v. Correll . .-. 380

AUTHORS' NOTE 383Revenue Ruling 99-7 384Henderson v. Commissioner 388

Chapter 17 ENTERTAINMENT AND BUSINESS MEALS 393


A. Business or Pleasure? 395B. Entertainment Activities 397C. Entertainment Facilities 399D. Substantiation Requirements 401

E. Exceptions 402

F. Business Meals 402Walliserv. Commissioner 404Moss v. Commissioner 408Churchill Downs, Inc. v. Commissioner 411

Chapter 18 EDUCATION EXPENSES 417

I. PROBLEMS 417II. VOCABULARY '. 418III. OBJECTIVES 418IV. OVERVIEW 420

A. Deductibility of Educational Expenses Under Section 162 420

B. The Skill-Maintenance or Employer-Requirement Tests of Regulation

§ 1.162-5(a) 421C. The Minimum-Educational-Requirements and New-Trade-or-Business

Tests of Regulation § 1.162-5(b) 423D. Travel Expenses 426

Takahashi v. Commissioner 426Wassenaar v. Commissioner 429

xvi

TABLE OF CONTENTSFurnerv. Commissioner 433

Revenue Ruling 68-591 436

Sharon v. Commissioner 436

NOTE: EDUCATION TAX INCENTIVES 444

Chapter 19 MOVING EXPENSES, CHILD CARE, LEGALEXPENSES ; 449

Part A: Moving Expenses 449

I. PROBLEMS \. :.'.'. 449II. VOCABULARY 449III. OBJECTIVES 450IV. OVERVIEW 451Part B: Child Care Expenses 454I. PROBLEM 454II. VOCABULARY 454

III. OBJECTIVES 454IV. OVERVIEW 455Part C: Legal Expenses 457

I. PROBLEM 457II. VOCABULARY .' 457III. OBJECTIVES 457IV. OVERVIEW ' 458

Chapter 20 HOBBY LOSSES 461

I. PROBLEMS 461II. VOCABULARY 462III. OBJECTIVES '. 462IV. OVERVIEW 463

A. Historical Development 463

B. Section 183 Activities 464C. Deductions Allowable Under Section 183 466

Dreicerv. Commissioner 467

Remuzzi v. Commissioner 470

Chapter 21 HOME OFFICES, VACATION HOMES AND OTHER DUALUSE PROPERTY 479

I. PROBLEMS 479II. VOCABULARY 481III. OBJECTIVES 481

IV. OVERVIEW 482A. Home Office Deductions 482

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TABLE OF CONTENTS

B. Vacation Home Deductions 488

C. Other Dual Use Property 489

1. Computers and Other "Listed Property" 489

2. Passenger Automobiles 490

Popov v. Commissioner 493

Chapter 22 THE INTEREST DEDUCTION 497

I. PROBLEMS ,. . . ._.. 497

II. VOCABULARY 498

III. OBJECTIVES 499

IV. OVERVIEW 500

A. What is Interest? 500

B. Deduction of Personal Interest 501

C. Investment Interest 504

D. Timing Issues and Limitations 506

1. Section 461(g) 506

2. Section 263A 507

3. Payment Issues 507

Davison v. Commissioner 508

Chapter 23 THE DEDUCTION FOR TAXES 515

I. PROBLEMS 515II. VOCABULARY . . . • 516


A. Historical Background 517B. Taxes Deductible Under Section 164 517C. Who May Claim the Deduction? 518

D. Special Problems Associated With the Deduction of Real PropertyTaxes and Assessments ; 519

1. . Are Real Property Assessments "Taxes" Under Section 164? 5192. Apportionment of Real Property Taxes Between Buyer and Seller . . 520

PRESIDENT REAGAN'S "TAX PROPOSALS TO THECONGRESS FOR FAIRNESS, GROWTH AND

SIMPLICITY" : 521AUTHORS' NOTE 525

Chapter 24 CASUALTY LOSSES 527

I. PROBLEMS , 527II. VOCABULARY 529

xviii

TABLE OF CONTENTSIII. OBJECTIVES ; ' : 529

IV. OVERVIEW . ' . . . ' -..'.'.., 530

A. Definitional Questions 530

B. Timing of the Loss 533

C. Amount of the Loss 533

D. Insurance Coverage , • • • • ' ^34

Revenue Ruling 72-592 . . 534

Popa v. Commissioner ...... ... . .,. , 535

Chamales v. Commissioner , .,, 539

Chapter 25 MEDICAL EXPENSES 547

I. PROBLEM 547

II. VOCABULARY . . 548

IE. OBJECTIVES 548

IV. OVERVIEW 549

Montgomery v. Commissioner 553

Revenue Ruling 78-266 . . 556

Chapter 26 CHARITABLE DEDUCTIONS 559

I. PROBLEMS 559

II. VOCABULARY 561

III. OBJECTIVES : 561

IV. OVERVIEW 562

A. In General . . . . ' . ' . . . . 562

B. Requirements for Charitable Deductions 562

1. Who is a Qualified Recipient? . . : . . . 563

2. What is a "Contribution" or "Gift"? : 564

3. Actual Payment Required . . : . . . . 566

4. Limitation on Charitable Deductions 567

C. Contribution of Services '. 567

D. Contribution of Appreciated Property 568

E. Contributions of Partial Interests in Property 571

F. Bargain Sale to Charity 573

G. Substantiation ....:.'. 573

Davis v. United States ••. 575

Revenue Ruling 67-246 , '. 583

Revenue Procedure 90-12 . . 585

Revenue Ruling 2003-28 • i . . .' 587

Sklar v. Commissioner : ; 590

AUTHORS' NOTE : 594

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TABLE OF CONTENTSChapter 27 LIMITATIONS ON DEDUCTIONS 595

Part A: Section 267 — Transactions Between Related Parties 595

I. PROBLEMS 595

II. VOCABULARY 596

III. OBJECTIVES 596

IV. OVERVIEW '. 597A. The Section 267(a)(l) Loss Rule 597B. The Section 267(a)(2) Matching Requirement 599

McWilliams v. Commissioner ." 600Miller v. Commissioner 604

PartB: Section 265 — Expenses Related to Tax-Exempt Income . . . 608I. PROBLEMS 608II. VOCABULARY 608


A. Section 265(a)(l) 610B. Section 265(a)(2) 611

C. Allocation ' 612Revenue Procedure 72-18 613

Part C: . Section 1091 — Wash Sales 617I. PROBLEM 617II. VOCABULARY 617

III. OBJECTIVES 617IV. OVERVIEW 618Part D: Judicial Limitations on Interest Deductions 620

Chapter 28 CASH METHOD ACCOUNTING 623


A. Income Under the Cash Method 6261. In General 6262. Constructive Receipt 626

a. Specific Factors Affecting Application of Constructive ReceiptDoctrine 627

b. . . . Specific Exceptions to Constructive Receipt Rules 6303. Cash Equivalency Doctrine * 631

4. The Economic Benefit Doctrine 6345. Deferred Compensation 635

a. . Non-qualified Deferred Compensation Arrangements 635

xx

TABLE OF CONTENTSb. Property Transfer Under Section 83 637

c. Section 409A and Revenue Ruling 60-31 638

6. Lottery Prizes 640

7. Prepayments 640

B. Deductions Under the Cash Method 641

1. In General 641

2. Cash Method Prepayments 643


Ames v. Commissioner 650

Cowden v. Commissioner 653

AUTHORS' NOTE 656


AUTHORS' NOTE 658

Chapter 29 ACCRUAL METHOD ACCOUNTING 659


IV. OVERVIEW 663

A. The All Events Test 663

B. Accrual of Income ." 664

1. General Rules 664

2. Income Prior to Receipt: Accrual Issues . 665

3. Receipt Prior to Earning: Prepayments and the "Earliest o f Test . . . 667

C. Deductions Under the Accrual Method 670

1. General Rules 670

, 2. Premature Accruals 672

i 3. The Economic Performance Test — § 461(h) 674

4. Capitalization 675

I 5. Contested Liabilities 675

i D. Choice of Accounting Methods 676

Schlude v. Commissioner 678

Revenue Procedure 2004-34 681

United States v. General Dynamics 685


xxi

TABLE OF CONTENTSNOTE ON ACCRUAL METHOD ACCOUNTING 693

Chapter 30 ANNUAL ACCOUNTING ; 703

I. PROBLEMS 703

II. VOCABULARY , 704

III. OBJECTIVES 704

IV. OVERVIEW '. 705

A. Restoring Amounts Received Under Claim of Right 705

B. The Tax Benefit Rule 708

C. Net Operating Losses 711

Burnet v. Sanford & Brooks Company 712

Alice Phelan Sullivan Corporation v. United States 715

Hillsboro National Bank v. Commissioner 717

Chapter 31 CAPITAL GAINS AND LOSSES 723

I. PROBLEMS , 723

A. Definition of Capital Asset 723

B. Rate Preference for Long Term Capital Gains and Limitation on theDeduction of Capital Losses 724

C. Miscellaneous Capital Gain/Loss Issues 725

II. VOCABULARY 726

III. OBJECTIVES 726

IV. OVERVIEW 728A. Historical Overview 728

1. Preferential Treatment for Long Term Capital Gain 728

2. Limitation on the Deduction of Capital Losses 7313. Justification for Preferential Capital Gain Treatment 732

B. Current Law: Section l(h) 7331. Maximum Rates on Long-Term Capital Gain under the Current

Law 7332. The Components of Net Capital Gain: 28-Percent Rate Gain;

Unrecaptured Section 1250 Gain; and Adjusted Net Capital Gain . . . 734

a. 28-Percent Rate Gain: Collectibles Gain and Section 1202 Gain . . 735

b. Unrecaptured Section 1250 Gain — 25-Percent Rate 735c. Adjusted Net Capital Gain: 15-Percent and 0-Percent Rates 73^d. Adjusted Net Capital Gain: Qualified Dividend Income 738

3. Attribution of Capital Losses Included in the Computation of NetCapital Gain 739

C. Current Law: Application of the Section 121 l(b) Limitation on theDeduction of Capital Losses 741

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TABLE OF CONTENTSD. Definition of Capital Asset ; 745

1. Section 1221(a)(l): Inventory, Stock in Trade, and Property Held

Primarily for Sale to Customers in the Ordinary Course of the

Taxpayer's Trade or Business . : . . . . . 745

2. Section 1221(a)(2): Property Used in the Taxpayer's.Trade or

Business 747

3. Section 1221(a)(3): Copyrights, Literary, Musical, or Artistic

Compositions, Etc 747

4. Section 1221(a)(4): Accounts Receivable for Services Rendered or

Inventory-Type Assets Sold 748

5. Section 1221(a)(5): Certain Publications of the U.S. Government . . . 748

6. Section 1221(a)(8): Supplies Used or Consumed in the Taxpayer's

Trade or Business '. 749

7. Judicially Established Limits on Capital Asset Characterization . . . . 749

E. The Sale or Exchange Requirement . . . . ' . 753

F. The Arrowsmith Rule: Characterization of Certain Gains or Losses

Dependent on Prior Tax Treatment of Related Gains or Losses 754

G. Holding Period : 7561 Bynum v. Commissioner . . . ' : , 756

Arkansas Best Corp. v. Commissioner 762

Hortv. Commissioner 767

Davis v. Commissioner • ; 769

AUTHORS' NOTE 773

Kenan v. Commissioner . . . . . ' . 774

Chapter 32 QUASI-CAPITAL ASSETS: SECTION 1231 779

I. PROBLEMS 779

II. VOCABULARY : . .... 780

III. OBJECTIVES 780

IV. OVERVIEW . . . : . . . . . -781

A. Definitions: Section 1231 Gains and Section 1231 Losses 781

B. The Hotchpot Analysis 783

1. The Preliminary Hotchpot Analysis 783

2. The Principal Hotchpot Analysis 785

C. Recapture of Net Ordinary Losses: Section 1231(c) 786

Chapter 33 RECAPTURE OF DEPRECIATION 789

I. PROBLEMS . . 789

II. VOCABULARY . . . . 790

III. OBJECTIVES . .' 790

IV. . OVERVIEW . . . : , 791

xxiii

TABLE OF CONTENTSA. Section 1245 Recapture 792

B. Section 1250 Recapture 793

C. Unrecaptured Section 1250 Gain 794

D. Section 1239 Ordinary Income . . .• 795

E. Other Recapture Provisions 796

Chapter 34 ASSIGNMENT OF INCOME 797

I. PROBLEMS . . , , , 797

II. VOCABULARY 798

III. OBJECTIVES 798

IV. OVERVIEW 800

A. The Progressive Rate Structure 800

B. Development of Rules Limiting Income-Shifting 801

C. Application of the Assignment of Income Rules 802

D. Income-Shifting Within Families and Between Related Parties 805

Lucas v. Earl 807

Helvering v. Horst . . 808

Helvering v. Eubank 811

Salvatore v. Commissioner 813

Stranahan v. Commissioner 816

May v. Commissioner 818

Chapter 35 THE KIDDIE TAX 823

I. PROBLEMS 823II. VOCABULARY :. 824III. OBJECTIVES • 824IV. OVERVIEW 825

Chapter 36 INTEREST-FREE OR BELOW-MARKET LOANS 829

I. PROBLEMS. 829II. VOCABULARY 830


A. History: Pre-Section 7872 831

1. Early IRS Attempts 8312. Gift Tax Consequences of Interest-Free Loans 833

. 3. Post Dean/Johnson History 833B. 1984 Tax Reform Act — Rationale for § 7872 834C. Operation of § 7872 836

1. Treatment of Term Loans Other Than Term Gift Loans 837

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TABLE OF CONTENTS

2. Demand Loans and Term Gift Loans 839

3. Exceptions to the Basic Operating Rules 841

Chapter 37 TAX CONSEQUENCES OF DIVORCE 843


IV. OVERVIEW '-, . . 847

A. Alimony: General Requirements 847

B. Child Support 851

C. Excess Front-Loading 852

D. Alimony Trusts 854

E. Dependency Exemption 854

F. Filing Status 855

G. Property Transfers 856

H. Special Rules Regarding Personal Residence — §121 859

I. Legal Expenses 860

Revenue Ruling 2002-22 '. 860

United States v. Gilmore 863


Chapter 38 NONRECOURSE DEBT: BASIS AND AMOUNT REALIZEDREVISITED 869


IV. OVERVIEW; 872

A. Crane v. Commissioner 872

B. Commissioner v. Tufts 873

C. Nonrecourse Borrowing and the § 108 Insolvency Exclusion 875

D. Nonrecourse Borrowing and Appreciated Property 876

E. Impact of Contingent Liabilities 879

Crane v. Commissioner 881

Commissioner v. Tufts ; 886


Estate Of Franklin v. Commissioner . 894

Aizawa v. Commissioner 898

XXV

TABLE OF CONTENTSChapter 39 LIKE KIND EXCHANGES 901

I. PROBLEMS . . 901II. VOCABULARY 903III. OBJECTIVES . : . . : 904IV. OVERVIEW ; 905

A. Continuity of Interest 905

B. The Like Kind Requirement 906C. The Holding Requirements 908

D. "Solely" for Like Kind Property: The Presence of "Boot" 912E. Treatment of Liabilities 912F. Basis Calculations 913G. The Relationship Between § 267(a)(l) and § 1031 914H. Sale or Exchange? 915I. Three-Way Exchanges and Deferred Exchanges 915

J. Reverse Starker Exchanges 918

K. Interface of § 121 and § 1031 9181. Exchanges Qualifying for Both § 121 and § 1031 Treatment 9182. Section 121(d)(10) — Property Acquired in a Like Kind Exchange . 920

Revenue Ruling 77-297 922AUTHORS' NOTE 923Revenue Ruling 72-151 923Bolker v. Commissioner 925Bell Lines, Inc. v. United States 929

. . Revenue Ruling 90-34 . 932

Revenue Procedure 2008-16 934Revenue Procedure 2000-37 936

AUTHORS' NOTE 941

Chapter 40 INVOLUNTARY CONVERSIONS 943


IV. OVERVIEW 946A. General Policy 946

B. The Mandatory and Elective Rules of § 1033 946C. Involuntary Conversion Events 947D. Similar or Related in Service or Use 948E. Time for Replacement 950F. Partial Recognition of Gain Under § 1033 951

G. Basis 951H. Holding Period of Replacement Property 951

xxvi

TABLE OF CONTENTSI. Involuntary Conversion of Principal Residence • 952

Liant Record, Inc. v. Commissioner 953




Willamette Industries, Inc. v. Commissioner 961

Chapter 41 INSTALLMENT SALES 969

I. PROBLEMS 969II. VOCABULARY 971III. OBJECTIVES : 972IV. OVERVIEW . . . 973PartA: 973

A. Statutory Framework -973B. Payments and Liabilities 974C. Recapture Income 975

D. Electing Out of the Installment Method 976E. Exclusions 976F. Contingent Payment Sales 977G. Dispositions of Installment Obligations 979

Part B: 980A. Second Dispositions by Related Persons 980

B. Sales of Depreciable Property to Related Persons . : 982C. Special Rules for Nondealers 982D. Installment Obligations and Like Kind Exchanges 983

Burnet v. Logan 984Revenue Ruling 79-371 986

Chapter 42 SALE OF A BUSINESS AND SALE-LEASEBACKS 989

I. PROBLEMS 989II. VOCABULARY : 991


A. Sale of a Sole Proprietorship — Sale of Single Asset or Saleof Separate

Assets? . . : 9921. The Standard of Williams v. McGowan 9922. Goodwill, Going Concern Value and Covenants Not to Compete . . . 993

a. Goodwill 993b. Going Concern Value . .: 993

c. Covenant Not to Compete 9943. Tax Consequences of Allocations of Purchase Price to Goodwill,

xxvii

TABLE OF CONTENTSCovenants Not to Compete and Going Concern Value 995

a. Historic Allocation Strategies 995

b. Section 197.— Amortization of Business Intangibles 996

B. Valuing Goodwill, Going Concern Value and Covenants Not To

Compete 997

C. Sale-Leaseback 1000

1. Sale-Leaseback Characterized as Financing Arrangement 1000

2. Sale-Leaseback Characterized as a Tax-Free Exchange 1001

Williams v. McGowan .7 1002

Annabelle Candy Co. v. Commissioner 1004

Frank Lyon Co. v. United States 1009

Leslie Co. v. Commissioner 1018

Chapter 43 ORIGINAL ISSUE DISCOUNT 1025

I. PROBLEMS 1025

II. VOCABULARY '. 1027


A. Original Issue Discount: Introduction 1028B. ' Original Issue Discount: Debt Instruments Issued for Cash 1032

1. Determining the Amount of OID 10322. Current Inclusion of OID 10333. Deduction of OID : 1034

4. Gain or Loss on Sale, Exchange or Retirement 10355. Market Discount 1036

C. Original Issue Discount and Unstated Interest: Debt Instruments Issuedfor Property 1037

1. Determining Issue Price Under § 1274: Inadequate Stated Interest . 10372. Determining Issue Price Under § 1274: Adequate Stated Interest . . 10403. Adequate Interest Charged and Paid Currently: No OID 10404. Exceptions to § 1274 1041

5. Unstated Interest: § 483 10416. Special Rules: The Cash Method Election of § 1274A — The

$2,000,000 Rule 1043

7. Special Rules: Interest Rate Limitation on Qualifying Sales of$2,800,000 or Less 1044

8. Special Rules: Interest Rate Limitation on Certain Land TransfersBetween Related Parties 1044

9. Special Rules: Personal Use Property 1044

10. Coordination with § 7872 1045

11. Ordering Between §§ 1274 and 483 1045

xxviii

TABLE OF CONTENTSAUTHORS' NOTE: SECTION 467 RENTAL

AGREEMENTS 1045

United States v. Midland-Ross Corporation 1046

Chapter 44 LIMITATIONS ON TAX SHELTERS — SECTIONS 465AND 469 1049

Part A: Section 465 — The At Risk Rules 1049

I. PROBLEMS 1049

II. VOCABULARY 1050

III. OBJECTIVES 1050

IV. OVERVIEW 1051A. General Background 1051B. Operation of the At Risk Rules 1052

1. Activities Subject to the At Risk Rules 10522. Determination of the Initial Amount At Risk 10533. Qualified Nonrecourse Financing 1053

4. Adjustments to the Amount At Risk 1054Part B: Section 469 — Limitation on Passive Activity Losses and

Credits . . 1057

I. PROBLEMS . 1057II. VOCABULARY 1058III. OBJECTIVES 1058IV. OVERVIEW , 1059

A. Background 1059B. Section 469 — In General 1060

C. Passive Activities 10611. Material Participation 10612. Rental Activities 1063

D. Scope of Passive Activities 1063E. Treatment of Losses and Credits 1064F. Portfolio Income and Expenses 1065

G. Exception for Active Participation in Rental Real Estate 1066H. Disposition of Taxpayer's Entire Interest in Passive Activity 1066

Chapter 45 THE ALTERNATIVE MINIMUM TAX 1069

I. PROBLEM 1069II. VOCABULARY 1070III. OBJECTIVES 1070IV. OVERVIEW 1071

A. Mechanics 1071B. Determining Alternative Minimum Taxable Income 1072

xxix

TABLE OF CONTENTSC. Determining Tax Liability 1075

D. Credits Allowed 1075Klaassen v. Commissioner 1076

Appendix 1 RESEARCHING THE TAX LAW 1079

Appendix 2 ANNUAL COMPOUND INTEREST TABLES 1085

Table of Cases ':.... TC-1Index '. '.'.'. 1-1

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taxation of individual income - gbv · taxation of individual income ninth edition ... chapter 1...

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