User:CheshireKatz/Tax/Code

(A) DETERMINING TAX LIABILITY (1-59B)

(I) TAX ON INDIVIDUALS

§1(a)-(h) Tax Imposed

Tax Imposed on (a) (1) Married TPs (§7703) filing one joint-return (§6013) w/spouse & (2) Surviving Spouses (§2(a)), (b) Heads of Households, (c) Other Unmarried TPs, (d) Married TPs Filing Separate, and (e) (1) Estates & (2) Trusts

(a)(1)&(2) Married FJ & Surviving Spouses		(b) Heads of Households		(c) Other Unmarrieds		(d) Married TPs FS		(e)(1)&(2) Estates & Trusts
If TI is	Then Imposed Tax is	If TI is	Then Imposed Tax is	If TI is	Then Imposed Tax is	If TI is	Then Imposed Tax is	If TI is	Then Imposed Tax is
< $36,900	15% of TI	< $29,600	15% of TI	< $22,100	15% of TI	< $18,450	15% of TI	< $1,500	15% of TI
$36,900 - $89,150	$5,535 + (28% of Rem over $36,900)	$29,600 - $76,400	$4,400 + (28% of Rem over $29,600)	$22,100 - $53,500	$3,315 + (28% of Rem over $22,100)	$18,450 - $44,575	$2,767.50 + (28% of Rem over $18,450)	$1,500 - $3,500	$225 + (28% of Rem over $1,500)
$89,150 - $140,000	$20,165 + (31% of Rem over $89,150)	$76,400 - $127,500	$17,544 + (31% of Rem over $76,400)	$53,500 - $115,000	$12,107 + (31% of Rem over $53,500)	$44,575 - $70,000	$10,082.50 + (31% of Rem over $44,575)	$3,500 - $5,500	$785 + (31% of Rem over $3,500)
$140,000 - $250,000	$35,928.50 + (36% of Rem over $140,000)	$127,500 - $250,000	$33,385 + (36% of Rem over $127,500)	$115,000 - $250,000	$31,172 + (36% of Rem over $115,000)	$70,000 - $125,000	$17,964.25 + (36% of Rem over $70,000)	$5,500 - $7,500	$1,405 + (36% of Rem over $5,500)
> $250,000	$75,528.50 + (39.6% of Rem over $250,000)	> $250,000	$77,485 + (39.6% of Rem over $250,000)	> $250,000	$79,772 + (39.6% of Rem over $250,000)	> $125,000	$37,764.25 + (39.6% of Rem over $125,000)	> $7,500	$2,125 + (39.6% of Rem over $7,500)

(f) Phaseout of Marriage Penalty in 15% bracket; Tax table adjustments to avoid inflation increasing tax

(g) Minor Children's Unearned Income Taxed as Parent’s

(h) Max Capital Gains Rate

(1) For TPs w/ NCGains, the Max Tax Imposed by this § will be

(A) tax computed on the greater of —

(i) TI minus NCGain OR (ii) the lesser of (I) TI w/TR < 25% or (II) TI minus Adjusted NCGain;

(B) 5% of Adjusted NCGain (or, if less, TI) below the amt of (i) TI w/TR of < 25% over (ii) TI minus Adjusted NCGain;

(C) 15% of Adjusted NCGain (or, if less, TI) above the amt described in sub¶(B);

(D) 25% of the excess of (i) Unrecaptured §1250 Gain (or, if less, NCGain (w/o ¶(11))) over (ii) the excess of (I) the Sub¶(A) Amt plus NCGain, over (II) TI; and

(E) 28% of the TI in excess of the sum of the amounts on which tax is determined under the preceding sub¶ of this ¶.

(2) NCGain does not include TP's §163(d)(4)(B)(iii) investment income.

(3) Adjusted Net Capital Gain (ANCGain) → (A) NCG (w/o ¶(11)) minus (i) Unrecaptured §1250 Gain & (ii) 28% Rate Gain, plus (B) QDI (¶(11)).

(4) 28% Rate Gain → the excess (if any) of—

(A) the sum of (i) collectibles gain & (ii) §1202 gain, over

(B) the sum of (i) collectibles loss, (ii) net short-term capital loss; & (iii) amt of §1212(b)(1)(B) long-term capital loss carried to this year.

(5) Collectibles gain and loss

(A) → gain or loss (respectively) from the sale or exchange of a collectible (as defined in §408(m) without regard to ¶(3) thereof) which is a capital asset held for more than 1 year but only to the extent such gain is taken into account in computing GI and such loss is taken into account in computing TI.

(B) Partnerships, etc. - any gain from the sale of an interest in a partnership, S corporation, or trust which is attributable to unrealized appreciation in the value of collectibles shall be treated as gain from the sale or exchange of a collectible. Rules similar to the rules of §751 shall apply for purposes of the preceding sentence.

(6) Unrecaptured §1250 gain

(A) → the excess (if any) of—

(i) the amt of long-term capital gain (not otherwise treated as ordinary income) which would be treated as ordinary income if §1250 (b)(1) included all depreciation and the applicable percentage under §1250 (a) were 100%, over

(ii) the excess (if any) of (I) the ¶(4)(B) amt over (II) the ¶(4)(A) amt.

(B) Limitation with respect to §1231 property - The amount described in sub¶(A)(i) from sales, exchanges, and conversions described in §1231(a)(3)(A) for any taxable year shall not exceed the net §1231 gain (§1231(c)(3)) for such year.

(7) §1202 gain → the excess of—

(A) the gain which would be excluded from GI under §1202 but for the §1202(a) percentage limitation, over

(B) the gain excluded from GI under §1202.

(8) Coordination with recapture of net ordinary losses under §1231 - If any amount is treated as ordinary income under §1231(c), such amount shall be allocated among the separate categories of net §1231 gain (§1231(c)(3)) in such manner as the Secretary may by forms or regulations prescribe.

§1(g) Kiddie Tax Simplified: If you try shifting Income to your minor child, child must declare & is taxed at Parent's rate

(IV) CREDITS AGAINST TAX

§21 Dependent Care Services necessary for Gainful Employment

(a) Allowance of credit

(1) In the case of an individual for which there are 1 or more qualifying individuals (as defined in subsection (b)(1)) with respect to such individual, there shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to the applicable percentage of the employment-related expenses (as defined in subsection (b)(2)) paid by such individual during the taxable year.

(2) Applicable percentage → 35 percent reduced (but not below 20 percent) by 1 percentage point for each $2,000 (or fraction thereof) by which the taxpayer’s adjusted gross income for the taxable year exceeds $15,000.

(b) Definitions of qualifying individual and employment-related expenses

(1) Qualifying individual →

(A) a dependent of the taxpayer (as defined in section 152 (a)(1)) who has not attained age 13,

(B) a dependent of the taxpayer (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B)) who is physically or mentally incapable of caring for himself or herself and who has the same principal place of abode as the taxpayer for more than one-half of such taxable year, or

(C) the spouse of the taxpayer, if the spouse is physically or mentally incapable of caring for himself or herself and who has the same principal place of abode as the taxpayer for more than one-half of such taxable year.

(2) Employment-related expenses

(A) → amounts paid for the following expenses, but only if such expenses are incurred to enable the taxpayer to be gainfully employed for any period for which there are 1 or more qualifying individuals with respect to the taxpayer:

(i) expenses for household services & (ii) expenses for the care of a qualifying individual.

Such term shall not include any amount paid for services outside the taxpayer’s household at a camp where the qualifying individual stays overnight.

(B) Exception - Employment-related expenses described in sub¶(A) incurred for services outside TP’s household only if incurred for the care of a qualifying individual (i)described in paragraph (1)(A) or (ii) who regularly spends 8+ hours/day in TP’s household.

(C) Dependent care centers - Employment-related expenses described in subparagraph (A) which are incurred for services provided outside the taxpayer’s household by a dependent care center (as defined in subparagraph (D)) shall be taken into account only if—

(i) such center complies with all applicable laws and regulations of a State or unit of local government, and

(ii) the requirements of subparagraph (B) are met.

(D) Dependent care center → any facility which—

(i) provides care for more than six individuals (other than individuals who reside at the facility), and

(ii) receives a fee, payment, or grant for providing services for any of the individuals (regardless of whether such facility is operated for profit).

(c) Dollar limit on amount creditable

(1) $3,000 if there is 1 qualifying individual with respect to the taxpayer for such taxable year, or

(2) $6,000 if there are 2 or more qualifying individuals with respect to the taxpayer for such taxable year.

The amount determined under paragraph (1) or (2) (whichever is applicable) shall be reduced by the aggregate amount excludable from gross income under section 129 for the taxable year.

(d) Earned income limitation

(1) Except as otherwise provided in this subsection, the amount of the employment-related expenses incurred during any taxable year which may be taken into account under subsection (a) shall not exceed—

(A) in the case of an individual who is not married at the close of such year, such individual’s earned income for such year, or

(B) in the case of an individual who is married at the close of such year, the lesser of such individual’s earned income or the earned income of his spouse for such year.

(2) Special rule for spouse who is a student or incapable of caring for himself

In the case of a spouse who is a student or a qualifying individual described in subsection (b)(1)(C), for purposes of paragraph (1), such spouse shall be deemed for each month during which such spouse is a full-time student at an educational institution, or is such a qualifying individual, to be gainfully employed and to have earned income of not less than—

(A) $250 if subsection (c)(1) applies for the taxable year, or

(B) $500 if subsection (c)(2) applies for the taxable year.

In the case of any husband and wife, this paragraph shall apply with respect to only one spouse for any one month.

Dependent QChild < 13 or Mentally/physically handicapped dependent/spouse

Amount of Credit is based on the amount of Child Care Expenses

$3,000 cap for one child

$6,000 cap for more than one child

AGI: Percentage of Credit allowed is determined based on AGI

Child Care Expenses x AGI % Limit = Amount of Credit

Example: $3,000 in expenses, AGI = $75,0000

Credit = $3,000 x 20% = $600 Child Care Credit

§24 Child Tax Credit

(a) $1,000 Credit for each Qualifying Child

(b) Limitations

(1) Amount be reduced (Min 0) by $50 for each $1,000 (or fraction thereof) by which the TP’s Mod AGI exceeds ThrAmt. Mod AGI → AGI plus income otherwise excluded under § 911, 931, or 933.

(2) ThrAmt → (A) $110K (joint return), (B) $75K (single), & (C) $55K (MarFilSeps).

(3) Limitation based on amount of tax

In the case of a taxable year to which § 26 (a)(2) does not apply, the credit allowed under subsection (a) for any taxable year shall not exceed the excess of—

(A) the sum of the regular tax liability (as defined in § 26 (b)) plus the tax imposed by § 55, over

(B) the sum of the credits allowable under this subpart (other than this § and sections 23 and 25B) and § 27 for the taxable year.

(c) Qualifying Child

(1) → §152(c) QC < 17yrs.

(2) Exception for Certain Noncitizens

The term “qualifying child” shall not include any individual who would not be a dependent if subparagraph (A) of § 152 (b)(3) were applied without regard to all that follows “resident of the United States”.

(d) Portion of credit refundable

(1) The aggregate credits allowed to a taxpayer under subpart C shall be increased by the lesser of—

(A) the credit which would be allowed under this § without regard to this subsection and the limitation under § 26 (a)(2) or subsection (b)(3), as the case may be, or

(B) the amount by which the aggregate amount of credits allowed by this subpart (determined without regard to this subsection) would increase if the limitation imposed by § 26 (a)(2) or subsection (b)(3), as the case may be, were increased by the excess (if any) of—

(i) 15% of so much of the taxpayer’s earned income (within the meaning of § 32) which is taken into account in computing taxable income for the taxable year as exceeds $10,000, or

(ii) in the case of a taxpayer with 3 or more qualifying children, the excess (if any) of—

(I) the taxpayer’s social security taxes for the taxable year, over

(II) the credit allowed under § [1] for the taxable year.

The amount of the credit allowed under this subsection shall not be treated as a credit allowed under this subpart and shall reduce the amount of credit otherwise allowable under subsection (a) without regard to § 26 (a)(2) or subsection (b)(3), as the case may be. For purposes of subparagraph (B), any amount excluded from gross income by reason of § 112 shall be treated as earned income which is taken into account in computing taxable income for the taxable year.

(2) Social security taxes

(A) → with respect to any taxpayer for any taxable year—

(i) the amount of the taxes imposed by sections 3101 and 3201 (a) on amounts received by the taxpayer during the calendar year in which the taxable year begins,

(ii) 50% of the taxes imposed by § 1401 on the self-employment income of the taxpayer for the taxable year, and

(iii) 50% of the taxes imposed by § 3211 (a) on amounts received by the taxpayer during the calendar year in which the taxable year begins.

(B) Coordination with special refund of social security taxes

The term “social security taxes” shall not include any taxes to the extent the taxpayer is entitled to a special refund of such taxes under § 6413 (c).

(C) Any amounts paid pursuant to an agreement under §3121(l) (relating to agreements entered into by American employers with respect to foreign affiliates) which are equivalent to the taxes referred to in subparagraph (A)(i) shall be treated as taxes referred to in such subparagraph.

(3) InflAdj

(e) ID Requirement - No credit shall be allowed under this § to a taxpayer with respect to any qualifying child unless the taxpayer includes the name and taxpayer identification number of such qualifying child on the return of tax for the taxable year.

(f) Taxable year must be full taxable year

Except in the case of a taxable year closed by reason of the death of the taxpayer, no credit shall be allowable under this § in the case of a taxable year covering a period of less than 12 months.

$1,000 per < 17yr old kid per year

Phased out at $75,000

Only refundable to people who have more than $10K earned income, and then only some

§25A Hope & Lifetime Learning Credits

(a) Credit Against Tax equal to the sum of (1) the Hope Scholarship Credit plus (2) the Lifetime Learning Credit.

(b) Hope Scholarship Credit (HSC)

(1) For any electing student, HSC → an amount equal to the sum of—

(A) 100% of so much of the qualified tuition and related expenses paid by the TP during the taxable year (for education furnished to the eligible student during any academic period beginning in such taxable year) as does not exceed $1,000, plus

(B) 50% of such expenses so paid as exceeds $1,000 but does not exceed the applicable limit.

(2) Limitations applicable to Hope Scholarship Credit

(A) Credit allowed only for 2 taxable years

An election to have this § apply with respect to any eligible student for purposes of the Hope Scholarship Credit under subsection (a)(1) may not be made for any taxable year if such an election (by the taxpayer or any other individual) is in effect with respect to such student for any 2 prior taxable years.

(B) Credit allowed for year only if individual is at least 1/2 time student for portion of year

The Hope Scholarship Credit under subsection (a)(1) shall not be allowed for a taxable year with respect to the qualified tuition and related expenses of an individual unless such individual is an eligible student for at least one academic period which begins during such year.

(C) Credit allowed only for first 2 years of postsecondary education

The Hope Scholarship Credit under subsection (a)(1) shall not be allowed for a taxable year with respect to the qualified tuition and related expenses of an eligible student if the student has completed (before the beginning of such taxable year) the first 2 years of postsecondary education at an eligible educational institution.

(D) Denial of credit if student convicted of a felony drug offense

The Hope Scholarship Credit under subsection (a)(1) shall not be allowed for qualified tuition and related expenses for the enrollment or attendance of a student for any academic period if such student has been convicted of a Federal or State felony offense consisting of the possession or distribution of a controlled substance before the end of the taxable year with or within which such period ends.

(3) Eligible Student → with respect to any academic period, a student who—

(A) meets the requirements of §484(a)(1) of the '65 Higher Education Act (20 USC 1091(a)(1)), as in effect on the date of the enactment of this section, and

(B) is carrying at least 1/2 the normal full-time work load for the course of study the student is pursuing.

(4) Applicable Limit → an amount equal to twice the ¶(1)(A) dollar amount.

(c) Lifetime Learning Credit

(1) Per taxpayer credit

The Lifetime Learning Credit for any taxpayer for any taxable year is an amount equal to 20% of so much of the qualified tuition and related expenses paid by the taxpayer during the taxable year (for education furnished during any academic period beginning in such taxable year) as does not exceed $10,000 ($5,000 in the case of taxable years beginning before January 1, 2003).

(2) Special rules for determining expenses

(A) Coordination with Hope Scholarship

The qualified tuition and related expenses with respect to an individual who is an eligible student for whom a Hope Scholarship Credit under subsection (a)(1) is allowed for the taxable year shall not be taken into account under this subsection.

(B) Expenses eligible for Lifetime Learning Credit

For purposes of paragraph (1), qualified tuition and related expenses shall include expenses described in subsection (f)(1) with respect to any course of instruction at an eligible educational institution to acquire or improve job skills of the individual.

(d) Limitation based on modified AGI

(1) The amount which would (but for this subsection) be taken into account under subsection (a) for the taxable year shall be reduced (but not below zero) by the amount determined under paragraph (2).

(2) Amount of Reduction → the amount which bears the same ratio to the amount which would be so taken into account as—

(A) the excess of (i) the TP’s modified AGI for such taxable year over (ii) $40K ($80K, if joint return), bears to

(B) $10K ($20K, if joint return).

(3) Modified AGI → the TP's AGI for the taxable year increased by any amount excluded from GI under §911, 931, or 933.

(e) TP may elect not to have this § apply.

(f) Definitions

(1) Qualified Tuition & Related Expenses

(A) → Tuition & fees required for the enrollment or attendance of

(i) the TP, (ii) the TP’s spouse, or (iii) any TP's dependent (entitling TP to a §151 deduction),

at an eligible educational institution for courses of instruction of such individual at such institution.

(B) Exception for education involving sports, etc.

Such term does not include expenses with respect to any course or other education involving sports, games, or hobbies, unless such course or other education is part of the individual’s degree program.

(C) Exception for nonacademic fees

Such term does not include student activity fees, athletic fees, insurance expenses, or other expenses unrelated to an individual’s academic course of instruction.

(2) Eligible educational institution → an institution—

(A) which is described in §481 of the Higher Education Act of 1965 (20 USC 1088), as in effect on the date of the enactment of this section, and

(B) which is eligible to participate in a program under title IV of such Act.

Hope Credit → % of college costs for 1st 2 years, maxes out at $1,500, phases out, only actually affects the middle class

Lifetime Learning Credit → anytime, 20% of up to $10,000, phases out

§32 Earned Income Tax Credit (EITC)

(a) Allowance of Credit

(1) Eligible TPs receive refundable credit equal to the Credit % of [TP's EI (or, if less, EIAmt)].

(2) TP's allowable credit amount may not exceed the excess of (A) the Credit % of the EIAmt, over (B) the Phaseout % of [TP's AGI (or EI, if greater) minus the PhAmt]. (see Calc-32a)

(b) Percentages (%) & Amounts (Amts)

(1) Credit % & Phaseout % → (A) After '95: w/1 QC, C%34 & P%15.98 | w/2+ QC, C%40 & P%21.06 | w/o QC, C%7.65 & P%7.65. (B) & (C) omitted

(2) Earned Income Amounts (EIAmt) & Phaseout amounts (PhAmt)

(A) EIAmt & PhAmt: With 1 QC, EIAmt is $6,330, PhAmt is $11,610 / With 2+ QC, EIAmt is $8,890, PhAmt is $11,610 / With 0 QC, EIAmt is $4,220, PhAmt is $5,280

(B) PhAmt increased for joint-filings by (i) $1,000 in '02-04, (ii) $2,000 in '05-07, & (iii) $3,000 after '07.

(c) Defs & Special Rules

(1) Eligible Individual

(A) → (i) anyone with a QC, or (ii) w/o a QC, if (I) 1/2+ year in US (II) 25-65 yrs old, & (III) not another TP's §151 deductible dependent.

Ineligible if (B) eligible as another TP's QC, (C) claiming §911 benefits (re: TPs living abroad), (D) NonResAlien, not electing to treatment as a US resident (§6013(g)or(h)), (E) filed w/o (i) TP's & (ii) TP's joint-filing spouse's ID#s, (F) filed w/o QC of QCs' ID#s ((c)(3)(D)).

(2) Earned Income (EI)

(A) → (i) wages, salaries, tips, et al., includible in GI, plus (ii) TP’s net earnings from self-employment (within §1402(a)) less the §164(f) deduction.

(B) Excluding (i) community property laws, (ii) pensions or annuities, (iii) §871(a) income (re: NonResAlien income not connected with US business), (iv) penal inmate income, (v) State program work income under SSAct §407(d)(4) & (7) assigned (Tit. IV Pt. A) to the extent subsidized, & (vi) omitted

(3) Qualifying Child

(A) Def: See §152(c) less (c)(1)(D) or (e).

(B) Unmarried unless TP entitled to a §151 deduction (or would be but for §152(e)).

(C) Place of abode (reqs of §152(c)(1)(B)) is in US

(D) ID Reqs → (i) QC only if name, age, & TIN of QC included on return or (ii) by other methods prescribed by Secretary

(4) Place of abode of USAF member treated as US while extended active duty (excess of 90 days or indefinite).

(d) If married (§7703), only eligible if joint-filing (§6013).

(e) No credit unless a full taxable year or closed by TP's death

Anyone who has a dependent child or is single between 25 and 65

Percentage allowed to credit depends on number of children

Phased out up to $33,000.

Refundable (BIG)

Calc-32a →

Refundable Credit = ((Credit %) * (Lesser of EI & EIAmt))

Allowable Credit = ((Credit %) * (EIAmt)) - ((Phaseout %) * ((Greater of AGI & EI) - PhAmt))

(VI) ALTERNATIVE MINIMUM TAX

§55 Alternative Minimum Tax Imposed

(a) AMTax → excess of (1) TentMinTax over (2) RegTax owed.

(b) Tentative Minimum Tax (TentMinTax)

(1) Amt → (A) For NonCorp TPs,

(i) (I) 26% of TExcess (Max $175K) plus (II) 28% TExcess (Max $175K). (Reduced by AMTax Foreign Tax Credit.)

(ii) Taxable Excess (TExcess) → excess of AMTI over ExAmt.

(iii) For MarFilSeps, replace $175K of Cl(i) w/ $87.5K.

(2) Alternative Minimum Taxable Income (AMTI) → TP's TI (A) adjusted by §56 & 58 and (B) increased by amt of the §57 items of tax preference.

If a TP is subject to RegTax, such TP shall be subject to the tax imposed by this section (and, if RegTax is determined by reference to an amount other than TI, such amount shall be treated as the TI of such TP for purposes of the preceding sentence).

(3) Max Tax Rate on Net Capital Gain of NonCorp TP (¶(1)(A)(i)(I))) → the sum of -

(A) the amt determined under such first sentence computed at the rates and in the same manner as if this paragraph had not been enacted on the TExcess reduced by the lesser of —

(i) the Net Capital Gain or (ii) the sum of (I) the Adjusted Net Capital Gain (ANCGain) plus (II) the Unrecaptured §1250 Gain, plus

(B) 5% (0% after '07) of so much of the ANCGain (or, if less, TExcess) as does not exceed an amt equal to the §1(h)(1)(B) excess, plus

(C) 15% of the ANCGain (or, if less, TExcess) in excess of the amount on which tax is determined under subparagraph (B), plus

(D) 25% of the amt of TExcess in excess of the sum of the amts on which tax is determined under the preceding subparagraphs of this paragraph.

Terms used in this paragraph which are also used in §1(h) shall have the respective meanings given such terms by §1(h) but computed with the adjustments under this part.

(c) Regular tax (RegTax)

(1) → the regular tax liability for the taxable year (§26(b)) reduced by the foreign tax credit allowable under §27(a), the §936 credit allowable under §27 (b), and the Puerto Rico economic activity credit under §30A. Such term shall not include any increase in tax under §45(e)(11)(C), §49(b), §50(a), or §42 (j)-(k)

(2) Coordination with income averaging for farmers and fishermen

Solely for purposes of this section, §1301 (relating to averaging of farm & fishing income) shall not apply in computing the regular tax liability.

(3) Cross Refs: Some credits not allowable against this tax calc (§26(a), 30(b)(3), 30B(g)(2), 30C(d)(2), & 38(c)).

(d) Exemption Amount (AMTax-ExAmt)

(1) NonCorp TP's AMTax-ExAmt

(A) $45K for (i) Joint-Returns or (ii) Surv. Spouses (§2(a)),

(B) $33.75K for anyone not (i) Married (§7703) or (ii) Surv. Spouse

(C) 1/2 the $ Amt applicable (¶(1)(A)) for MarFilSeps, and

(D) $22.5K for Estate or Trust.

(2) Corp TP's AMTax-ExAmt → $40,000.

(3) Phaseout → AMTax-ExAmt reduced (but not < 0) by an amount equal to 25% of the amount by which the TP's AMTI exceeds—

(A) $150K for ¶(1)(A) or (2) TP,

(B) $112.5K for ¶(1)(B) TP, and

(C) $75K for ¶(1)(C) or (D) TP.

For paragraph (1)(C) TP, AMTI shall be increased by the lesser of (i) 25 percent of the excess of AMTI (determined without regard to this sentence) over the MinAmt of such income (as so determined) for which the exemption amount under ¶(1)(C) is 0, or (ii) such AMTax-ExAmt (determined without regard to this paragraph).

(e) Small Corps Exemption (omitted)

Calculation

1. TI + Taxes + Misc Item Deducts = AMTI
2. AMTI - ExAmt = Amt subject to AMT Rates
3. Amt subject * AMT Rates = AMTax

(B) COMPUTATION OF TAXABLE INCOME (61-291)

(I) DEFINITIONS OF INCOME

§61 Gross Income Defined

(a) All Income From Whatever Source Derived, including (but not limited to)

(1) Compensation for services, including fees, commissions, fringe benefits, and similar items;

(2) Gross income derived from business;

(3) Gains derived from dealings in property;

(4) Interest;

(5) Rents;

(6) Royalties;

(7) Dividends;

(8) Alimony and separate maintenance payments;

(9) Annuities;

(10) Income from life insurance and endowment contracts;

(11) Pensions;

(12) Income from discharge of indebtedness;

(13) Distributive share of partnership gross income;

(14) Income in respect of a decedent; and

(15) Income from an interest in an estate or trust.

Unique Situations

Treasure Trove/Found Money: Once its discovered its income

Income taxes paid by employer

Punitive Damages Generally Included, but if in the form of property, Transferor realizes gain

Frequent Flyer Miles: Only if you make money off of them

Exchange of Services: If you receive services instead of payment the FMV of the services you received = income

Free Rent: FMV of rent received = income

§62 Adjusted Gross Income Defined

(a) AGI → GI less Deducts

(1) Trade & business deductions → Those attributable to a trade or business carried on by the TP

(2) Certain trade and business deductions of employees

(A) Reimbursed expenses of employees (§161)

(B) Certain expenses of performing artists (§162)

(C) Certain expenses of officials (§162)

(D) Certain expenses of elementary and secondary school teachers (§162)

(E) Certain expenses of members of reserve components of the USAF (§162)

(3) Losses from sale or exchange of property (§161)

(4) Deductions attributable to rents and royalties

(5) Certain deductions of life tenants and income beneficiaries of property

(6) Pension, profit-sharing, and annuity plans of self-employed individuals

(7) Retirement savings (§219)

(8) Repealed

(9) Penalties forfeited because of premature withdrawal of funds from time savings accounts or deposits

(10) Alimony (§215)

(11) Reforestation expenses (§194)

(12) Certain required repayments of supplemental unemployment compensation benefits

(13) Jury duty pay remitted to employer

(14) Deduction for clean-fuel vehicles and certain refueling property (§179A)

(15) Moving expenses (§217)

(16) Archer MSAs (§220)

(17) Interest on education loans (§221)

(18) Higher education expenses (§222)

(19) Health savings accounts (§223)

(20) Costs involving discrimination suits, etc.

(b) Qualified Performing Artist

(1) Means, with respect to any taxable year, any individual if—

(A) such individual performed services in the performing arts as an employee during the taxable year for at least 2 employers,

(B) the aggregate amt allowable as a deduction under §162 in connection with the performance of such services exceeds 10% of such individual’s GI attributable to the performance of such services, and

(C) AGI of such individual for the taxable year (determined without regard to sub§(a)(2)(B)) does not exceed $16,000.

(2) Nominal employer not taken into account - An individual shall not be treated as performing services in the performing arts as an employee for any employer during any taxable year unless the amount received by such individual from such employer for the performance of such services during the taxable year equals or exceeds $200.

(3) Special rules for married couples

(A) Except in the case of a husband and wife who lived apart at all times during the taxable year, if the taxpayer is married at the close of the taxable year, sub§(a)(2)(B) shall apply only if the TP & spouse file a joint return for the taxable year.

(B) Application of ¶(1) - In the case of a joint return—

(i) ¶(1) (other than sub¶(C) thereof) shall be applied separately with respect to each spouse, but

(ii) ¶(1)(C) shall be applied with respect to their combined AGI.

(C) Determination of marital status §7703(a)

(D) Joint return §6013

(c) Not a Reimbursement Arrangement, if employee is

(1) not required to substantiate the covered expenses to the reimburser, or

(2) entitled to retain any excess amt of the covered expenses.

Substantiation reqs of the preceding sentence shall not apply to any expense to the extent that substantiation is not required under §274(d) for such expense by reason of the regulations prescribed under the 2nd sentence thereof.

(d) Definition; Special Rules

(1) Eligible Educator

(A) → an individual who is a k-12 teacher, instructor, counselor, principal, or aide in a school for 900+ hours during a school year.

(B) School → any school which provides elementary education or secondary education (k-12), as determined under State law.

(2) Coordination with exclusions - A deduction shall be allowed under sub§(a)(2)(D) for expenses only to the extent the amount of such expenses exceeds the amount excludable under §135, 529(c)(1), or 530(d)(2) for the taxable year.

(e) Unlawful Discrimination → an act that is unlawful under any of the following

(1) §302 of the Civil Rights Act of '91 (2 USC §1202).

(2) §201-207 of the Congressional Accountability Act of '95 (2 USC §1311-1317).

(3) The National Labor Relations Act (29 USC §151 et seq.).

(4) The Fair Labor Standards Act of '38 (29 USC §201 et seq.).

(5) §4 or 15 of the Age Discrimination in Employment Act of '67 (29 USC §623 or 633a).

(6) §501 or 504 of the Rehabilitation Act of '73 (29 USC §791 or 794).

(7) §510 of the Employee Retirement Income Security Act of '74 (29 USC §1140).

(8) Title IX of the Education Amendments of '72 (20 USC §1681 et seq.).

(9) The Employee Polygraph Protection Act of '88 (29 USC §2001 et seq.).

(10) The Worker Adjustment and Retraining Notification Act (29 USC §2102 et seq.).

(11) §105 of the Family and Medical Leave Act of '93 (29 USC §2615).

(12) Chapter 43 of title 38, USC (relating to employment and reemployment rights of members of the uniformed services).

(13) §1977, 1979, or 1980 of the Revised Statutes (42 USC §1981, 1983, or 1985).

(14) §703, 704, or 717 of the Civil Rights Act of '64 (42 USC §2000e–2, 2000e–3, or 2000e–16).

(15) §804, 805, 806, 808, or 818 of the Fair Housing Act (42 USC §3604, 3605, 3606, 3608, or 3617).

(16) §102, 202, 302, or 503 of the Americans with Disabilities Act of 1990 (42 USC §12112, 12132, 12182, or 12203).

(17) Any provision of Federal law (popularly known as whistleblower protection provisions) prohibiting the discharge of an employee, the discrimination against an employee, or any other form of retaliation or reprisal against an employee for asserting rights or taking other actions permitted under Federal law.

(18) Any provision of Federal, State, or local law, or common law claims permitted under Federal, State, or local law—

(i) providing for the enforcement of civil rights, or

(ii) regulating any aspect of the employment relationship, including claims for wages, compensation, or benefits, or prohibiting the discharge of an employee, the discrimination against an employee, or any other form of retaliation or reprisal against an employee for asserting rights or taking other actions permitted by law.

§63 Taxable Income Defined

Taxable Income → (a) If itemizing, GI minus Itemized Deductions OR (b) If not, AGI minus (1) Standard Deduction & (2) §151 Deduction for Personal Exemptions.

(c) Standard deduction

(1) → the sum of (A) the basic standard deduction & (B) the additional standard deduction.

(2) Basic standard deduction →

(A) 200% of subparagraph (C) dollar amount for the taxable year if (i) a joint return, or (ii) a surviving spouse (§2(a)),

(B) $4,400 in the case of a head of household (as defined in § 2 (b)), or

(C) $3,000 in any other case.

(3) Additional standard deduction for aged and blind

(4) InflAdj

(5) Limitation on basic standard deduction in the case of certain dependents

In the case of an individual with respect to whom a deduction under §151 is allowable to another taxpayer for a taxable year beginning in the calendar year in which the individual’s taxable year begins, the basic standard deduction applicable to such individual for such individual’s taxable year shall not exceed the greater of—

(A) $500, or

(B) the sum of $250 and such individual’s earned income.

(6) Certain individuals, etc., not eligible for standard deduction

In the case of—

(A) a married individual filing a separate return where either spouse itemizes deductions,

(B) a nonresident alien individual,

(C) an individual making a return under §443(a)(1) for a period of less than 12 months on account of a change in his annual accounting period, or

(D) an estate or trust, common trust fund, or partnership,

the standard deduction shall be zero.

(d) Itemized deductions → the deductions allowable under this chapter other than—

(1) the deductions allowable in arriving at AGI, and

(2) the deduction for personal exemptions provided by §151.

(e) Election to itemize

(1) Unless an individual makes an election under this subsection for the taxable year, no itemized deduction shall be allowed for the taxable year. For purposes of this subtitle, the determination of whether a deduction is allowable under this chapter shall be made without regard to the preceding sentence.

(2) Any election under this subsection shall be made on the taxpayer’s return, and the Secretary shall prescribe the manner of signifying such election on the return.

(3) Change of election

Under regulations prescribed by the Secretary, a change of election with respect to itemized deductions for any taxable year may be made after the filing of the return for such year. If the spouse of the taxpayer filed a separate return for any taxable year corresponding to the taxable year of the taxpayer, the change shall not be allowed unless, in accordance with such regulations—

(A) the spouse makes a change of election with respect to itemized deductions, for the taxable year covered in such separate return, consistent with the change of treatment sought by the taxpayer, and

(B) the taxpayer and his spouse consent in writing to the assessment (within such period as may be agreed on with the Secretary) of any deficiency, to the extent attributable to such change of election, even though at the time of the filing of such consent the assessment of such deficiency would otherwise be prevented by the operation of any law or rule of law.

This paragraph shall not apply if the tax liability of the taxpayer’s spouse for the taxable year corresponding to the taxable year of the taxpayer has been compromised under §7122.

§67 2% Floor on Misc Itemized Deductions

(a) Misc. Itemized Deductions permitted only as they, in aggregate, exceed 2% of AGI.

(b) Misc. Itemized Deductions → Itemized Deductions other than

(1) §163 (re: interest),

(2) §164 (re: taxes),

(3) §165(a) (casualty/theft losses (c)(2)&(3) & losses (d)),

(4) §170 (relating to charitable, etc., contributions & gifts) & §642 (c) (relating to deduction for amts paid or permanently set aside for a charitable purpose),

(5) §213 (relating to medical, dental, etc., expenses),

(6) Impairment-Related Work Expenses,

(7) §691(c) (relating to deduction for estate tax in case of income in respect of the decedent),

(8) Connection with personal property used in a short sale,

(9) §1341 (re: computation of tax where TP restores substantial amt held under claim of right),

(10) §72(b)(3) (re: annuity payments ceasing before investment recovered deducts),

(11) §171 (re: amortizable bond premium deducts), and

(12) §216 (re: connection with coop housing corp deducts).

(c) Disallowance of indirect deduction through pass-thru entity

(1) Secretary shall regulate which prohibit the indirect deduction through pass-thru entities of amounts which are not allowable as a deduction if paid or incurred directly by an individual and which contain such reporting requirements as may be necessary to carry out the purposes of this sub§.

(2) Treatment of publicly offered regulated investment companies

(A) ¶(1) shall not apply with respect to any publicly offered regulated investment company.

(B) Publicly Offered Regulated Investment Company (PORIC)

(i) → a regulated investment company the shares of which are—

(I) continuously offered pursuant to a public offering (within the meaning of §4 of the '33 Securities Act, as amended (15 USC 77a to 77aa)),

(II) regularly traded on an established securities market, or

(III) held by or for 500+ persons at all times during the taxable year.

(ii) Secretary may reduce 500 person requirement The Secretary may by regulation decrease the minimum shareholder requirement of clause (i)(III) in the case of regulated investment companies which experience a loss of shareholders through net redemptions of their shares.

(3) Treatment of certain other entities

(A) with respect to cooperatives and real estate investment trusts, and

(B) except as provided in regulations, with respect to estates and trusts.

(d) Impairment-related work expenses →

(1) of a handicapped individual (§190(b)(3)) for attendant care services at the individual’s place of employment and other expenses in connection with such place of employment which are necessary for such individual to be able to work, and

(2) with respect to which a deduction is allowable under §162 (w/o regard to this §).

(II) INCLUDED IN GROSS INCOME

§71 Alimony & Separate Maintenance Payments

(a) Gross income includes amounts received as alimony or separate maintenance payments.

(b) Alimony or separate maintenance payments (Alim/SepMaintPay)

(1) → any payment in cash if—

(A) received by (or on behalf of) a spouse under a divorce or separation instrument,

(B) the divorce or separation instrument does not designate such payment as a payment which is not includible in gross income under this § and not allowable as a deduction under § 215,

(C) in the case of an individual legally separated from his spouse under a decree of divorce or of separate maintenance, the payee spouse and the payor spouse are not members of the same household at the time such payment is made, and

(D) there is no liability to make any such payment for any period after the death of the payee spouse and there is no liability to make any payment (in cash or property) as a substitute for such payments after the death of the payee spouse.

(2) Divorce or separation instrument →

(A) a decree of divorce or separate maintenance or a written instrument incident to such a decree,

(B) a written separation agreement, or

(C) a decree (not described in subparagraph (A)) requiring a spouse to make payments for the support or maintenance of the other spouse.

(c) Payments to support children

(1) → Not Alimony

(2) Reductions contingent to children → (A) if terminated by child's age, marriage, death, school departure, etc., or (B) at such a time consistent, that amount treated as child support, not alimony.

(d) "Spouse" includes a former spouse.

(e) This § and § 215 shall not apply if the spouses make a joint return with each other.

(f) Recomputation where excess front-loading of alimony payments

(1) If there are excess alimony payments—

(A) the payor spouse shall include the amount of such excess payments in gross income for the payor spouse’s taxable year beginning in the 3rd post-separation year, and

(B) the payee spouse shall be allowed a deduction in computing adjusted gross income for the amount of such excess payments for the payee’s taxable year beginning in the 3rd post-separation year.

(2) Excess alimony payments → the sum of (A) excess payments for the 1st Post-Sep year, & (B) excess payments for the 2nd Post-Sep year.

(3) Excess payments for 1st Post-Separation year =

(A) the amount of Alim/SepMaintPay paid during 1st Post-Sep year, over

(B) the sum of (i) the average of (I) Alim/SepMaintPay paid during 2nd Post-Sep year reduced by the excess, and (II) Alim/SepMaintPay paid during 3rd Post-Sep year, plus (ii) $15K.

(4) Excess payments for 2nd Post-Sep year =

(A) the amount of Alim/SepMaintPay paid during 2nd Post-Sep year, over

(B) the sum of (i) the amount of Alim/SepMaintPay paid during 3rd Post-Sep year, plus (ii) $15,000.

(5) Exceptions - (A) Payment ceasing by reason of death or remarriage, (B) Support payments ((b)(2)(C)), & (C) Fluctuating payments outside payor spouse's control (paid out of fixed % of employment income)

How much of divorce decree is Child Support?

Separation agreement calls for $10,000 in alimony each year to be reduced to $8,000 when the kids turn 18

$2,000 is Child Support and thus is not includable or excludable.

$8,000 is Alimony, therefore it's §61 Gross Income

Alimony Recapture

§71(f): Designed to prevent front-loading alimony payments

Rule: If alimony payments in the second year exceed payments in the third year by the third year amount + 15,000, then the excess is recaptured as income in the third year.

Example: Year 1: 80k Year 2: 80k Year 3: 30k

Year Three + 15k = 45k, difference of 35k (recapture 35k)

New Year Two: 45 k after recapture

Average of New Year Two and Original Three: 37.5 k

Year Two Average: 37.5k + 15 k = 52.5k

Year One recapture: 80k – 52.5k = 27.5k

Total Recapture: 27.5k + 35k = 62.5 k.

§72(a)&(b) Annuities; Certain Endowments & Life Insurance Contracts

(a) General rule for annuities

Except as otherwise provided in this chapter, gross income includes any amount received as an annuity (whether for a period certain or during one or more lives) under an annuity, endowment, or life insurance contract.

(b) Exclusion ratio

(1) Gross income does not include that part of any amount received as an annuity under an annuity, endowment, or life insurance contract which bears the same ratio to such amount as the investment in the contract (as of the annuity starting date) bears to the expected return under the contract (as of such date).

(2) Exclusion limited to investment

The portion of any amount received as an annuity which is excluded from gross income under paragraph (1) shall not exceed the unrecovered investment in the contract immediately before the receipt of such amount.

(3) Deduction where annuity payments cease before entire investment recovered

(A) If—

(i) after the annuity starting date, payments as an annuity under the contract cease by reason of the death of an annuitant, and

(ii) as of the date of such cessation, there is unrecovered investment in the contract,

the amount of such unrecovered investment (in excess of any amount specified in subsection (e)(5) which was not included in gross income) shall be allowed as a deduction to the annuitant for his last taxable year.

(B) Payments to other persons

In the case of any contract which provides for payments meeting the requirements of subparagraphs (B) and (C) of subsection (c)(2), the deduction under subparagraph (A) shall be allowed to the person entitled to such payments for the taxable year in which such payments are received.

(C) Net operating loss deductions provided

For purposes of § 172, a deduction allowed under this paragraph shall be treated as if it were attributable to a trade or business of the taxpayer.

(4) Unrecovered investment

For purposes of this subsection, the unrecovered investment in the contract as of any date is—

(A) the investment in the contract (determined without regard to subsection (c)(2)) as of the annuity starting date, reduced by

(B) the aggregate amount received under the contract on or after such annuity starting date and before the date as of which the determination is being made, to the extent such amount was excludable from gross income under this subtitle.

Annuity Exclusion Ratio

Exclude from income the amount of money received from an Annuity that is Return of Principal (aka what you put in initially to the annuity) by applying the Annuity Exclusion Ratio

Annuity Exclusion Ration = Principal / Expected Return

Ex: $25,000 Annuity is expected to return $75,000 over 25 years with payments of $3,000 per year

Exclusion Ratio: 25,000/75,000 = 33%

33% of $3,000 excluded from income as Return of Principal

Exclude up to $50K in LifeIns

(III) EXCLUDED FROM GROSS INCOME

§101 Interest from Life Insurance Proceeds

Interest portion of LifeIns if taken in payments instead of lump sum

§102 Gifts & Inheritances

(a) Exclude the value of Property Acquired by Gift, bequest, devise, or inheritance.

(b) Income from Property Exceptions - Include in GI any

(1) Income from Property Gifts or (2) Gifts of Income from Property,

Portions Paid or distributed at intervals Out of Income from Property,

Bequested Amounts described as Includible under Subchapter J.

(c) Include in GI any Employee Gifts

§104 Compensation for Injuries or Sickness

(a) Except amounts attributable to (& not in excess of) §213 deductions (relating to medical, etc., expenses) for any prior taxable year, exclude —

(1) amounts received under workmen’s compensation acts as compensation for personal injuries or sickness;

(2) the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness;

(3) amounts received through accident or health insurance (or through an arrangement having the effect of accident or health insurance) for personal injuries or sickness (other than amounts received by an employee, to the extent such amounts

(A) are attributable to contributions by the employer which were not includible in the gross income of the employee, or

(B) are paid by the employer);

(4) amounts received as a pension, annuity, or similar allowance for personal injuries or sickness resulting from active service in the armed forces of any country or in the Coast and Geodetic Survey or the Public Health Service, or as a disability annuity payable under the provisions of § 808 of the Foreign Service Act of 1980; and

(5) amounts received by an individual as disability income attributable to injuries incurred as a direct result of a terroristic or military action (as defined in § 692 (c)(2)).

For purposes of paragraph (2), emotional distress shall not be treated as a physical injury or physical sickness. The preceding sentence shall not apply to an amount of damages not in excess of the amount paid for medical care (described in subparagraph (A) or (B) of § 213 (d)(1)) attributable to emotional distress.

(b) Termination of application of subsection (a)(4) in certain cases

(1) Subsection (a)(4) shall not apply in the case of any individual who is not described in paragraph (2).

(2) Individuals to whom subsection (a)(4) continues to apply

(A) on or before 9/24/75, he was entitled to receive any amount described in subsection (a)(4),

(B) on 9/24/75, he was a member of any organization (or reserve component thereof) referred to in subsection (a)(4) or under a binding written commitment to become such a member,

(C) he receives an amount described in subsection (a)(4) by reason of a combat-related injury, or

(D) on application therefor, he would be entitled to receive disability compensation from the Veterans’ Administration.

(3) Combat-related injuries → personal injury or sickness—

(A) incurred (i) as a direct result of armed conflict, (ii) while engaged in extrahazardous service, or (iii) under conditions simulating war; or

(B) which is caused by an instrumentality of war.

(4) Amount excluded to be not less than veterans’ disability compensation

§104 – Health insurance payouts and workmen’s comp aren’t income.

(a)(2) - You don't need to include tort awards for medical bills and physical injury in income

§105 – Health insurance payouts that are attributable to employer contributions are income, but not if reimbursement for medical expenses or disability payments. Plans that favor highly-paid employees are income.

§106 – Employer contributions to a health plan aren’t income.

Collectively encourages having employer insurance.

§108 Discharge of Indebtedness

If debt is canceled debtor must include cancelled amount in income – this is b/c liability has disappeared

B notes w/o this treatment would be huge hole in tax system b/c every pay check could be considered forgiveness of a loan

§108(d)(1)(A) indebtedness for which tp is liable (not negotiated for by settlement)

§108(d)(1)(B) indebtedness subject to which tp holds property (not poker chips, can't be used generally)

§111(a) Recovery of Tax Benefit Items

Gross income does not include income attributable to the recovery during the taxable year of any amount deducted in any prior taxable year to the extent such amount did not reduce the amount of tax imposed by this chapter.

Tax Benefit Rule - loss in earlier year, reversal of loss in later year

Exclusionary aspect

if you had a loss, but you didn’t gain any tax benefit from that loss (and carryovers have expired unused) (like if you’re in the 0 bracket) → you don’t have to include the restored income in the later year

Inclusionary aspect

if you took a benefit, and the includability or amount of the subsequent offsetting gain is not otherwise clearcut → income in amount of prior deduction should be included

At liquidation, the proportion of tax benefits derived from deductible goods unconsumed as intended, trigger the tax benefit doctrine as well.

Tax benefits from deducting state income tax later refunded also trigger tax benefits rule

§117 Qualified Scholarships

(a) Exclude any qualified scholarship by a candidate for a degree at an educational organization (§170(b)(1)(A)(ii)).

(b) Qualified scholarship

(1) → any amount received by an individual as a scholarship or fellowship grant to the extent the individual establishes that, in accordance with the conditions of the grant, such amount was used for qualified tuition and related expenses.

(2) Qualified Tuition & Related Expenses →

(A) Tuition & Fees required for the enrollment or attendance of a student at an educational organization described in § 170 (b)(1)(A)(ii), and

(B) fees, books, supplies, and equipment required for courses of instruction at such an educational organization.

(c) Limitation

(1) Except in ¶(2), sub§(a)&(d) shall not apply to that portion of any amount received which represents payment for teaching, research, or other services by the student required as a condition for receiving the qualified scholarship or qualified tuition reduction.

(2) Exceptions - ¶(1) shall not apply to any amount received by an individual under—

(A) the National Health Service Corps Scholarship Program under § 338A(g)(1)(A) of the Public Health Service Act, or

(B) the Armed Forces Health Professions Scholarship and Financial Assistance program under subchapter I of chapter 105 of title 10, United States Code.

(d) Qualified tuition reduction

(1) Gross income shall not include any qualified tuition reduction.

(2) Qualified tuition reduction → the amt of any reduction in tuition provided to an employee of an organization described in §170(b)(1)(A)(ii) for the education (below the graduate level) at such organization (or another organization described in §170(b)(1)(A)(ii)) of—

(A) such employee, or

(B) any person treated as an employee (or whose use is treated as an employee use) under the rules of § 132 (h).

(3) Reduction must not discriminate in favor of highly compensated, etc.

Paragraph (1) shall apply with respect to any qualified tuition reduction provided with respect to any highly compensated employee only if such reduction is available on substantially the same terms to each member of a group of employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of highly compensated employees (within the meaning of § 414 (q)). For purposes of this paragraph, the term “highly compensated employee” has the meaning given such term by § 414 (q).

(4) Repealed

(5) Special Rules for Teaching & Research Assistants

In the case of the education of an individual who is a graduate student at an educational organization described in § 170 (b)(1)(A)(ii) and who is engaged in teaching or research activities for such organization, paragraph (2) shall be applied as if it did not contain the phrase “(below the graduate level)”.

§119(a)-(b) Meals or Lodging Furnished for Convenience of Employer

(a) Meals and lodging furnished to employee, his spouse, and his dependents, pursuant to employment

There shall be excluded from gross income of an employee the value of any meals or lodging furnished to him, his spouse, or any of his dependents by or on behalf of his employer for the convenience of the employer, but only if—

(1) in the case of meals, the meals are furnished on the business premises of the employer, or

(2) in the case of lodging, the employee is required to accept such lodging on the business premises of his employer as a condition of his employment.

(b) Special rules

(1) Provisions of employment contract or State statute not to be determinative

(2) Certain factors not taken into account with respect to meals (convenience of the employer, additional meal charges, & optional acceptance, shall not be taken into account.

(3) Certain fixed charges for meals

(A) If (i) employee is required to pay a periodic fixed charge for meals, & (ii) such meals are furnished by the employer for the convenience of the employer, the fixed charge is excluded from GI

(B) Subparagraph (A) shall apply

(i) whether the employee pays the fixed charge out of his stated compensation or out of his own funds, and

(ii) only if the employee is required to make the payment whether he accepts or declines the meals.

(4) Meals furnished to employees on business premises where meals of most employees are otherwise excludable

(c) Employees living in certain camps

(1) In the case of an individual who is furnished lodging in a camp located in a foreign country by or on behalf of his employer, such camp shall be considered to be part of the business premises of the employer.

(2) Camp → lodging which is—

(A) provided by or on behalf of the employer for the convenience of the employer because the place at which such individual renders services is in a remote area where satisfactory housing is not available on the open market,

(B) located, as near as practicable, in the vicinity of the place at which such individual renders services, and

(C) furnished in a common area (or enclave) which is not available to the public and which normally accommodates 10 or more employees.

(d) Lodging furnished by certain educational institutions to employees

(1) For educational institution employees, GI shall not include the value of qualified campus lodging furnished to such employee during the taxable year.

(2) Paragraph (1) shall not apply to the extent of the excess of—

(A) the lesser of—

(i) 5% of the appraised value of the qualified campus lodging, or

(ii) the average of the rentals paid by individuals (other than employees or students of the educational institution) during such calendar year for lodging provided by the educational institution which is comparable to the qualified campus lodging provided to the employee, over

(B) the rent paid by the employee for the qualified campus lodging during such calendar year.

The appraised value under subparagraph (A)(i) shall be determined as of the close of the calendar year in which the taxable year begins, or, in the case of a rental period not greater than 1 year, at any time during the calendar year in which such period begins.

(3) Qualified campus lodging → lodging to which subsection (a) does not apply and which is—

(A) located on, or in the proximity of, a campus of the educational institution, and

(B) furnished to the employee, his spouse, and any of his dependents by or on behalf of such institution for use as a residence.

(4) Educational institution, etc.

(A) → (i) §170 (b)(1)(A)(ii) institution (state conglomerate thereof), or (ii) an academic health center.

(B) Academic health center → an entity (i) § 170 (b)(1)(A)(iii), (ii) receiving payments under gov't funding (relating to graduate medical education), and (iii) primary function is teaching medical science & research with the entity’s own faculty.

§121 Exclusion of Gain from Sale of Principal Residence

(a) Exclude gain from the sale or exchange of property if during past 5-years used as TP’s principal residence for periods aggregating 2 years or more.

(b) Limitations (1) shall not exceed $250,000, or

(2) For joint returns,

(A) $500,000, if (i) either spouse meets ownership reqs, (ii) both spouses meet the use reqs; & (iii) neither is ineligible under paragraph (3).

(B) Otherwise, the limitation shall be the sum of the limitations under paragraph (1) to which each spouse would be entitled if such spouses had not been married. For purposes of the preceding sentence, each spouse shall be treated as owning the property during the period that either spouse owned the property.

(3) Application to only 1 sale or exchange every 2 years

(A) Subsection (a) shall not apply to any sale or exchange by the taxpayer if, during the 2-year period ending on the date of such sale or exchange, there was any other sale or exchange by the taxpayer to which subsection (a) applied.

(B) Pre-5/7/97 sales not taken into account

§125(a)-(d)(1),(f) Cafeteria Plans

(a) A benefit is excludible even if a result of an employer's pick & choose benefits plan

(b) Exception for Highly Compensated Participants & Key Employees

(1) No exclusion for HCPs if discriminatory in favor of HCPs in (A) eligibility, or (B) contributions & benefits.

(2) Key Employees (§416(i)(1)) shall not apply to any benefit attributable to a plan for which the statutory nontaxable benefits provided to key employees exceed 25% of the aggregate of such benefits provided for all employees under the plan. For purposes of the preceding sentence, statutory nontaxable benefits shall be determined without regard to the last sentence of sub§(f).

(d) Cafeteria Plan

(1) → a written plan under which—

(A) all participants are employees, and

(B) the participants may choose among 2 or more benefits consisting of cash and qualified benefits.

(e) Highly compensated participant and individual defined

(1) Highly compensated participant → a participant who is—

(A) an officer,

(B) a SH owning 5%+ voting power or value of all classes of stock of the employer,

(C) highly compensated, or

(D) a spouse or dependent (§152 w/o regard to sub§(b)(1)&(2) and (d)(1)(B)) of a sub¶(A),(B), or (C) individual.

(f) Qualified benefits → any benefit excludible from employee's GI by reason of an express provision of this chapter (other than §106(b), 117, 127, or 132).

Including any Group Term LifeIns includible in GI only b/c it exceeds the §79 dollar limitation and any other benefit permitted.

Excluding any product advertised, marketed, or offered as long-term care insurance.

§127 Educational Assistance Programs

(a) Exclude from GI

(1) amounts paid or expenses incurred by employer for Educational Assistance to employee

(2) $5,250 Max Exclusion

(b) Educational Assistance Program

(1) → A separate written plan of an employer for the exclusive benefit of his employees to provide such employees with educational assistance. The program must meet the requirements of ¶(2)-(6) of this subsection.

(2) Eligibility - No discrimination in favor of Highly compensated

(3) For Principal SHs or owners - only 5% of amounts paid or incurred by the employer, if owning 5%+ of the stock or of the capital or profits interest in the employer.

§129 Dependent Care Assistance Programs

(a) Exclusion

(1) Exclude amounts paid or incurred by employer for Dependent Care Assistance provided.

(2) Limitation of exclusion

(A) → $5K ($2.5K for MarFilSeps).

(B) Included the year services provided (even if payment occurs later).

(C) Marital status determined under §21(e)(3)&(4).

(b) Earned Income Limitation

(1) Exclusion Amt shall not exceed (A) single employee's Earned Income or (B) if married, the lesser of (i) Employee's or (ii) Spouse's Earned Income.

(2) A student or incapacitated spouse's earned income determined by §21(d)(2)

(c) Employer payments not excluded if paid to an individual

(1) eligible as §151(c) dependent (relating to personal exemptions for dependents) to employee or spouse of such employee, or

(2) child of such employee (§152(f)(1)) < 19 yrs at the close of such taxable year.

§ 129 permits employers to make available to employees, tax-free up to 5K per year for child-care expenses

§132 (a)-(j) Certain Fringe Benefits

(a) EXCLUSIONS FROM GROSS INCOME

(1) No-Additional-Cost Service, (2) Qualified Employee Discount, (3) Working Condition Fringe, (4) De Minimis Fringe, (5) Qualified Transportation Fringe,
(6) Qualified Moving Expense Reimbursement, (7) Qualified Retirement Planning Services, or (8) Qualified Military Base Realignment & Closure Fringe.

(b) NO-ADDITIONAL-COST SERVICE (NACS)

(1) Service in employee's line of business, & (2) No addt'l cost to employer (incl. forgone revenue) to provide (w/o regard to employee pay for service).

(c) QUALIFIED EMPLOYEE DISCOUNT (QED)

(1) Discounts not >, (A) Gross Profit % of property price to customers, or (B) 20% of Service price to customers.

(2) Gross Profit % → (excess above Cost)

(A) The % which, (i) the excess of sales price to a customer over cost to employer, is of (ii) the sale price of,

(B) (i) all property offered in employee's line of business, and (ii) employer’s experience during a representative period.

(3) Discount → (A) employee price minus (B) customer price.

(4) Qualified Property or Services → any Property (except real or personal property of a kind held for investment) or Services offered to customers in employee's line of business.

(d) WORKING CONDITION FRINGE (WCF) → Any Property/Services deductable §162 or 167

(e) DE MINIMIS FRINGE (DMF)

(1) Nominal property/service unreasonable to account for, and

(2) Employee Eating Facilities → (A) located near business premises, and (B) revenue derived equals or exceeds facility operating costs.

For §414(q) HCEs only if facility access is available on same terms to all similar employees, not discriminating in favor of HCEs. Employees entitled to §119 meal exclusion treated as having paid the direct operating costs attributable to such meal.

(f) QUALIFIED TRANSPORTATION FRINGE (QTF)

(1) (A) Transit in a Commuter Highway Vehicle (CHV) btwn home & work, (B) Any Transit Pass, & (C) Qualified Parking

(2) Limitation → (A) $100/mo in ¶(1)(A&B) Benefits & (B) $175/mo in ¶(1)(C) Q.Parking.

(3) Cash Reimbursements to employee for a ¶(1) benefit treated as QTF (for Transit Pass, if voucher not already provided)

(4) No Constructive Receipt of Fringe Benefits

(5) Definitions:

(A) Transit Pass → A pass for free or discount transit if (i) on mass-transit, or (ii) by transport-for-hire meeting the reqs of (f)(5)(B)(i).

(B) CHV → Any highway vehicle that (i) seats driver & 6+ adults and (ii) 80%+ of mileage use is (I) for employee commuting & (II) 50%+ of adult seating is occupied by employees.

(C) Qualified Parking → Parking near work or commuting station to continue by CHV or carpool, not near employee's residential property.

(D) Transit Provided by Employer → If furnished in a CHV operated by or for employer.

(E) Employee → Not §401(c)(1) self-employed persons.

(6) InflAdj

(7) QTFs not included in WCFs or DMFs

(g) QUALIFIED MOVING EXPENSE REIMBURSEMENT (QMER)

Repayments for incurred expenses deductible as moving expenses, not previously deducted under §217.

(h) RETIREES & DISABLED & THEIR SPOUSES TREATED AS EMPLOYEES FOR (a)(1&2)

(1) → (A)one who's employment was ended by retirement or disability, and (B) their widows.

(2) ::(A) Spouse or Dependent Child (DepC) use treated as by employee. (B) DepC → Child (§152(f)(1)), (i) who is a Dep or (ii) orphan < 25 (where §152(e) applies, Dep of both).

(3) Air Transit by employee's parent (w/o regard to (h)(1)(B)) treated as employee use.

(i) RECIPROCAL AGREEMENTS → any NACS provided by employer to another employer's employee treated as employee if—

(1) service provided pursuant to written agreement btwn employers, and

(2) neither incurs any addit'l costs (incl. forgone revenue) to provide service or pursuant to agreement.

(j) SPECIAL RULES

(1) NACS & QED for HCEs only if available on same terms to like-employees without discrimination in favor of HCEs.

(2) Special Rule for Leased Sections of Department Stores

(A) For Qualified Employee Discounts, treated as in the Dept Store's line of business (i) leased sections of store & (ii) employees in leased sections

(B) Leased § of Dept Store → Any leased part of dept store where over-the-counter sales of goods are made under a lease or similar arrangement where it appears to the general public that individuals making such sales are employed by the person operating the department store.

(3) Auto Salesmen

(A) Qualified Automobile Demonstration (B) Auto use by full-time auto salesman in dealer’s sales office area is located if (i) facilitating salesman’s performance, and (ii) personal use is restricted.

(4) On-Premises Athletic Facilities

(A) Exclude value of OPAF

(B) On-Premises Athletic Facility (OPAF) → Any gym or athletic facility (i) on premises, (ii) employer-operated, & (iii) substantially used by employees, spouses, & dependent children

(5) Special Rule For Affiliates of Airlines

(A) Qualified Affiliate Employees treated as engaged in airline services, if (i) QA affiliated with airline, and (ii) QA ARS Employees entitled to air transport NACS

(B) Qualified Affiliate (QA) → Any ARS Corp.

(C) Airline-Related Services (ARS) → In connection with air transport: (i) Catering, (ii) Baggage Handling, (iii) Ticketing & Reservations, (iv) Flight Planning & Weather Analysis, (v) Airport Restaurants & Gift Shops, (vi) Similar Secretary Prescribed Services

(D) Affiliated Group → given by §1504(a)

(6) Highly Compensated Employee → given by §414(q).

(7) Air Cargo → Cargo & Passenger Air Transit treated as the same.

(8) Application to otherwise taxable educational or training benefits

Amts paid or expenses incurred by the employer for education or training provided to the employee which are not excludable from GI under § 127 shall be excluded from GI under this § if (and only if) such amounts or expenses are a working condition fringe.

(m) QUALIFIED RETIREMENT PLANNING SERVICES (QRPS)

(1) Any retirement planning advice or info provided to employee & spouse by employer maintaining a QED.

(2) Nondiscrimination rule - QRPS applies to HCEs only if services are available on substantially the same terms to each member of the group of employees normally provided education and information regarding the employer’s qualified employer plan.

(3) Qualified Employer Plan → a plan, contract, pension, or account described in §219(g)(5).

So long as you don’t take a cash option these expenses are excludable

Commonly Tested Fringe Benefits

Accident & health benefits (but not medical savings accounts or long-term care insurance):

Exempt from income. Employee can deduct the cost of health insurance paid under itemized Medical Deductions subject to the 7.5% AGI floor.

Adoption assistance - Qualified Adoption expenses are generally Exempt

Dependent care assistance - Exempt up to certain limits, $5K ($2.5K for MarFilSeps).

Term life insurance coverage (including costs that cannot be excluded from wages):

Cost of up to $50,000 in coverage is exempt from income

Health savings accounts (HSAs) - Exempt for qualified individuals up to the HSA contribution limits.

(V) DEDUCTIONS FOR EXEMPTIONS

§151 Personal & Dependency Exemption Deductions

(a) Exemptions are deducted in computing TI

(b) Personal ExAmts for TP & Spouse (unless filing or eligible as another TP's dependent) [RR71-158]

(c) Dependency ExAmts for each dependent (See §152) (Spouse is never a Dependent)

(d) Exemption Amounts (ExAmts) → (1) $2,000 (plus inflation), (2) $0 for TP if eligible as another TP's dependent.

(3) Phaseout

(A) If TP's AGI > ThrAmt, reduce ExAmt by App% of ExAmt.

(B) Applicable Percentage (App%) → +2% for each $2,500 ($1,250 if MarFilSep) TP's AGI exceeds ThrAmt (100% max).

(C) Threshold Amount (ThrAmt) → (i) Joint-returns & surviving spouses ($150K), (ii) Heads of Households ($125K), (iii) Other singles ($100K), (iv) MarFilSep ($75K).

(D) Phaseout has no impact on one's eligibility as another TP's Dependent.

(E) Reduction of Phaseout → (i) From '06-'09, Reduce App% of ExAmt by AppFrac (ii) Applicable Fraction (AppFrac) → '06-'07 (2/3) & '08-'09 (1/3)

(F) Phaseout expires on 12/31/09

(4) InflAdj

(e) TIN ID info must be included on the return for the exemption.

RevRul 71-158: Widow(er) can claim exemption for deceased in year of death, unless remarried the same year.

§152 Dependent Defined

(a) DEPENDENT (Dep) → (1) Qualifying Child (QC) or (2) Qualifying Relative (QR)

(b) NOT A TP'S DEP, IF (1)TP eligible as another TP's Dep, or (2) Dep is Joint-filing (§6013) or (3) an Alien, unless (A) US (or NAFTA) Res, or (B) (i) Household Member of & Living w/TP and (ii) TP is US citizen.

(c) QUALIFYING CHILD

(1) → (A) Relationship to TP, (B) Lives 1/2+ yr w/TP, (C) Meets Age Reqs, & (D) 1/2+ support from TP.

(2) Relationship → (A) descendant or (B) (step-)sibling/'s descendants

(3) Age Reqs → (A) At year's end, (i) ↓19 or (ii) a student ↓24, or else (B) Disabled (§22(e)(3)) during year

(4) Claimed by 2+ TPs, (A) QC of (i) parent, but if none, (ii) Highest AGI; (B) If 2+ parents, (i) whoever QC lives w/longer, if none, (ii) Highest AGI.

(d) QUALIFYING RELATIVE

(1) → (A) Relationship to TP, (B) GI < ExAmt (§151(d)), (C) 1/2+ support from TP., (D) not eligible as any TP's QC

(2) Relationship → (A) descendant, (B) (step-)sibling, (C) ancestor, (D) step-parent, (E) niece/nephew, (F) aunt/uncle, (G) nuclear in-law (H) or one living with & member of TP’s household.

(3) Multi-Support Agreements → 1/2+ support from TP, if (A) 1/2+ support from no other TP, (B) 1/2+ support from 2+ TPs each of whom could claim dependent but for other's contribution, (C) contribs 10%+ support, and (D) each 10%+ contriber files written declaration waiving dep claim

(4) Rule for Handicapped Deps' Income

(A) Exclude GI of Disabled (§22(e)(3)) from Sheltered Workshop Services, if (i) participation is for medical care availability, (ii) income arises from workshop activities incident to such care.

(B) Sheltered Workshop → a school (i) providing disability alleviation training, and (ii) operated by a 501(c)(3) Non-profit, by State, D.C., US, US Org, or political subdivision.

(5) Rule for Support, (A) spouse payments included in GI (under 71 or 682) are not treated as dependent support, (B) support payments by remarried parent's spouse treated as from parent.

(e) FOR DIVORCED & UNMARRIED PARENTS

(1) Notwithstanding (c)(1)(B), (c)(4), or (d)(1)(C), if child

(A) receives 50%+ support from parents, who (i) are divorced or separated under decree, (ii) are separated under written agreement, or (iii) live apart the entire last 6 months of a year, and

(B) is in one or both parent's custody for 50%+ year, then if reqs of (2) & (3) met QC of noncustodial parent.

(2) CustP's Exemption Claim Released by (A) CustP signing written declaration disclaiming child as dep, and (B) NonCustP attaching it to NonCustP’s return

(3) Exception for Qualified Pre-1985 Instruments (Pre85 QI)

(A) Reqs met if (i) Applicable Pre-85 QI btwn parents entitles NonCustP to §151 deduction for child, and (ii) NonCustP provides $600+ support to child for year.

(B) Qualified Pre-85 Instrument → any divorce/separation decree or written agreement (i) executed before 1/1/85, (ii) containing (A)(i) provision, and (iii) unmodified to disqualify this ¶

(4) Parent Defs: (A) Custodial parent → having custody for 50%+ of year & (B) Noncustodial parent → parent, but not custodian.

(5) Exception for Multi-Support Agreement where 50%+ support treated as received from TP (under (d)(3)).

(6) Rule for New Step-Parent Support → treated as received from their spouse.

(f) OTHER DEFS & RULES

(1) Child → (A) One who is (i) a (step) child or (ii) Eligible Foster Child. (B) Adoptees are treated as blood. (C) EFC → child placed with TP by authorized agency, decree, or court order.

(2) Student → during each of 5 calendar months is (under §170(b)(1)(A)(ii)) a (A) full-time student at school, or (B) pursuing full-time on-farm training by accredited agent or State or political subdiv of State.

(3) Member of Household → Not if relationship between individual & taxpayer is in violation of local law.

(4) Siblings → includes half-blood siblings.

(5) Support Test for Students → For (A) a child of TP & (B) a student, amounts received as scholarships for school (under §170(b)(1)(A)(ii)) shall not be included.

(6) Kidnappees

(A) Child of TP (i) presumed by law kidnapped by a non-family member, and (ii) for 50%+ of year prior to kidnapping had lived with TP, treated as meeting reqs of (c)(1)(B) while kidnapped.

(B) Apply solely for purposes of determining (i) §151(c) deduction, (ii) §24 child tax credit, (iii) whether one is a surviving spouse or head of a household (under §2), and (iv) §32 earned income credit

(C) Comparable Treatment of Certain QRs → Child of TP (i) presumed by law kidnapped by a non-family member, and (ii) QR of TP for year prior to kidnapping, treated as QR for all years while kidnapped.

(D) Termination of Treatment → First year child is either declared dead or 18+.

(7) For provision treating child as dependent of both parents, see §105(b), 132(h)(2)(B), & 213(d)(5).

(VI) ITEMIZED DEDUCTIONS

§161 Allowance of Deductions

In computing taxable income under §63, there shall be allowed as deductions the items specified in this part, subject to the exceptions provided in part IX (§261 and following, relating to items not deductible).

§162 Trade or Business Expenses

Subject to 2% of AGI Floor

(a) Deduction for Ordinary & necessary business expenses paid or incurred in carrying on a trade or business, or while away from home, and rental payments for business property

(1) Reasonable Salaries, Advertising, Legal Fees (No excessive compensation or disguised dividends).

(2) Transportation for Overnight Business Away From Home (Unless trip anticipated to last longer than a year)

(c) No Deduction for Illegal Violations (bribes, kickbacks, etc.)

(e) Limitied deduction for Lobbying expenses

(f) No Deduction for Fines or victim restitution

(g) No Deduction for Punitive Damages

(m) $1M limit for CEO of publicly held corp.

Treasury Regs

§1.162-5(a)(1) Education deductible as business expense where maintains or improves skills as necessary for continued employment

See Carroll, 7th Cir. – no deduction for general costs of college education or educational expenses to enter new line of business

§1.162-2 - No Deduction for expenses incurred by spouses

§1.162-7 - Salary deducted must be reasonable and for services rendered (no > $1M salaries for CEOs, though performance-based pay is)

Ordinary: Typical in course of general & accepted business practice (Deputy v. Dupont)

Reasonable in amount & occurrence

For Traveling Salesman's Car Accident (Dancer) & Legal Fees Defending Employees Against Sexual Assault Charges (Clark)

But Not for Legal Fee for Unmedicated Artist Assaulting Flight Passenger (Gilliam)

Necessary: Deference to TP (Courts reluctant to 2nd guess, but can't be nuts

Daily Commuting Costs (162a): Needs to be outside of the metro area where the person works.

Not for Financial Advice-Seeking Séances with Dead Father or Travel Expenses from Choice to Live Far from Work

Expense: Not a Capital Expenditure

Carrying on: Actually Engaged in Business (Prior Expenses Capitalized)

In Connection With Trade or Business: Profit Motive

Deduction for Dairy Farm – Not very wealthy; No recreational facilities; No personal consumption (Nickerson)

Contrast with Hobby (Not For Profit activity - § 183)

Business Clothing - Strict test (See Pevsner – no deduction for Yves St. Laurent clothes b/c adaptable for ordinary use)

(1) required as condition of employment, (2) not adaptable to general use, & (3) not worn in general

deduction allowed for TV series wardrobe; not allowed for tennis shoes for tennis player

makes sense b/c very personal item

Takeover/Acquisition Fees: Capitalize

Advertising: If the useful life is

< 1 year = Expense ; > 1 year = Capitalize (Billboards)

Headhunting Costs: Deductible so long as your seeking a new job, 50 miles away from your current job in the same industry

Education Expense: Deductible only if it is necessary to keep your job

Continuing education for lawyers: Not deductible because it is not necessary to keep your license.

Differentiated from Capital Contributions

Expenditures resulting from Unexpected Events = Deductible

Expenditures resulting from Depreciation & Maintenance = Capitalized (added to basis)

Methods to Deduct Business Expenses

Deduct Immediately, “expensed” as accountants say

Capitalized and written off over a period o time by the way of depreciation or amortization deductions

Taken into account on a realization of gain or loss from the property.

§163 Interest

Deduction on Interest from Trade or business, Investment, Mortgages on Qualified Residences

Must match net income from investments

Qualified Residence: Personal residence & one other (use > 14 days/year)

Two Kinds of QR debt

Acquisition indebtedness – up to $1M in loans to acquire or construct; can exceed FMV of house

Home equity indebtedness – up to $100K or FMV of residence in loans

Can’t exceed TP’s equity in residence (or original basis)

Can’t deduct interest on mortgage you got through appreciation

§164 Taxes

(a) Taxes deductable for the year paid or accrued

(1) State and local, and foreign, real property taxes.

(2) State and local personal property taxes.

(3) State and local, and foreign, income, war profits, and excess profits taxes.

(4) The GST tax imposed on income distributions.

(5) The environmental tax imposed by § 59A.

In addition, there shall be allowed as a deduction State and local, and foreign, taxes not described in the preceding sentence which are paid or accrued within the taxable year in carrying on a trade or business or an activity described in § 212 (relating to expenses for production of income). Notwithstanding the preceding sentence, any tax (not described in the first sentence of this subsection) which is paid or accrued by the taxpayer in connection with an acquisition or disposition of property shall be treated as part of the cost of the acquired property or, in the case of a disposition, as a reduction in the amount realized on the disposition.

No federal gift, estate, or social security taxes or state sales tax

Foreign income taxes taken as credits

§165 Losses

(a) Losses uncompensated for by insurance or otherwise deductable.

(b) Amount of deduction - Basis for determining the deduction amount for any loss is the adjusted basis provided in §1011 for determining the loss from the sale or other disposition of property.

(c) Limitation on losses of individuals to

(1) losses incurred in a trade or business;

(2) losses incurred in any transaction entered into for profit, though not connected with a trade or business; and

(3) except as provided in subsection (h), losses of property not connected with a trade or business or a transaction entered into for profit, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft.

(d) Wagering Losses - Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions.

(e) Theft Losses - For purposes of subsection (a), any loss arising from theft shall be treated as sustained during the taxable year in which the taxpayer discovers such loss.

(f) Capital Losses - Losses from sales or exchanges of capital assets shall be allowed only to the extent allowed in §1211 & 1212.

(h) Treatment of casualty gains and losses

(1) Deductible loss only excess over $100 per casualty

(2) Net Casualty Loss only to the extent it exceeds 10% of AGI

(A) If the personal casualty losses for any taxable year exceed the personal casualty gains for such taxable year, such losses shall be allowed for the taxable year only to the extent of the sum of—

(i) the amount of the personal casualty gains for the taxable year, plus

(ii) so much of such excess as exceeds 10 percent of the adjusted gross income of the individual.

(B) If the personal casualty gains for any taxable year exceed the personal casualty losses for such taxable year—

(i) all such gains shall be treated as gains from sales or exchanges of capital assets, and

(ii) all such losses shall be treated as losses from sales or exchanges of capital assets.

(3) Definitions of personal casualty gain and personal casualty loss

(A) Personal casualty gain → the recognized gain from any involuntary conversion of property which is described in subsection (c)(3) arising from fire, storm, shipwreck, or other casualty, or from theft.

(B) Personal casualty loss → any loss described in subsection (c)(3). For purposes of paragraph (2), the amount of any personal casualty loss shall be determined after the application of paragraph (1).

(4) Special rules

(A) Personal casualty losses allowable in computing AGI to the extent of personal casualty gains

In any case to which paragraph (2)(A) applies, the deduction for personal casualty losses for any taxable year shall be treated as a deduction allowable in computing adjusted gross income to the extent such losses do not exceed the personal casualty gains for the taxable year.

(B) Husband & wife filing joint treated as 1 individual.

(C) Determination of adjusted gross income in case of estates and trusts

For purposes of paragraph (2), the adjusted gross income of an estate or trust shall be computed in the same manner as in the case of an individual, except that the deductions for costs paid or incurred in connection with the administration of the estate or trust shall be treated as allowable in arriving at adjusted gross income.

(D) No loss described in subsection (c)(3) shall be allowed if, at the time of filing the return, such loss has been claimed for estate tax purposes in the estate tax return.

(E) Claim required to be filed in certain cases - Any loss of an individual described in subsection (c)(3) to the extent covered by insurance shall be taken into account under this § only if the individual files a timely insurance claim with respect to such loss.

Start Up Costs (165c2): If the business fails a taxpayer can claim a deduction through this section

Re: Losses under (c)(3) & (h)

“sudden, unexpected, and unusual cause such as fire, storm, or a shipwreck or other casualty, or from theft”

construe “other casualty narrowly (See Dyer, T.C.M. – breakage by cat having fit not casualty loss, but negligence)

must be sudden, so termite damages doesn’t count; mixed holdings re: wedding rings

Deductible to extent they exceed $100 per event & 10% of AGI in aggregate

so add these two things together

loss is lower of FMV or adjusted basis 1.165-7, -8

so not cost to replace

no deduction for temporary decline in market value (Chamales – house next door to OJs declines in value due to media swarm)

may have exceptions when abandonment permanently lowers value (See Finkbohner v. US, 11th Cir) but temporary in Chamales

9th circuit only recognizes physical damage loss (Citizens Bank)

grossly negligent conduct bars deduction (See Blackman, T.C. – husband sets fire to wife’s clothes and whole house catches on fire; would frustrate public policy)

NOTE: need to offset casualty gain

§167 Depreciation

(a) Depreciation deduction for reasonable exhaustion, wear, & tear (& obsolescence) of property

(1) used in the trade or business, or (2) held for the production of income.

Calculation of Basis Depreciation by Accelerated (ACRS) Method

For any given year, the Adjusted Basis of the Depreciating Property is the Original Basis less the Depreciated Portion & an amount equal to the Remainder divided by Half the Property's Valuable Lifespan

Calculation of Basis Depreciation by Straight-Line Method (For Real Property)

For any given year, the Adjusted Basis of the Depreciating Property is the Original Basis times the Percentage of the Property's Valuable Lifespan remaining.

Calculations of $100,000 Basis over 10 years (not including midyear convention & special rule for first & last years)

Yr1: 100,000
Yr2: 100,000/10 * 200% = 20,000          100,000 - 20,000 = 80,000
Yr3:  80,000/10 * 200% = 16,000           80,000 - 16,000 = 64,000
Yr4:  64,000/10 * 200% = 12,800           64,000 - 12,800 = 51,200
Yr5:  51,200/10 * 200% = 10,240           51,200 - 10,240 = 40,960
Yr6:  40,960/10 * 200% =  8,192   STOP     8,192 < 10,000 (Straight line depreciation value)
 - Switch to Straight line method - 

§170 Charitable, Etc., Contributions & Gifts

Deduction for Charitable Contributions

Deduction for Donations Limited to 50% of AGI (30% of AGI limit on property; 20% limit if given to private foundation)

Excess carried forward for 5 years

Deduction Value of Gifted Property is Cash or Fair Market Value, Not Basis (but no gain recognized).

Donated vehicles are worth their FMV, not purchase price.

gifts of property limited to 30% AGI (or 20% if gift to private foundation)

Excluded Contributions

Services or Income from Property

Those exchanged for benefit (no scientology seminars, though church dues are okay)

Those given to Individuals or NGOs/any org trying to influence politics

§179 Election to Expense Certain Depreciable Business Assets

(a) Deduction for §179 property treated as an expense not chargeable to capital account.

(b) Limitations

(1) Dollar limitation: Aggregate cost < $100K

(2) Reduction in limitation (Min 0) by the amount by which the cost of §179 property placed in service is < $400K

(3) Limitation based on income from trade or business

(A) The amount allowed as a deduction under subsection (a) for any taxable year (determined after the application of paragraphs (1) and (2)) shall not exceed the aggregate amount of taxable income of the taxpayer for such taxable year which is derived from the active conduct by the taxpayer of any trade or business during such taxable year.

(B) Carryover of disallowed deduction

The amount allowable as a deduction under subsection (a) for any taxable year shall be increased by the lesser of—

(i) the aggregate amount disallowed under subparagraph (A) for all prior taxable years (to the extent not previously allowed as a deduction by reason of this subparagraph), or

(ii) the excess (if any) of—

(I) the limitation of paragraphs (1) and (2) (or if lesser, the aggregate amount of taxable income referred to in subparagraph (A)), over

(II) the amount allowable as a deduction under subsection (a) for such taxable year without regard to this subparagraph.

(C) Compute taxable income without regard to the deduction allowable under this section.

(4) Married individuals filing separately

In the case of a husband and wife filing separate returns for the taxable year—

(A) such individuals shall be treated as 1 taxpayer for purposes of paragraphs (1) and (2), and

(B) unless such individuals elect otherwise, 50 percent of the cost which may be taken into account under subsection (a) for such taxable year (before application of paragraph (3)) shall be allocated to each such individual.

(5) Inflation adjustments

(c) Election

(1) An election under this § for any taxable year shall—

(A) specify the items of §179 property to which the election applies and the portion of the cost of each of such items which is to be taken into account under subsection (a), and

(B) be made on the taxpayer’s return of the tax imposed by this chapter for the taxable year.

(2) Election irrevocable w/o Secretary consent

(d) Definitions and special rules

(1) §179 property → property—

(A) which is—

(i) tangible property (to which §168 applies), or

(ii) computer software (§197(e)(3)(B)) described in §197(e)(3)(A)(i), to which §167 applies, and which is placed in service in a taxable year beginning after 2002 and before 2008,

(B) which is §1245 property (§1245(a)(3)), and

(C) which is acquired by purchase for use in the active conduct of a trade or business.

Such term shall not include any property described in §50 (b) and shall not include air conditioning or heating units.

(2) Purchase → any acquisition of property, but only if—

(A) the property is not acquired from a person whose relationship to the person acquiring it would result in the disallowance of losses under § 267 or 707 (b) (but, in applying §267(b) & (c) for purposes of this section, paragraph (4) of §267(c) shall be treated as providing that the family of an individual shall include only his spouse, ancestors, and lineal descend–ants),

(B) the property is not acquired by one component member of a controlled group from another component member of the same controlled group, and

(C) the basis of the property in the hands of the person acquiring it is not determined—

(i) in whole or in part by reference to the adjusted basis of such property in the hands of the person from whom acquired, or

(ii) under §1014 (a) (relating to property acquired from a decedent).

§183 Activities not engaged in for profit

Nine factor (intent) test – Reg. § 1.183-2

(1) Businesslike manner, (2) Preparation via study or consultation w/ experts, (3) Time & energy spent on activity, (4) Likelihood assets will appreciate, (5) Similar success or failure, (6) History of income and losses, (7) Financial situation of TP, (8) Occasional profits as compared to investment, (9) Personal enjoyment (e.g., never rode Arabian horses)

If hobby generated income in 3 out of 5 past consecutive years, rebuttable presumption of profit motive and TP may deduct

any deductible non-business expenses

expenses equal to (gross income – nonbusiness expenses)

(VII) ADDT'L ITEMIZED DEDUCTIONS

§212 Expenses for Production of Income

Deductions for individual of all the ordinary and necessary expenses paid or incurred...

(1) for the production or collection of income;

(2) for the management, conservation, or maintenance of property held for the production of income; or

(3) in connection with the determination, collection, or refund of any tax.

Subject to 2% of AGI Floor

§213 Medical, dental, etc., expenses

(a) Deduction for medical expenses, not reimbursed for by insurance or otherwise, for TP, his spouse, or a dependent (§152 w/o regard to (b)(1), (b)(2), & (d)(1)(B) thereof), to the extent that such expenses exceed 7.5% of AGI.

(b) Only for insulin & prescribed medicine or drugs.

(c) Special rule for decedents

(1) Treatment of expenses paid after death

For purposes of subsection (a), expenses for the medical care of the taxpayer which are paid out of his estate during the 1-year period beginning with the day after the date of his death shall be treated as paid by the taxpayer at the time incurred.

(2) Limitation

Paragraph (1) shall not apply if the amount paid is allowable under § 2053 as a deduction in computing the taxable estate of the decedent, but this paragraph shall not apply if (within the time and in the manner and form prescribed by the Secretary) there is filed—

(A) a statement that such amount has not been allowed as a deduction under § 2053, and

(B) a waiver of the right to have such amount allowed at any time as a deduction under § 2053.

(d) Definitions

(1) The term “medical care” means amounts paid—

(A) for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body,

(B) for transportation primarily for and essential to medical care referred to in subparagraph (A),

(C) for qualified long-term care services (as defined in § 7702B (c)), or

(D) for insurance (including amounts paid as premiums under part B of title XVIII of the Social Security Act, relating to supplementary medical insurance for the aged) covering medical care referred to in subparagraphs (A) and (B) or for any qualified long-term care insurance contract (as defined in § 7702B (b)).

In the case of a qualified long-term care insurance contract (as defined in § 7702B (b)), only eligible long-term care premiums (as defined in paragraph (10)) shall be taken into account under subparagraph (D).

(2) Amounts paid for certain lodging away from home treated as paid for medical care.— Amounts paid for lodging (not lavish or extravagant under the circumstances) while away from home primarily for and essential to medical care referred to in paragraph (1)(A) shall be treated as amounts paid for medical care if—

(A) the medical care referred to in paragraph (1)(A) is provided by a physician in a licensed hospital (or in a medical care facility which is related to, or the equivalent of, a licensed hospital), and

(B) there is no significant element of personal pleasure, recreation, or vacation in the travel away from home.

The amount taken into account under the preceding sentence shall not exceed $50 for each night for each individual.

(3) Prescribed drug.— The term “prescribed drug” means a drug or biological which requires a prescription of a physician for its use by an individual.

(4) Physician.— The term “physician” has the meaning given to such term by § 1861(r) of the Social Security Act (42 U.S.C. 1395x (r)).

(5) Special rule in the case of child of divorced parents, etc.— Any child to whom § 152 (e) applies shall be treated as a dependent of both parents for purposes of this section.

(6) In the case of an insurance contract under which amounts are payable for other than medical care referred to in subparagraphs (A), (B), and (C) of paragraph (1)—

(A) no amount shall be treated as paid for insurance to which paragraph (1)(D) applies unless the charge for such insurance is either separately stated in the contract, or furnished to the policyholder by the insurance company in a separate statement,

(B) the amount taken into account as the amount paid for such insurance shall not exceed such charge, and

(C) no amount shall be treated as paid for such insurance if the amount specified in the contract (or furnished to the policyholder by the insurance company in a separate statement) as the charge for such insurance is unreasonably large in relation to the total charges under the contract.

(7) Subject to the limitations of paragraph (6), premiums paid during the taxable year by a taxpayer before he attains the age of 65 for insurance covering medical care (within the meaning of subparagraphs (A), (B), and (C) of paragraph (1)) for the taxpayer, his spouse, or a dependent after the taxpayer attains the age of 65 shall be treated as expenses paid during the taxable year for insurance which constitutes medical care if premiums for such insurance are payable (on a level payment basis) under the contract for a period of 10 years or more or until the year in which the taxpayer attains the age of 65 (but in no case for a period of less than 5 years).

(8) The determination of whether an individual is married at any time during the taxable year shall be made in accordance with the provisions of § 6013 (d) (relating to determination of status as husband and wife).

(9) Cosmetic surgery

(A) The term “medical care” does not include cosmetic surgery or other similar procedures, unless the surgery or procedure is necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease.

(B) Cosmetic surgery defined.— For purposes of this paragraph, the term “cosmetic surgery” means any procedure which is directed at improving the patient’s appearance and does not meaningfully promote the proper function of the body or prevent or treat illness or disease.

(10) Eligible long-term care premiums.—

(A) In general.— For purposes of this section, the term “eligible long-term care premiums” means the amount paid during a taxable year for any qualified long-term care insurance contract (as defined in § 7702B (b)) covering an individual, to the extent such amount does not exceed the limitation determined under the following table:

In the case of an individual with an attained age before the close of the taxable year of:	The limitation is:
40 or less	$200
More than 40 but not more than 50	$375
More than 50 but not more than 60	750
More than 60 but not more than 70	2,000
More than 70	2,500

(B) Indexing.—

(i) In general.— In the case of any taxable year beginning in a calendar year after 1997, each dollar amount contained in subparagraph (A) shall be increased by the medical care cost adjustment of such amount for such calendar year. If any increase determined under the preceding sentence is not a multiple of $10, such increase shall be rounded to the nearest multiple of $10.

(ii) Medical care cost adjustment.— For purposes of clause (i), the medical care cost adjustment for any calendar year is the percentage (if any) by which—

(I) the medical care component of the Consumer Price Index (as defined in § 1 (f)(5)) for August of the preceding calendar year, exceeds

(II) such component for August of 1996.

The Secretary shall, in consultation with the Secretary of Health and Human Services, prescribe an adjustment which the Secretary determines is more appropriate for purposes of this paragraph than the adjustment described in the preceding sentence, and the adjustment so prescribed shall apply in lieu of the adjustment described in the preceding sentence.

(11) Certain payments to relatives treated as not paid for medical care.— An amount paid for a qualified long-term care service (as defined in § 7702B (c)) provided to an individual shall be treated as not paid for medical care if such service is provided—

(A) by the spouse of the individual or by a relative (directly or through a partnership, corporation, or other entity) unless the service is provided by a licensed professional with respect to such service, or

(B) by a corporation or partnership which is related (within the meaning of § 267 (b) or 707 (b)) to the individual.

For purposes of this paragraph, the term “relative” means an individual bearing a relationship to the individual which is described in any of subparagraphs (A) through (G) of § 152 (d)(2). This paragraph shall not apply for purposes of § 105 (b) with respect to reimbursements through insurance.

(e) Exclusion of amounts allowed for care of certain dependents

Any expense allowed as a credit under § 21 shall not be treated as an expense paid for medical care.

Deductible only to the extent that in aggregate they exceed 7.5% of AGI

Medical care means amount paid for

diagnosis, cure, mitigation, treatment or prevention of disease

for transportation primarily for and essential to medical care

for qualified long term services

health insurance premiums

medical expense v. life choice (See Ochs, 2d. Cir.)

petitioner bears BoP (See Taylor, TCM 1987 – lawn mowing expense not deductible for allergic petitioner)

but for test in Taylor but 2d Cir. rejects this test over dissent in Ochs (no deduction for sending kids to boarding school to help wife for cancer)

deduction disallowed for “personal” expense

e.g., Braille books (Rev. Ruling 55-318); hiring person for blind child (RR 64-173); elevators, ramps, pools to extent don’t add value to house

depreciation doesn’t count as “expense paid” in statute (See Henderson, TC – can deduct med. modifications to van, but not depreciation)

obviously can’t deduct same amount reimbursed by insurance

recoveries under medical insurance policy excluded from income

interesting that employer-provided med insurance excludable from income (pre-tax dollars) whereas individual medical expenses paid for in after-tax dollars then deducted

Other Deductible examples

Wig for cancer patient: Deduct

Clarinet to play in order to help mouth injury: Deduct

Child birth class: Deduct

Laser Eye Surgery: Deduct

Stop smoking program: Deduct

Cost of special food for allergy sufferers: Deduct

Navajo Hearing Ceremony: Deduct

Cost of Doctor Ordered Weight Loss Program: Deduct

BUT Not

Food for Weight Loss Program: No deduction allowed

Medical Marijuana: No deduction allowed

§217 Moving Expenses

(a) Deduction allowed

There shall be allowed as a deduction moving expenses paid or incurred during the taxable year in connection with the commencement of work by the taxpayer as an employee or as a self-employed individual at a new principal place of work.

(b) Moving expenses

(1) → only the reasonable expenses—

(A) of moving household goods and personal effects from the former residence to the new residence, and

(B) of traveling (including lodging) from the former residence to the new place of residence.

Such term shall not include any expenses for meals.

(2) Individuals other than taxpayer

In the case of any individual other than the taxpayer, expenses referred to in paragraph (1) shall be taken into account only if such individual has both the former residence and the new residence as his principal place of abode and is a member of the taxpayer’s household.

(c) Conditions for allowance

(1) the taxpayer’s new principal place of work—

(A) is 50+ miles farther from his former residence than was his former principal place of work, or

(B) if he had no former principal place of work, is at least 50 miles from his former residence, and

(2) either—

(A) during the 12-month period immediately following his arrival in the general location of his new principal place of work, the taxpayer is a full-time employee, in such general location, during at least 39 weeks, or

(B) during the 24-month period immediately following his arrival in the general location of his new principal place of work, the taxpayer is a full-time employee or performs services as a self-employed individual on a full-time basis, in such general location, during at least 78 weeks, of which not less than 39 weeks are during the 12-month period referred to in subparagraph (A).

For purposes of paragraph (1), the distance between two points shall be the shortest of the more commonly traveled routes between such two points.

(d) Rules for application of subsection (c)(2)

(1) The condition of subsection (c)(2) shall not apply if the taxpayer is unable to satisfy such condition by reason of—

(A) death or disability, or

(B) involuntary separation (other than for willful misconduct) from the service of, or transfer for the benefit of, an employer after obtaining full-time employment in which the taxpayer could reasonably have been expected to satisfy such condition.

(2) If a taxpayer has not satisfied the condition of subsection (c)(2) before the time prescribed by law (including extensions thereof) for filing the return for the taxable year during which he paid or incurred moving expenses which would otherwise be deductible under this section, but may still satisfy such condition, then such expenses may (at the election of the taxpayer) be deducted for such taxable year notwithstanding subsection (c)(2).

(3) If—

(A) for any taxable year moving expenses have been deducted in accordance with the rule provided in paragraph (2), and

(B) the condition of subsection (c)(2) cannot be satisfied at the close of a subsequent taxable year,

then an amount equal to the expenses which were so deducted shall be included in gross income for the first such subsequent taxable year.

§221 Interest on Educational Loans

(a) Allowance of deduction

In the case of an individual, there shall be allowed as a deduction for the taxable year an amount equal to the interest paid by the taxpayer during the taxable year on any qualified education loan.

(b) Maximum deduction

(1) Except as provided in paragraph (2), the deduction allowed by subsection (a) for the taxable year shall not exceed $2,500.

(2) Limitation based on modified adjusted gross income

(A) The amount which would (but for this paragraph) be allowable as a deduction under this § shall be reduced (but not below zero) by the amount determined under subparagraph (B).

(B) The amount determined under this subparagraph is the amount which bears the same ratio to the amount which would be so taken into account as—

(i) the excess of—

(I) the taxpayer’s modified adjusted gross income for such taxable year, over

(II) $50,000 ($100,000 in the case of a joint return), bears to

(ii) $15,000 ($30,000 in the case of a joint return).

(C) Modified AGI → AGI determined—

(i) w/o regard to this § and §§199, 222, 911, 931, & 933, and

(ii) after application of sections 86, 135, 137, 219, and 469.

(c) Dependents not eligible for deduction

No deduction shall be allowed by this § to an individual for the taxable year if a deduction under § 151 with respect to such individual is allowed to another taxpayer for the taxable year beginning in the calendar year in which such individual’s taxable year begins.

(d) Definitions

(1) Qualified education loan → any indebtedness incurred by the taxpayer solely to pay qualified higher education expenses—

(A) which are incurred on behalf of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer as of the time the indebtedness was incurred,

(B) which are paid or incurred within a reasonable period of time before or after the indebtedness is incurred, and

(C) which are attributable to education furnished during a period during which the recipient was an eligible student.

Such term includes indebtedness used to refinance indebtedness which qualifies as a qualified education loan. The term “qualified education loan” shall not include any indebtedness owed to a person who is related (within the meaning of § 267 (b) or 707 (b)(1)) to the taxpayer or to any person by reason of a loan under any qualified employer plan (as defined in § 72 (p)(4)) or under any contract referred to in § 72 (p)(5).

(2) Qualified higher education expenses → the cost of attendance (as defined in § 472 of the Higher Education Act of 1965, 20 U.S.C. 1087ll, as in effect on the day before the date of the enactment of the Taxpayer Relief Act of 1997) at an eligible educational institution, reduced by the sum of—

(A) the amount excluded from gross income under § 127, 135, 529, or 530 by reason of such expenses, and

(B) the amount of any scholarship, allowance, or payment described in § 25A (g)(2).

For purposes of the preceding sentence, the term “eligible educational institution” has the same meaning given such term by § 25A (f)(2), except that such term shall also include an institution conducting an internship or residency program leading to a degree or certificate awarded by an institution of higher education, a hospital, or a health care facility which offers postgraduate training.

(3) Eligible student → §25A(b)(3).

(4) Dependent → §152 (w/o regard to sub§(b)(1), (b)(2), and (d)(1)(B) thereof).

(e) Special rules

(1) Denial of double benefit

No deduction shall be allowed under this § for any amount for which a deduction is allowable under any other provision of this chapter.

(2) Married couples must file joint return

If the taxpayer is married at the close of the taxable year, the deduction shall be allowed under subsection (a) only if the taxpayer and the taxpayer’s spouse file a joint return for the taxable year.

(3) Marital status → §7703

(f) Inflation adjustments

For self, spouse of dependants (up to $2,500 w/ income limits)

§222 Qualified tuition & related expenses

(a) Deduction for an amount equal to the qualified tuition and related expenses paid by the taxpayer during the taxable year.

(b) Dollar limitations

(1) The amount allowed as a deduction under subsection (a) with respect to the taxpayer for any taxable year shall not exceed the applicable dollar limit.

(2) Applicable dollar limit

(A) 2002 and 2003, the applicable dollar limit shall be equal to—

(i) in the case of a taxpayer whose adjusted gross income for the taxable year does not exceed $65,000 ($130,000 in the case of a joint return), $3,000, and—

(ii) in the case of any other taxpayer, zero.

(B) 2004 and 2005, the applicable dollar amount shall be equal to—

(i) in the case of a taxpayer whose adjusted gross income for the taxable year does not exceed $65,000 ($130,000 in the case of a joint return), $4,000,

(ii) in the case of a taxpayer not described in clause (i) whose adjusted gross income for the taxable year does not exceed $80,000 ($160,000 in the case of a joint return), $2,000, and

(iii) in the case of any other taxpayer, zero.

(C) AGI shall be determined—

(i) without regard to this § and sections 199, 911, 931, and 933, and

(ii) after application of sections 86, 135, 137, 219, 221, and 469.

(c) No double benefit

(1) No deduction shall be allowed under subsection (a) for any expense for which a deduction is allowed to the taxpayer under any other provision of this chapter.

(2) Coordination with other education incentives

(A) Denial of deduction if credit elected

No deduction shall be allowed under subsection (a) for a taxable year with respect to the qualified tuition and related expenses with respect to an individual if the taxpayer or any other person elects to have § 25A apply with respect to such individual for such year.

(B) Coordination with exclusions

The total amount of qualified tuition and related expenses shall be reduced by the amount of such expenses taken into account in determining any amount excluded under § 135, 529 (c)(1), or 530 (d)(2). For purposes of the preceding sentence, the amount taken into account in determining the amount excluded under § 529 (c)(1) shall not include that portion of the distribution which represents a return of any contributions to the plan.

(3) Dependents

No deduction shall be allowed under subsection (a) to any individual with respect to whom a deduction under §151 is allowable to another taxpayer for a taxable year beginning in the calendar year in which such individual’s taxable year begins.

(d) Definitions and special rules

(1) Qualified tuition and related expenses → §25A(f). Such expenses shall be reduced in the same manner as under § 25A (g)(2).

(2) ID requirement - No deduction shall be allowed under subsection (a) to a taxpayer with respect to the qualified tuition and related expenses of an individual unless the taxpayer includes the name and taxpayer identification number of the individual on the return of tax for the taxable year.

(3) Limitation on taxable year of deduction

(A) A deduction shall be allowed under subsection (a) for qualified tuition and related expenses for any taxable year only to the extent such expenses are in connection with enrollment at an institution of higher education during the taxable year.

(B) Certain prepayments allowed

Subparagraph (A) shall not apply to qualified tuition and related expenses paid during a taxable year if such expenses are in connection with an academic term beginning during such taxable year or during the first 3 months of the next taxable year.

(4) No deduction for MarFilSeps

(IX) ITEMS NOT DEDUCTIBLE

§261 Disallowance of Deductions

In computing taxable income no deduction shall in any case be allowed in respect of the items specified in this part.

§262 Personal, Living, & Family Expenses

(a) No deduction shall be allowed for personal, living, or family expenses.

(b) Treatment of certain phone expenses

For purposes of subsection (a), in the case of an individual, any charge (including taxes thereon) for basic local telephone service with respect to the 1st telephone line provided to any residence of the taxpayer shall be treated as a personal expense.

§263 Capital Expenditures

(a) No deduction shall be allowed for—

(1) Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate, other than expenditures for:

(A) the development of mines or deposits deductible under §616,

(B) research & experiments deductible under §174,

(C) the conservation of soil & water deductible under §175,

(D) fertilizer, etc. by farmers deductible under §180,

(E) removal of architectural & transportation barriers to the handicapped & elderly which the TP elects to deduct under §190,

(F) expenditures for tertiary injectants with respect to which a deduction is allowed under §193; [1]

or deductible under (G) §179; (H) §179A, (I) §179B, (J) §179C, or (K) §179D.

(2) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made.

Capital Expenditures 263(a): No deduction allowed for expenses that increase the value of property or have a useful life/will benefit the taxpayer for more than one year

Capital Expenditures get “capitalized” and added to the basis of the asset

§274 Disallowance of certain entertainment, etc., expenses

(a) Entertainment, amusement, or recreation

(1) No deduction otherwise allowable under this chapter shall be allowed for any item—

(A) With respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation, unless the taxpayer establishes that the item was directly related to, or, in the case of an item directly preceding or following a substantial and bona fide business discussion (including business meetings at a convention or otherwise), that such item was associated with, the active conduct of the taxpayer’s trade or business, or

(B) With respect to a facility used in connection with an activity referred to in subparagraph (A).

In the case of an item described in subparagraph (A), the deduction shall in no event exceed the portion of such item which meets the requirements of subparagraph (A).

(2) Special rules

(A) Dues or fees to any social, athletic, or sporting club or organization shall be treated as items with respect to facilities.

(B) An activity described in section 212 shall be treated as a trade or business.

(C) In the case of a club, paragraph (1)(B) shall apply unless the taxpayer establishes that the facility was used primarily for the furtherance of the taxpayer’s trade or business and that the item was directly related to the active conduct of such trade or business.

(3) Denial of deduction for dues in any club organized for business, pleasure, recreation, or other social purpose.

(b) Gifts

(1) Limitation - No deduction shall be allowed under section 162 or section 212 for any expense for gifts made directly or indirectly to any individual to the extent that such expense, when added to prior expenses of the taxpayer for gifts made to such individual during the same taxable year, exceeds $25. For purposes of this section, the term “gift” means any item excludable from gross income of the recipient under section 102 which is not excludable from his gross income under any other provision of this chapter, but such term does not include—

(A) an item having a cost to the taxpayer not in excess of $4.00 on which the name of the taxpayer is clearly and permanently imprinted and which is one of a number of identical items distributed generally by the taxpayer, or

(B) a sign, display rack, or other promotional material to be used on the business premises of the recipient.

(2) Special rules

(A) In the case of a gift by a partnership, the limitation contained in paragraph (1) shall apply to the partnership as well as to each member thereof.

(B) For purposes of paragraph (1), a husband and wife shall be treated as one taxpayer.

50% limit (doesn’t cover employee picnics)

TP must be physically present; can’t be lavish / extravagant (fact ?)

Entertainment must be associated w/ trade or business (if before or after business meeting) or directly related to trade of business

obviously “directly related” is higher standard

can’t deduct country club dues - § 274(a)

must be different from or in excess of personal preferences (Moss – daily firm lunches not deductible under § 162(a))

Foreign Travel (274c): Allocate between business and personal

Attendance at a Convention (274h): Needs to be directly related to the convention

Luxury Water Transportation (274m): No deduction allowed

Accompanying Spouse or Relative (274m3): No deduction allowed

Meals and Entertainment (274): Only 50% deduction allowed

Tickets: Only 50% of the FACE Value

Don’t have to accompany client to event

Meals: Have to talk business during the meal

§280A Disallowance of certain expenses in connection with business use of home, rental of vacation homes, etc.

(a) No deduction with respect to the use of a dwelling unit which is used by the taxpayer during the taxable year as a residence.

(b) Exception for interest, taxes, casualty losses, etc.

Subsection (a) shall not apply to any deduction allowable to the taxpayer without regard to its connection with his trade or business (or with his income-producing activity).

(c) Exceptions for certain business or rental use; limitation on deductions for such use

(1) Certain business use

Subsection (a) shall not apply to any item to the extent such item is allocable to a portion of the dwelling unit which is exclusively used on a regular basis—

(A) as the principal place of business for any trade or business of the taxpayer,

(B) as a place of business which is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of his trade or business, or

(C) in the case of a separate structure which is not attached to the dwelling unit, in connection with the taxpayer’s trade or business.

In the case of an employee, the preceding sentence shall apply only if the exclusive use referred to in the preceding sentence is for the convenience of his employer. For purposes of subparagraph (A), the term “principal place of business” includes a place of business which is used by the taxpayer for the administrative or management activities of any trade or business of the taxpayer if there is no other fixed location of such trade or business where the taxpayer conducts substantial administrative or management activities of such trade or business.

(2) Certain storage use

Subsection (a) shall not apply to any item to the extent such item is allocable to space within the dwelling unit which is used on a regular basis as a storage unit for the inventory or product samples of the taxpayer held for use in the taxpayer’s trade or business of selling products at retail or wholesale, but only if the dwelling unit is the sole fixed location of such trade or business.

(3) Rental use

Subsection (a) shall not apply to any item which is attributable to the rental of the dwelling unit or portion thereof (determined after the application of subsection (e)).

(4) Use in providing day care services

(A) Subsection (a) shall not apply to any item to the extent that such item is allocable to the use of any portion of the dwelling unit on a regular basis in the taxpayer’s trade or business of providing day care for children, for individuals who have attained age 65, or for individuals who are physically or mentally incapable of caring for themselves.

(B) Licensing, etc., requirement

Subparagraph (A) shall apply to items accruing for a period only if the owner or operator of the trade or business referred to in subparagraph (A)—

(i) has applied for (and such application has not been rejected),

(ii) has been granted (and such granting has not been revoked), or

(iii) is exempt from having,

a license, certification, registration, or approval as a day care center or as a family or group day care home under the provisions of any applicable State law. This subparagraph shall apply only to items accruing in periods beginning on or after the first day of the first month which begins more than 90 days after the date of the enactment of the Tax Reduction and Simplification Act of 1977.

(C) Allocation formula

If a portion of the taxpayer’s dwelling unit used for the purposes described in subparagraph (A) is not used exclusively for those purposes, the amount of the expenses attributable to that portion shall not exceed an amount which bears the same ratio to the total amount of the items allocable to such portion as the number of hours the portion is used for such purposes bears to the number of hours the portion is available for use.

(5) Limitation on deductions

In the case of a use described in paragraph (1), (2), or (4), and in the case of a use described in paragraph (3) where the dwelling unit is used by the taxpayer during the taxable year as a residence, the deductions allowed under this chapter for the taxable year by reason of being attributed to such use shall not exceed the excess of—

(A) the gross income derived from such use for the taxable year, over

(B) the sum of—

(i) the deductions allocable to such use which are allowable under this chapter for the taxable year whether or not such unit (or portion thereof) was so used, and

(ii) the deductions allocable to the trade or business (or rental activity) in which such use occurs (but which are not allocable to such use) for such taxable year.

Any amount not allowable as a deduction under this chapter by reason of the preceding sentence shall be taken into account as a deduction (allocable to such use) under this chapter for the succeeding taxable year. Any amount taken into account for any taxable year under the preceding sentence shall be subject to the limitation of the 1st sentence of this paragraph whether or not the dwelling unit is used as a residence during such taxable year.

(6) Treatment of rental to employer

Paragraphs (1) and (3) shall not apply to any item which is attributable to the rental of the dwelling unit (or any portion thereof) by the taxpayer to his employer during any period in which the taxpayer uses the dwelling unit (or portion) in performing services as an employee of the employer.

Home Office & Temporary Assignments (<1 year) Deduction

Must be principal place of business OR place where taxpayer regularly meets with patients, clients or customers

See Popov (musician used bedroom exclusively as practice/recording area)

deduction for stock traders but not investors (not trade or business) (See Moller v. U.S.)

Can only deduct portion of expenses allocable to activity

can’t deduct in excess of gross income – nonbusiness deductions + bus. deductions not related to use of property

can deduct utilities, repairs, etc. and take depreciation

Vacation rental homes deduction

Can’t exceed (total expenses x (# days rented / # days used))

can take depreciation

(E) ACCOUNTING (441-483)

II. METHODS OF ACCOUNTING

Cash or Accrual Basis Tax Payers

Cash Basis Taxpayer:

Income when actually received in pocket

Expense when actually paid out of pocket

Exceptions

Constructive Receipt: An item of income is “constructively received” if it is made available to the TP so that he could receive it but he chooses not to receive it. Reg. 1.451-2

Economic Benefit: An item is recognized as income when the payor irrevocably sets aside funds in a manner that prevents the payor’s creditors from being able to reach the amount set aside (Pulsifer v. Commissioner, 1975)

Accrual Basis Taxpayer:

Income or expense when earned

Not when received in pocket or paid out of pocket

Eg. Lawyer, an accrual basis taxpayer ,charges $100,000 on December 15, 2007 for services rendered on November 15, 2007. Lawyer receives payment on January 15, 2008. How much income does the lawyer have in 2007?

$100,000: Because he “earned” the money

§453 Installment Method

Pro rata recognition (installment method)

Sale Price = $8000

Basis = $1000

Gross Profit (Gain) = $7000

Inclusion ratio: 7000 / 8000 = 87.5%

Pay taxes on 87.5% of installment payments received each year.

Income should be recog from any year where you have that proportion where the gross profit

I = ↑C + ΔW↓

(O) GAIN OR LOSS ON DISPOSITION OF PROPERTY (1001-1111)

(II) BASIS RULES OF GENERAL APPLICATION

§1014(a) Basis of Property Acquired from a Decedent

Except as otherwise provided in this section, the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall, if not sold, exchanged, or otherwise disposed of before the decedent’s death by such person, be—

(1) the fair market value of the property at the date of the decedent’s death,

(2) in the case of an election under either §2032 or §811(j) of the Internal Revenue Code of 1939 where the decedent died after 10/21/42, its value at the applicable valuation date prescribed by those sections,

(3) in the case of an election under §2032A, its value determined under such section, or

(4) to the extent of the applicability of the exclusion described in §2031(c), the basis in the hands of the decedent.

Basis = FMV at date of death or 120 days after death if executor chooses

§1015(a) Basis of Property Acquired by Gifts & Transfers in Trust

(a) Gifts after 12/31/20

If the property was acquired by gift after 12/31/20, the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift, except that if such basis (adjusted for the period before the date of the gift as provided in §1016) is greater than the fair market value of the property at the time of the gift, then for the purpose of determining loss the basis shall be such fair market value.

If the facts necessary to determine the basis in the hands of the donor or the last preceding owner are unknown to the donee, the Secretary shall, if possible, obtain such facts from such donor or last preceding owner, or any other person cognizant thereof.

If the Secretary finds it impossible to obtain such facts, the basis in the hands of such donor or last preceding owner shall be the fair market value of such property as found by the Secretary as of the date or approximate date at which, according to the best info that the Secretary is able to obtain, such property was acquired by such donor or last preceding owner.

When Sold (1015):

If Sold for above donor’s basis: Use the donor’s basis

If Sold for below donor’s basis, but above FMV @ transfer: No Gain or Loss

If Sold for below both: Use lessor of donor’s basis & FMV @ transfer

§1016 Adjustments to basis

Cost = Most used calculation of basis

Adjustments to Basis 1016(a):

Increase for capital improvements and mortgages

Decrease for cost recovery (decrease or mortgage) and depreciation

Eg. John buys a house with a 400,000 mortgage. John sells the house to George for $200,000 subject to the 400,000 mortgage. What is John’s Gain/Loss? Basis: 400,000 Received: 200,000 cash & 400,000 debt relief Gain: 200,000

Eg. John’s house has a basis of 100K. He takes out a 50K mortgage on the house: What is John’s Basis if he uses money to buy Porsche? Still 100K What is John’s Basis if he uses the 50K to make an addition? 150,000K

(III) COMMON NONTAXABLE EXCHANGES

§1031 Exchange of Property Held for Productive Use or Investment

(a) Nonrecognition of gain or loss from exchanges solely in kind

(1) No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.

(2) Exception - This subsection shall not apply to any exchange of—

(A) stock in trade or other property held primarily for sale,

(B) stocks, bonds, or notes,

(C) other securities or evidences of indebtedness or interest,

(D) interests in a partnership,

(E) certificates of trust or beneficial interests, or

(F) choses in action.

For purposes of this section, an interest in a partnership which has in effect a valid election under § 761 (a) to be excluded from the application of all of subchapter K shall be treated as an interest in each of the assets of such partnership and not as an interest in a partnership.

(3) Requirement that property be identified and that exchange be completed not more than 180 days after transfer of exchanged property

For purposes of this subsection, any property received by the taxpayer shall be treated as property which is not like-kind property if—

(A) such property is not identified as property to be received in the exchange on or before the day which is 45 days after the date on which the taxpayer transfers the property relinquished in the exchange, or

(B) such property is received after the earlier of—

(i) the day which is 180 days after the date on which the taxpayer transfers the property relinquished in the exchange, or

(ii) the due date (determined with regard to extension) for the transferor’s return of the tax imposed by this chapter for the taxable year in which the transfer of the relinquished property occurs.

(b) Gain from exchanges not solely in kind

If an exchange would be within the provisions of subsection (a), of § 1035(a), of § 1036(a), or of § 1037(a), if it were not for the fact that the property received in exchange consists not only of property permitted by such provisions to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.

(c) Loss from exchanges not solely in kind

If an exchange would be within the provisions of subsection (a), of § 1035(a), of § 1036(a), or of § 1037(a), if it were not for the fact that the property received in exchange consists not only of property permitted by such provisions to be received without the recognition of gain or loss, but also of other property or money, then no loss from the exchange shall be recognized.

(d) Basis

If property was acquired on an exchange described in this section, § 1035 (a), § 1036(a), or § 1037 (a), then the basis shall be the same as that of the property exchanged, decreased in the amount of any money received by the taxpayer and increased in the amount of gain or decreased in the amount of loss to the taxpayer that was recognized on such exchange. If the property so acquired consisted in part of the type of property permitted by this section, § 1035 (a), § 1036(a), or § 1037 (a), to be received without the recognition of gain or loss, and in part of other property, the basis provided in this subsection shall be allocated between the properties (other than money) received, and for the purpose of the allocation there shall be assigned to such other property an amount equivalent to its fair market value at the date of the exchange. For purposes of this section, § 1035 (a), and § 1036 (a), where as part of the consideration to the taxpayer another party to the exchange assumed (as determined under § 357 (d)) a liability of the taxpayer, such assumption shall be considered as money received by the taxpayer on the exchange.

(e) Exchanges of livestock of different sexes

For purposes of this section, livestock of different sexes are not property of a like kind.

§1033 Involuntary Conversions

(a) If property (as a result of its destruction in whole or in part, theft, seizure, or requisition or condemnation or threat or imminence thereof) is compulsorily or involuntarily converted—

(1) Into similar property or related in service → no gain shall be recognized.

(2) Into money → gain shall be recognized except to the extent:

(A) At TP's election, gain recognized only to the extent that amount realized exceeds the cost of such other property or such stock.

(i) no property or stock acquired before the disposition of the converted property shall be considered to have been acquired for the purpose of replacing such converted property unless held by the taxpayer on the date of such disposition; and

(ii) the taxpayer shall be considered to have purchased property or stock only if, but for the provisions of subsection (b) of this section, the unadjusted basis of such property or stock would be its cost within the meaning of section 1012.

(B) Period within which property must be replaced within (i) 2 years after any part of the gain upon the conversion is realized.

For 1033, cash relief must be used within two years to replace loss with similar property

Narrower definition for 1033: similar in purpose as opposed to like-kind

Only Defers gains, not losses

1033(a)(1) - Similary property given as relief, no gain recognized.

Examples:

Newark condemns building with adjusted basis of 100,000. Offers a replacement building in exchange. Adjusted basis transferred to replacement.

Fire burns building with adjusted basis of 100,000. Insurance offers $120,000 cash in replacement. All 120,000 spent on new replacement property. $20,000 of deferred gain.

Fire burns building with adjusted basis of 100K. Insurance offers 120K cash in replacement. 110K spent on new replacement property. 20K realized gain. 10K recog gain. 10K deferred gain.

§1041 Transfers of Property Between Spouses or Incident to Divorce

(a) No gain or loss shall be recognized on a transfer of property from an individual to (or in trust for the benefit of)—

(1) a spouse, or

(2) a former spouse, but only if the transfer is incident to the divorce.

(b) Transfer treated as gift; transferee has transferor’s basis

(1) §1041 property shall be treated as acquired by the transferee by gift, and

(2) the basis of the transferee in the property shall be the adjusted basis of the transferor.

(c) Incident to divorce → if such transfer

(1) occurs within 1 year after the date on which the marriage ceases, or

(2) is related to the cessation of the marriage.

(d) Special rule where spouse is nonresident alien

Subsection (a) shall not apply if the spouse (or former spouse) of the individual making the transfer is a nonresident alien.

(e) Transfers in trust where liability exceeds basis

Subsection (a) shall not apply to the transfer of property in trust to the extent that—

(1) the sum of the amount of the liabilities assumed, plus the amount of the liabilities to which the property is subject, exceeds

(2) the total of the adjusted basis of the property transferred.

Proper adjustment shall be made under subsection (b) in the basis of the transferee in such property to take into account gain recognized by reason of the preceding sentence.

(P) CAPITAL GAINS & LOSSES (1201-1298)

(III) DETERMINATIONS OF CAPITAL GAINS & LOSSES

§1221 Capital Asset Defined

(a) Capital Asset → property held by the taxpayer (whether or not connected with his trade or business), but does not include—

(1) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;

(2) property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in § 167, or real property used in his trade or business;

(3) a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by—

(A) a taxpayer whose personal efforts created such property,

(B) in the case of a letter, memorandum, or similar property, a taxpayer for whom such property was prepared or produced, or

(C) a taxpayer in whose hands the basis of such property is determined, for purposes of determining gain from a sale or exchange, in whole or part by reference to the basis of such property in the hands of a taxpayer described in subparagraph (A) or (B);

(4) accounts or notes receivable acquired in the ordinary course of trade or business for services rendered or from the sale of property described in paragraph (1);

(5) a publication of the United States Government (including the Congressional Record) which is received from the United States Government or any agency thereof, other than by purchase at the price at which it is offered for sale to the public, and which is held by—

(A) a taxpayer who so received such publication, or

(B) a taxpayer in whose hands the basis of such publication is determined, for purposes of determining gain from a sale or exchange, in whole or in part by reference to the basis of such publication in the hands of a taxpayer described in subparagraph (A);

(6) any commodities derivative financial instrument held by a commodities derivatives dealer, unless—

(A) it is established to the satisfaction of the Secretary that such instrument has no connection to the activities of such dealer as a dealer, and

(B) such instrument is clearly identified in such dealer’s records as being described in subparagraph (A) before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe);

(7) any hedging transaction which is clearly identified as such before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe); or

(8) supplies of a type regularly used or consumed by the taxpayer in the ordinary course of a trade or business of the taxpayer.

(b) Definitions & special rules

(1) Commodities Derivative Financial Instruments

For purposes of subsection (a)(6)—

(A) Commodities Derivatives Dealer → a person which [1] regularly offers to enter into, assume, offset, assign, or terminate positions in commodities derivative financial instruments with customers in the ordinary course of a trade or business.

(B) Commodities Derivative Financial Instrument

(i) → any contract or financial instrument with respect to commodities (other than a share of stock in a corporation, a beneficial interest in a partnership or trust, a note, bond, debenture, or other evidence of indebtedness, or a § 1256 contract (as defined in §1256(b))), the value or settlement price of which is calculated by or determined by reference to a specified index.

(ii) Specified index The term “specified index” means any one or more or any combination of—

(I) a fixed rate, price, or amount, or

(II) a variable rate, price, or amount,

which is based on any current, objectively determinable financial or economic information with respect to commodities which is not within the control of any of the parties to the contract or instrument and is not unique to any of the parties’ circumstances.

(2) Hedging transaction

(A) Hedging Transaction → any transaction entered into by the taxpayer in the normal course of the taxpayer’s trade or business primarily—

(i) to manage risk of price changes or currency fluctuations with respect to ordinary property which is held or to be held by the taxpayer,

(ii) to manage risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, by the taxpayer, or

(iii) to manage such other risks as the Secretary may prescribe in regulations.

(B) Treatment of nonidentification or improper identification of hedging transactions

Notwithstanding subsection (a)(7), the Secretary shall prescribe regulations to properly characterize any income, gain, expense, or loss arising from a transaction—

(i) which is a hedging transaction but which was not identified as such in accordance with subsection (a)(7), or

(ii) which was so identified but is not a hedging transaction.

§1222 Other Terms Relating to Capital Gains & Losses

(1) Short-term capital gain → Gain from the sale or exchange of a capital asset held for not more than 1 year, if and to the extent such gain is taken into account in computing gross income.

(2) Short-term capital loss → Loss from the sale or exchange of a capital asset held for not more than 1 year, if and to the extent that such loss is taken into account in computing taxable income.

(3) Long-term capital gain → Gain from the sale or exchange of a capital asset held for more than 1 year, if and to the extent such gain is taken into account in computing gross income.

(4) Long-term capital loss → Loss from the sale or exchange of a capital asset held for more than 1 year, if and to the extent that such loss is taken into account in computing taxable income.

(5) Net short-term capital gain → The excess of short-term capital gains for the taxable year over the short-term capital losses for such year.

(6) Net short-term capital loss → The excess of short-term capital losses for the taxable year over the short-term capital gains for such year.

(7) Net long-term capital gain → The excess of long-term capital gains for the taxable year over the long-term capital losses for such year.

(8) Net long-term capital loss → The excess of long-term capital losses for the taxable year over the long-term capital gains for such year.

(9) Capital gain net income → The excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges.

(10) Net capital loss → The excess of the losses from sales or exchanges of capital assets over the sum allowed under §1211.

(11) Net capital gain → The excess of the net long-term capital gain for the taxable year over the net short-term capital loss for such year.

§1223 Holding Period of Property

(1) In determining TP's holding period, included the period for which he held the property exchanged, if the property has the same basis in whole or in part in his hands as the property exchanged, and the property exchanged at the time of such exchange was a capital asset as defined in §1221 or property described in §1231,

(A) an involuntary conversion described in §1033 shall be considered an exchange of the property converted for the property acquired, and

(B) a distribution to which §355 (or so much of §356 as relates to §355) applies shall be treated as an exchange.

(2) In determining the period for which the taxpayer has held property however acquired there shall be included the period for which such property was held by any other person, if under this chapter such property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as it would have in the hands of such other person.

(3) In determining the period for which the taxpayer has held stock or securities the acquisition of which (or the contract or option to acquire which) resulted in the nondeductibility (under §1091 relating to wash sales) of the loss from the sale or other disposition of substantially identical stock or securities, there shall be included the period for which he held the stock or securities the loss from the sale or other disposition of which was not deductible.

(4) In determining the period for which the taxpayer has held stock or rights to acquire stock received on a distribution, if the basis of such stock or rights is determined under §307 (or under so much of §1052(c) as refers to §113(a)(23) of the Internal Revenue Code of 1939), there shall (under regulations prescribed by the Secretary) be included the period for which he held the stock in the distributing corporation before the receipt of such stock or rights upon such distribution.

(5) In determining the period for which the taxpayer has held stock or securities acquired from a corporation by the exercise of rights to acquire such stock or securities, there shall be included only the period beginning with the date on which the right to acquire was exercised.

(6) In determining the period for which the taxpayer has held a residence, the acquisition of which resulted under §1034 (as in effect on the day before the date of the enactment of the Taxpayer Relief Act of 1997) in the nonrecognition of any part of the gain realized on the sale or exchange of another residence, there shall be included the period for which such other residence had been held as of the date of such sale or exchange. For purposes of this paragraph, the term “sale or exchange” includes an involuntary conversion occurring after December 31, 1950, and before January 1, 1954.

(7) In determining the period for which the taxpayer has held a commodity acquired in satisfaction of a commodity futures contract (other than a commodity futures contract to which §1256 applies) there shall be included the period for which he held the commodity futures contract if such commodity futures contract was a capital asset in his hands.

(8) Any reference in this § to a provision of this title shall, where applicable, be deemed a reference to the corresponding provision of the Internal Revenue Code of 1939, or prior internal revenue laws.

(9) In the case of a person acquiring property from a decedent or to whom property passed from a decedent (within the meaning of §1014(b)), if—

(A) the basis of such property in the hands of such person is determined under §1014, and

(B) such property is sold or otherwise disposed of by such person within 1 year after the decedent’s death,

then such person shall be considered to have held such property for more than 1 year.

(10) If—

(A) property is acquired by any person in a transfer to which §1040 applies,

(B) such property is sold or otherwise disposed of by such person within 1 year after the decedent’s death, and

(C) such sale or disposition is to a person who is a qualified heir (as defined in §2032A(e)(1)) with respect to the decedent,

then the person making such sale or other disposition shall be considered to have held such property for more than 1 year.

In determing a capital asset's status as a long-term or short-term holding,

If received by gift, donee's holding period tacks onto donee's

If received by inheritance, automatically long-term holding.

Hypo: G bought GM stock 2 years ago, and gives it to T, when does HP begin? → The date that G bought stock. 1223 allows the holding period to tack onto the giver's holding period thus T could immediately sell the stock.

Hypo: A bought GM stock 2 years ago, and leave it to B by will. What is the HP? → 1223(9)(B) when stock is acquired by result of death, the receiver is granted long-term holding.

(IV) SPECIAL DETERMINATIONS OF CAPITAL GAINS & LOSSES

Recapture §1231, 1245, & 1250

Trade or Business assets depreciate in value & that depreciation reduces the asset’s basis.

Upon sale, the “artificial gain” is treated as ordinary gain instead of a capital gain.

Eg. On 1/05, Mechanic Jeff bought a $50K office computer w/a 5yr life.

On 1/07, Jeff sells the computer for $60K. Jeff uses straight-line depreciation.

Computer’s 1/07 basis? $30K

Ordinary gain? $20K (§1245 recaptures the $20K of depreciation as ordinary gain)

Capital gain? $10K (§1231…Taxed at 25% under §1250)

Eg. On 1/05, Mechanic Jeff bought a $50K office computer w/a 5yr life.

On 1/07, Jeff sells the computer for $40K. Jeff uses straight-line depreciation.

Computer’s 1/07 basis? $30K

Ordinary gain? $10K (§1245 recaptures the $20K of depreciation as ordinary gain)

Capital gain? None, didn’t sell for more than initial basis

§1231 Property Used in the Trade or Business & Involuntary Conversions

(a) General rule

(1) If (A) the §1231 gains exceed (B) the §1231 losses, such gains & losses shall be treated as LTCGains or LTCLosses respectively.

(2) If (A) the §1231 gains do not exceed (B) the §1231 losses, such gains & losses shall not be treated as gains & losses from sales or exchanges of capital assets.

(3) §1231 gains & losses

(A) §1231 gain →

(i) any recognized gain on the sale or exchange of property used in the trade or business, and

(ii) any recognized gain from the compulsory or involuntary conversion (as a result of destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation or the threat or imminence thereof) into other property or money of—

(I) property used in the trade or business, or

(II) any capital asset which is held for more than 1 year and is held in connection with a trade or business or a transaction entered into for profit.

(B) §1231 loss → any recognized loss from a sale or exchange or conversion described in subparagraph (A).

(4) Special rules

(A) In determining under this subsection whether gains exceed losses—

(i) the §1231 gains shall be included only if and to the extent taken into account in computing gross income, and

(ii) the §1231 losses shall be included only if and to the extent taken into account in computing taxable income, except that §1211 shall not apply.

(B) Losses (including losses not compensated for by insurance or otherwise) on the destruction, in whole or in part, theft or seizure, or requisition or condemnation of—

(i) property used in the trade or business, or

(ii) capital assets which are held for more than 1 year and are held in connection with a trade or business or a transaction entered into for profit,

shall be treated as losses from a compulsory or involuntary conversion.

(C) In the case of any involuntary conversion (subject to the provisions of this subsection but for this sentence) arising from fire, storm, shipwreck, or other casualty, or from theft, of any—

(i) property used in the trade or business, or

(ii) any capital asset which is held for more than 1 year and is held in connection with a trade or business or a transaction entered into for profit,

this subsection shall not apply to such conversion (whether resulting in gain or loss) if during the taxable year the recognized losses from such conversions exceed the recognized gains from such conversions.

(b) Property used in the trade or business

(1) → of a character which is subject to the allowance for depreciation provided in §167, held for more than 1 year, and real property used in the trade or business, held for more than 1 year, which is not—

(A) property of a kind which would properly be includible in the inventory of the taxpayer if on hand at the close of the taxable year,

(B) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business,

(C) a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by a taxpayer described in paragraph (3) of §1221(a), or

(D) a publication of the United States Government (including the Congressional Record) which is received from the United States Government, or any agency thereof, other than by purchase at the price at which it is offered for sale to the public, and which is held by a taxpayer described in 1221(a)(5).

(2) Timber, coal, or domestic iron ore with respect to which section 631 applies.

(3) Livestock including

(A) cattle and horses, regardless of age, held by the taxpayer for draft, breeding, dairy, or sporting purposes, and held by him for 24 months or more from the date of acquisition, and

(B) other livestock, regardless of age, held by the taxpayer for draft, breeding, dairy, or sporting purposes, and held by him for 12 months or more from the date of acquisition.

Such term does not include poultry.

(4) For an unharvested crop on land used in the trade or business and held for more than 1 year, if the crop and the land are sold or exchanged (or compulsorily or involuntarily converted) at the same time and to the same person, the crop shall be considered as “property used in the trade or business.”

(c) Recapture of net ordinary losses

(1) The net §1231 gain for any taxable year shall be treated as ordinary income to the extent such gain does not exceed the non-recaptured net §1231 losses.

(2) Non-recaptured net §1231 losses → the excess of—

(A) the aggregate amount of the net §1231 losses for the 5 most recent preceding taxable years beginning after December 31, 1981, over

(B) the portion of such losses taken into account under paragraph (1) for such preceding taxable years.

(3) Net §1231 gain → the excess of (A) §1231 gains over (B) §1231 losses.

(4) Net §1231 loss → the excess of (A) §1231 losses over (B) §1231 gains.

(5) For purposes of determining the amount of the net §1231 gain or loss, the rules of sub§(a)(4) shall apply.

§1245 Gain from Dispositions of Certain Depreciable Property

(a) General rule

(1) Ordinary income - Except as otherwise provided in this section, if §1245 property is disposed of the amount by which the lower of—

(A) the recomputed basis of the property or

(B)(i) if sold, exchanged, or involuntarily converted, the amount realized, or (ii) if not, the property's fair market value,

exceeds the adjusted basis of such property shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.

(2) Recomputed basis

(A) → with respect to any property, its adjusted basis recomputed by adding thereto all adjustments reflected in such adjusted basis on account of deductions (whether in respect of the same or other property) allowed or allowable to the taxpayer or to any other person for depreciation or amortization.

(B) Taxpayer may establish amount allowed

For purposes of subparagraph (A), if the taxpayer can establish by adequate records or other sufficient evidence that the amount allowed for depreciation or amortization for any period was less than the amount allowable, the amount added for such period shall be the amount allowed.

(C) Certain deductions treated as amortization

Any deduction allowable under section 179, 179A, 179B, 179C, 179D, 181, 190, 193, or 194 shall be treated as if it were a deduction allowable for amortization.

(3) §1245 Property → any property which is or has been property of a character subject to the allowance for depreciation provided in §167 and is either—

(A) personal property,

(B) other property (not including a building or its structural components) but only if such other property is tangible and has an adjusted basis in which there are reflected adjustments described in paragraph (2) for a period in which such property (or other property)—

(i) was used as an integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electrical energy, gas, water, or sewage disposal services,

(ii) constituted a research facility used in connection with any of the activities referred to in clause (i), or

(iii) constituted a facility used in connection with any of the activities referred to in clause (i) for the bulk storage of fungible commodities (including commodities in a liquid or gaseous state),

(C) so much of any real property (other than any property described in subparagraph (B)) which has an adjusted basis in which there are reflected adjustments for amortization under section 169, 179, 179A, 179B, 179C, 179D, 185,[1] 188 (as in effect before its repeal by the Revenue Reconciliation Act of 1990), 190, 193, or 194,[2]

(D) a single purpose agricultural or horticultural structure (as defined in section 168 (i)(13)),

(E) a storage facility (not including a building or its structural components) used in connection with the distribution of petroleum or any primary product of petroleum, or

(F) any railroad grading or tunnel bore (as defined in section 168 (e)(4)).

(b) Exceptions and limitations

(1) Gifts - Subsection (a) shall not apply to a disposition by Gift.

(2) Transfers at death - Except as provided in §691 (relating to income in respect of a decedent), subsection (a) shall not apply to a transfer at death.

(3) Certain tax-free transactions

If the basis of property in the hands of a transferee is determined by reference to its basis in the hands of the transferor by reason of the application of section 332, 351, 361, 721, or 731, then the amount of gain taken into account by the transferor under subsection (a)(1) shall not exceed the amount of gain recognized to the transferor on the transfer of such property (determined without regard to this section). Except as provided in paragraph (6), this paragraph shall not apply to a disposition to an organization (other than a cooperative described in section 521) which is exempt from the tax imposed by this chapter.

(4) Like kind exchanges; involuntary conversions, etc.

If property is disposed of and gain (determined without regard to this section) is not recognized in whole or in part under §1031 or 1033, then the amount of gain taken into account by the transferor under subsection (a)(1) shall not exceed the sum of—

(A) the amount of gain recognized on such disposition (determined without regard to this section), plus

(B) the fair market value of property acquired which is not section 1245 property and which is not taken into account under subparagraph (A).

(5) Property distributed by a partnership to a partner

(A) The basis of §1245 property distributed by a partnership to a partner shall be deemed to be determined by reference to the adjusted basis of such property to the partnership.

(B) Adjustments added back

In the case of any property described in subparagraph (A), for purposes of computing the recomputed basis of such property the amount of the adjustments added back for periods before the distribution by the partnership shall be—

(i) the amount of the gain to which subsection (a) would have applied if such property had been sold by the partnership immediately before the distribution at its fair market value at such time, reduced by

(ii) the amount of such gain to which section 751 (b) applied.

(6) Transfers to tax-exempt organization where property will be used in unrelated business

(A) The second sentence of paragraph (3) shall not apply to a disposition of section 1245 property to an organization described in section 511 (a)(2) or 511 (b)(2) if, immediately after such disposition, such organization uses such property in an unrelated trade or business (as defined in section 513).

(B) Later change in use

If any property with respect to the disposition of which gain is not recognized by reason of subparagraph (A) ceases to be used in an unrelated trade or business of the organization acquiring such property, such organization shall be treated for purposes of this section as having disposed of such property on the date of such cessation.

(7) Timber property

In determining, under subsection (a)(2), the recomputed basis of property with respect to which a deduction under section 194 was allowed for any taxable year, the taxpayer shall not take into account adjustments under section 194 to the extent such adjustments are attributable to the amortizable basis of the taxpayer acquired before the 10th taxable year preceding the taxable year in which gain with respect to the property is recognized.

(8) Disposition of amortizable section 197 intangibles

(A) If a TP disposes of more than 1 amortizable section 197 intangible (as defined in section 197 (c)) in a transaction or a series of related transactions, all such amortizable 197 intangibles shall be treated as 1 section 1245 property for purposes of this section.

(B) Exception - Subparagraph (A) shall not apply to any amortizable section 197 intangible (as so defined) with respect to which the adjusted basis exceeds the fair market value.

(c) Adjustments to basis

The Secretary shall prescribe such regulations as he may deem necessary to provide for adjustments to the basis of property to reflect gain recognized under subsection (a).

§1250 Gain from Dispositions of Certain Depreciable Realty

(a) Except as otherwise provided —

(1) Additional depreciation after 12/31/75

(A) If §1250 property is disposed of after December 31, 1975, then the applicable percentage of the lower of—

(i) that portion of the additional depreciation (as defined in sub§(b)(1) or (4)) attributable to periods after 12/31/75, in respect of the property, or

(ii) the excess of the amount realized (in the case of a sale, exchange, or involuntary conversion), or the fair market value of such property (in the case of any other disposition), over the adjusted basis of such property,

shall be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.

(B) Applicable percentage →

(i) in the case of §1250 property with respect to which a mortgage is insured under §221(d)(3) or 236 of the National Housing Act, or housing financed or assisted by direct loan or tax abatement under similar provisions of State or local laws and with respect to which the owner is subject to the restrictions described in §1039(b)(1)(B) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990), 100% minus 1% point for each full month the property was held after the date the property was held 100 full months;

(ii) in the case of dwelling units which, on the average, were held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under the provisions of State or local law authorizing similar levels of subsidy for lower-income families, 100% minus 1% point for each full month the property was held after the date the property was held 100 full months;

(iii) in the case of §1250 property with respect to which a depreciation deduction for rehabilitation expenditures was allowed under §167(k), 100% minus 1% point for each full month in excess of 100 full months after the date on which such property was placed in service;

(iv) in the case of §1250 property with respect to which a loan is made or insured under title V of the Housing Act of 1949, 100% minus 1% point for each full month the property was held after the date the property was held 100 full months; and

(v) in the case of all other §1250 property, 100%.

In the case of a building (or a portion of a building devoted to dwelling units), if, on the average, 85% or more of the dwelling units contained in such building (or portion thereof) are units described in clause (ii), such building (or portion thereof) shall be treated as property described in clause (ii). Clauses (i), (ii), and (iv) shall not apply with respect to the additional depreciation described in subsection (b)(4) which was allowed under section 167 (k).

(2) Additional depreciation after December 31, 1969, and before January 1, 1976

(A) If §1250 property is disposed of after 12/31/69, and the amount determined under paragraph (1)(A)(ii) exceeds the amount determined under paragraph (1)(A)(i), then the applicable percentage of the lower of—

(i) that portion of the additional depreciation attributable to periods after 12/31/69, and before 1/1/76, in respect of the property, or

(ii) the excess of the amount determined under paragraph (1)(A)(ii) over the amount determined under paragraph (1)(A)(i),

shall also be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.

(B) Applicable percentage →

(i) in the case of §1250 property disposed of pursuant to a written contract which was, on 7/24/69, and at all times thereafter, binding on the owner of the property, 100% minus 1% point for each full month the property was held after the date the property was held 20 full months;

(ii) in the case of §1250 property with respect to which a mortgage is insured under §221(d)(3) or 236 of the National Housing Act, or housing financed or assisted by direct loan or tax abatement under similar provisions of State or local laws, and with respect to which the owner is subject to the restrictions described in §1039(b)(1)(B) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990), 100% minus 1% point for each full month the property was held after the date the property was held 20 full months;

(iii) in the case of residential rental property (as defined in section 167 (j)(2)(B)) other than that covered by clauses (i) and (ii), 100% minus 1% point for each full month the property was held after the date the property was held 100 full months;

(iv) in the case of section 1250 property with respect to which a depreciation deduction for rehabilitation expenditures was allowed under §167(k), 100% minus 1% point for each full month in excess of 100 full months after the date on which such property was placed in service; and

(v) in the case of all other §1250 property, 100%.

Clauses (i), (ii), and (iii) shall not apply with respect to the additional depreciation described in subsection (b)(4).

(3) Additional depreciation before 1/1/70

(A) If §1250 property is disposed of after 12/31/63, and the amount determined under paragraph (1)(A)(ii) exceeds the sum of the amounts determined under paragraphs (1)(A)(i) and (2)(A)(i), then the applicable percentage of the lower of—

(i) that portion of the additional depreciation attributable to periods before January 1, 1970, in respect of the property, or

(ii) the excess of the amount determined under paragraph (1)(A)(ii) over the sum of the amounts determined under paragraphs (1)(A)(i) and (2)(A)(i),

shall also be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.

(B) Applicable percentage → 100% minus 1% point for each full month the property was held after the date on which the property was held for 20 full months.

(4) Any reference to §167(k) or 167(j)(2)(B) shall be treated as a reference to such section as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990.

(5) Cross reference - For reduction in the case of corporations on capital gain treatment under this section, see section 291 (a)(1).

(b) Additional Depreciation →

(1) in the case of any property, the depreciation adjustments in respect of such property; except that, in the case of property held more than one year, it means such adjustments only to the extent that they exceed the amount of the depreciation adjustments which would have resulted if such adjustments had been determined for each taxable year under the straight line method of adjustment.

(2) Property held by lessee

In the case of a lessee, in determining the depreciation adjustments which would have resulted in respect of any building erected (or other improvement made) on the leased property, or in respect of any cost of acquiring the lease, the lease period shall be treated as including all renewal periods. For purposes of the preceding sentence—

(A) the term “renewal period” means any period for which the lease may be renewed, extended, or continued pursuant to an option exercisable by the lessee, but

(B) the inclusion of renewal periods shall not extend the period taken into account by more than 2/3 of the period on the basis of which the depreciation adjustments were allowed.

(3) Depreciation adjustments → in respect of any property, all adjustments attributable to periods after December 31, 1963, reflected in the adjusted basis of such property on account of deductions (whether in respect of the same or other property) allowed or allowable to the taxpayer or to any other person for exhaustion, wear and tear, obsolescence, or amortization (other than amortization under section 168 (as in effect before its repeal by the Tax Reform Act of 1976), 169, 185 (as in effect before its repeal by the Tax Reform Act of 1986), 188 (as in effect before its repeal by the Revenue Reconciliation Act of 1990), 190, or 193). For purposes of the preceding sentence, if the taxpayer can establish by adequate records or other sufficient evidence that the amount allowed as a deduction for any period was less than the amount allowable, the amount taken into account for such period shall be the amount allowed.

(4) Additional depreciation attributable to rehabilitation expenditures

The term “additional depreciation” also means, in the case of section 1250 property with respect to which a depreciation or amortization deduction for rehabilitation expenditures was allowed under section 167 (k) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) or 191 (as in effect before its repeal by the Economic Recovery Tax Act of 1981), the depreciation or amortization adjustments allowed under such section to the extent attributable to such property, except that, in the case of such property held for more than one year after the rehabilitation expenditures so allowed were incurred, it means such adjustments only to the extent that they exceed the amount of the depreciation adjustments which would have resulted if such adjustments had been determined under the straight line method of adjustment without regard to the useful life permitted under section 167 (k) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) or 191 (as in effect before its repeal by the Economic Recovery Tax Act of 1981).

(5) Method of computing straight line adjustments

For purposes of paragraph (1), the depreciation adjustments which would have resulted for any taxable year under the straight line method shall be determined—

(A) in the case of property to which section 168 applies, by determining the adjustments which would have resulted for such year if the taxpayer had elected the straight line method for such year using the recovery period applicable to such property, and

(B) in the case any property to which section 168 does not apply, if a useful life (or salvage value) was used in determining the amount allowable as a deduction for any taxable year, by using such life (or value).

(c) §1250 property → any real property (other than §1245 property, as defined in §1245(a)(3)) which is or has been property of a character subject to the allowance for depreciation provided in section 167.

(d) Exceptions and limitations

(1) Gifts - Subsection (a) shall not apply to a disposition by gift.

(2) Transfers at death - Except as provided in section 691 (relating to income in respect of a decedent), subsection (a) shall not apply to a transfer at death.

(3) Certain tax-free transactions

If the basis of property in the hands of a transferee is determined by reference to its basis in the hands of the transferor by reason of the application of section 332, 351, 361, 721, or 731, then the amount of gain taken into account by the transferor under subsection (a) shall not exceed the amount of gain recognized to the transferor on the transfer of such property (determined without regard to this section). Except as provided in paragraph (9), this paragraph shall not apply to a disposition to an organization (other than a cooperative described in section 521) which is exempt from the tax imposed by this chapter.

(4) Like kind exchanges; involuntary conversions, etc.

(A) Recognition limit - If property is disposed of and gain (determined without regard to this section) is not recognized in whole or in part under section 1031 or 1033, then the amount of gain taken into account by the transferor under subsection (a) shall not exceed the greater of the following:

(i) the amount of gain recognized on the disposition (determined without regard to this section), increased as provided in subparagraph (B), or

(ii) the amount determined under subparagraph (C).

(B) Increase for certain stock - With respect to any transaction, the increase provided by this subparagraph is the amount equal to the fair market value of any stock purchased in a corporation which (but for this paragraph) would result in nonrecognition of gain under section 1033 (a)(2)(A).

(C) Adjustment where insufficient §1250 property is acquired

With respect to any transaction, the amount determined under this subparagraph shall be the excess of—

(i) the amount of gain which would (but for this paragraph) be taken into account under subsection (a), over

(ii) the fair market value (or cost in the case of a transaction described in section 1033(a)(2)) of the §1250 property acquired in the transaction.

(D) Basis of property acquired - In the case of property purchased by the taxpayer in a transaction described in §1033 (a)(2), in applying §1033(b)(2), such sentence shall be applied—

(i) first solely to §1250 properties and to the amount of gain not taken into account under subsection (a) by reason of this paragraph, and

(ii) then to all purchased properties to which such sentence applies and to the remaining gain not recognized on the transaction as if the cost of the §1250 properties were the basis of such properties computed under clause (i).

In the case of property acquired in any other transaction to which this paragraph applies, rules consistent with the preceding sentence shall be applied under regulations prescribed by the Secretary.

(E) Additional depreciation with respect to property disposed of

In the case of any transaction described in section 1031 or 1033, the additional depreciation in respect of the section 1250 property acquired which is attributable to the section 1250 property disposed of shall be an amount equal to the amount of the gain which was not taken into account under subsection (a) by reason of the application of this paragraph.

(5) Property distributed by a partnership to a partner

(A) The basis of §1250 property distributed by a partnership to a partner shall be deemed to be determined by reference to the adjusted basis of such property to the partnership.

(B) Additional depreciation - In respect of any property described in subparagraph (A), the additional depreciation attributable to periods before the distribution by the partnership shall be—

(i) the amount of the gain to which subsection (a) would have applied if such property had been sold by the partnership immediately before the distribution at its fair market value at such time and the applicable percentage for the property had been 100 percent, reduced by

(ii) if §751 (b) applied to any part of such gain, the amount of such gain to which section 751 (b) would have applied if the applicable percentage for the property had been 100 percent.

(6) Transfers to tax-exempt organization where property will be used in unrelated business

(A) The second sentence of paragraph (3) shall not apply to a disposition of §1250 property to an organization described in §511(a)(2) or 511(b)(2) if, immediately after such disposition, such organization uses such property in an unrelated trade or business (as defined in §513).

(B) Later change in use

If any property with respect to the disposition of which gain is not recognized by reason of subparagraph (A) ceases to be used in an unrelated trade or business of the organization acquiring such property, such organization shall be treated for purposes of this section as having disposed of such property on the date of such cessation.

(7) Foreclosure dispositions

If any section 1250 property is disposed of by the taxpayer pursuant to a bid for such property at foreclosure or by operation of an agreement or of process of law after there was a default on indebtedness which such property secured, the applicable percentage referred to in paragraph (1)(B), (2)(B), or (3)(B) of subsection (a), as the case may be, shall be determined as if the taxpayer ceased to hold such property on the date of the beginning of the proceedings pursuant to which the disposition occurred, or, in the event there are no proceedings, such percentage shall be determined as if the taxpayer ceased to hold such property on the date, determined under regulations prescribed by the Secretary, on which such operation of an agreement or process of law, pursuant to which the disposition occurred, began.

(e) Holding period - For purposes of determining the applicable percentage under this section, the provisions of §1223 shall not apply, and the holding period of section 1250 property shall be determined under the following rules

(1) Beginning of holding period

The holding period of section 1250 property shall be deemed to begin—

(A) in the case of property acquired by the taxpayer, on the day after the date of acquisition, or

(B) in the case of property constructed, reconstructed, or erected by the taxpayer, on the first day of the month during which the property is placed in service.

(2) Property with transferred basis

If the basis of property acquired in a transaction described in paragraph (1), (2), or (3) of subsection (d) is determined by reference to its basis in the hands of the transferor, then the holding period of the property in the hands of the transferee shall include the holding period of the property in the hands of the transferor.

(f) Special rules for property which is substantially improved

(1) Amount treated as ordinary income

If, in the case of a disposition of section 1250 property, the property is treated as consisting of more than one element by reason of paragraph (3), then the amount taken into account under subsection (a) in respect of such section 1250 property as ordinary income shall be the sum of the amounts determined under paragraph (2).

(2) Ordinary income attributable to an element

For purposes of paragraph (1), the amount taken into account for any element shall be the sum of a series of amounts determined for the periods set forth in subsection (a), with the amount for any such period being determined by multiplying—

(A) the amount which bears the same ratio to the lower of the amounts specified in clause (i) or (ii) of subsection (a)(1)(A), in clause (i) or (ii) of subsection (a)(2)(A), or in clause (i) or (ii) of subsection (a)(3)(A), as the case may be, for the section 1250 property as the additional depreciation for such element attributable to such period bears to the sum of the additional depreciation for all elements attributable to such period, by

(B) the applicable percentage for such element for such period.

For purposes of this paragraph, determinations with respect to any element shall be made as if it were a separate property.

(3) Property consisting of more than one element

In applying this subsection in the case of any section 1250 property, there shall be treated as a separate element—

(A) each separate improvement,

(B) if, before completion of section 1250 property, units thereof (as distinguished from improvements) were placed in service, each such unit of section 1250 property, and

(C) the remaining property which is not taken into account under subparagraphs (A) and (B).

(4) Property which is substantially improved

(A) Separate Improvement → each improvement added during the 36–month period ending on the last day of any taxable year to the capital account for the property, but only if the sum of the amounts added to such account during such period exceeds the greatest of—

(i) 25% of the adjusted basis of the property,

(ii) 10% of the adjusted basis of the property, determined without regard to the adjustments provided in §1016(a)(2)&(3), or

(iii) $5,000.

For purposes of clauses (i) and (ii), the adjusted basis of the property shall be determined as of the beginning of the first day of such 36–month period, or of the holding period of the property (within the meaning of subsection (e)), whichever is the later.

(B) Exception - Improvements in any taxable year shall be taken into account for purposes of subparagraph (A) only if the sum of the amounts added to the capital account for the property for such taxable year exceeds the greater of—

(i) $2,000, or

(ii) 1% of the adjusted basis referred to in subparagraph (A)(ii), determined, however, as of the beginning of such taxable year.

For purposes of this section, if the amount added to the capital account for any separate improvement does not exceed the greater of clause (i) or (ii), such improvement shall be treated as placed in service on the first day, of a calendar month, which is closest to the middle of the taxable year.

(C) Improvement → in the case of any section 1250 property, any addition to capital account for such property after the initial acquisition or after completion of the property.

(Q) READJUSTMENT OF TAX BTWN YEARS & SPECIAL LIMITATIONS (1301-1351)

(V) CLAIM OF RIGHT

§1341(a) Computation of Tax Where TP Restores Substantial Amount Held Under Claim of Right

(a) If

(1) an item was included in gross income for a prior taxable year (or years) because it appeared that the taxpayer had an unrestricted right to such item;

(2) a deduction is allowable for the taxable year because it was established after the close of such prior taxable year (or years) that the taxpayer did not have an unrestricted right to such item or to a portion of such item; and

(3) the amount of such deduction exceeds $3,000,

then the tax imposed by this chapter for the taxable year shall be the lesser of the following:

(4) the tax for the taxable year computed with such deduction; or

(5) an amount equal to—

(A) the tax for the taxable year computed without such deduction, minus

(B) the decrease in tax under this chapter (or the corresponding provisions of prior revenue laws) for the prior taxable year (or years) which would result solely from the exclusion of such item (or portion thereof) from gross income for such prior taxable year (or years).

For purposes of paragraph (5)(B), the corresponding provisions of the Internal Revenue Code of 1939 shall be chapter 1 of such code (other than subchapter E, relating to self-employment income) and subchapter E of chapter 2 of such code.

TP allowed to choose favorable treatment in regard to income wrongly declared & later returned.

They can either deduct it the year they lose it, or they can electively overrule Lewis by amending other return

If deduction is over $3000, then TP can reduce tax liability (not income) in the year of repayment by the reduction in tax that would have occurred in the year in which income was included had TP not included that amount (reduction in tax taken in lieu of present deduction), or can take the deduction in the amount repaid

Robber/Embezzler who claimed laundered income, but subsequently must return it, receive no benefit