FEDERAL TAXATION

I. Introduction to Federal Income Taxation a. Analysis of the Computation of Tax Liability of Mr. and Ms. Taxpayer i. Basic Questions Addressed by an Income Tax System 1. Tax = Taxable Income X Tax Rate a. TI = Adjusted Gross Income Standard Deduction Personal Exemptions. b. TI = AGI Itemized/Actual Deductions Personal Exemptions. ii. Evaluating their Tax Liability 1. Gross Income- 61 except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following [15] items. 2. Adjusted Gross Income- 62 gross income less certain deductions. 3. Deductions- two categories: above-the-line, below-the-line. a. 62- listed items = above-the-line deductions; anything else = below. b. 63- taxable income...itemizers v. non-itemizers. 4. Calculating Adjusted Gross Income- you must consider deductions above-theline; below-the-line deductions occur after the AGI. II. Gross Income: Concepts and Limitations a. Search for the Definition of Income i. 61(a)all income from whatever source derived. ii. Eisner v. Macomberthe gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through a sale or conversion of capital assets... iii. Glenshaw Glass Co.the mere fact that the payments were extracted from the wrongdoers as punishment for unlawful conduct cannot detract from their character as taxable income to the recipients...undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion. b. Income Realized in Any Form i. 1.61-1(a)income may be realized in any form, whether money, property, or services. ii. 1.61-2(d)(1)if services paid for in prop, FMV of prop is the measure; if paid for in services, the value of the services is the amount. 1. FMV def20.2031-1(b) iii. Frequent Flyer Miles, if attributed by reason of business travel paid for by her employer, is not gross income, even if used in personal travel. 2002-18, 2002-1 C.B. 621. c. Realization, Imputed Income and Bargain Purchases i. Realizationneed a realization event. 1.1001-1(a); 1001(b). 1. Embody legally distinct entitlements? Cottage Savings ii. Imputed Incomenot taxed if it derives from the personal efforts of the taxpayer. iii. Bargain Purchasesif the price you pay for something is less than the FMV, and it occurs at arms-length, generally it is not income. Pellar. 1. Employment setting 1.61-2(d)(2)(i) (if property is transferred as comp for services < FMV, the difference between both prices is GI). d. Treasure Trove- 1341 e. Cesariniin regards to whether money found in a piano was includable in gross income, i. Treasure trove, to the extent of its value in U.S. currency, constitutes gross income for the taxable year in which it is reduced to undisputed possession.- 1.61-14 Treasury Regulations 1965. ii. Title belongs to the finder as against all the world except the true owner. iii. State law, not Federal law.

f. Old Colony Trust Companythis payment (by the third person to pay the income tax) was in consideration of the services rendered by the employee, and was a gain derived by the employee from his labor. Thus, it is income. i. Rule: it was either compensation for services rendered, or a gain or profit derived from the sale of the stock of the corporation (or both)...in any view, it is taxable income. g. Rev. Rul. 79-24fair market value of the property or services rendered (if they are not paid in money) must be included in income. If they were at a stipulated price, this will be the value unless there is evidence to the contrary. h. McCannin a situation where an employer pays an employees expenses on a trip that is a reward for services rendered by the employee, the value of the reward must be regarded as income to the employee. i. Convenience of the Employer doctrine ii. Value = what Security paid. i. Pellarthe purchase of property for less than its value does not, of itself, give rise to the realization of taxable income. Such realization normally arises, and is taxed, upon sale or other disposition. i. Profit accrues only upon sale or disposition, and the taxable income is the difference between the amount thus realized and its cost (less allowed deductions). 1001. ii. The fact that the property may be acquired at a bargain price or one below its fair market value does not require a departure from this rule. 1. It may be compensation where there is a relationship of employer & employee, a dividend distribution, or a gift. j. Rocorewards (qui tam here could be one) are generally included in gross income. 1.612(a). i. Punitive damages are also includable in gross income. ii. The payment was a financial incentive for a private person to provide information and prosecute claims relating to fraudulent activity. iii. Subsequently, triggering an audit by omitting income reported on a Form 1099 is not a good faith attempt to comply with the tax laws. III. The Effect of an Obligation to Repay a. Loans: generally not gross income. Not an accession to wealth or an increase in net worth because of the equal and offsetting liability to repay the loan. i. Morrisoncommissioner argued that payments and disbursements considered taxable constructive dividends. Turns out they were loans. ii. Karns Prime & Fancy Foodfunds provided to the TP in return for executing a supply agreement and a promissory note = taxable income, not a loan. 1. 2007-53 follows Westpac, not Karns; will not treat payment of a qualifying advance trade discount as gross income. b. Claim of Right: money received under a claim of right, without restriction as to disposition, is income; the contingent repayment obligation does not allow the receipt to be treated as a loan. i. Mieleattorney deposits advance money in separate account, no income. c. Illegal Income i. Sullivangains from illegal business taxed ii. Jamesembezzlement funds constitute income iii. Gilbertno income due to intention to repay, reasonable certainty to repay, withdrawals get corporate approval, prompt assignment of assets to secure amount. 1. Repayment of illegal funds = deductible. Rev. Rul. 65-254. iv. Rochelle/Rosenthalconsistent pattern of fraudulent dealing called loans = income. d. Deposits i. Rent paid in advance generally is income in the year it is received regardless of the period covered or the taxpayers method of accounting. 1.61-8(b).

e. North American Oil Consolidated v. Burnetif a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income that he is required to return even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent. i. If in 1922 the Government had prevailed, and the company had been obliged to refund the profits received in 1917, it would have been entitled to a deduction from the profits of 1922, not from those of any earlier year... ii. Reception of part of the properties is not taxable; need to have control/charge over the entire property. f. Jamesin regards to whether embezzled funds are to be included in the gross income of the embezzler in the year in which the funds are misappropriated, i. The obvious intent of that Congress to tax income derived from both legal and illegal sources, to remove the incongruity of having the gains of the honest laborer taxed and the gains of the dishonest immune. ii. A gain constitutes taxable income when its recipient has such control over it that, as a practical matter, he derives readily realizable economic value from it. 1. All unlawful gains are taxable. iii. Rule: When a taxpayer acquires earnings, lawfully or unlawfully, without the consensual recognition, express or implied, of an obligation to repay and without restriction as to their disposition, he has received income which he is required to return, even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent. (citing North American Oil v. Burnet). g. Gilbertwe conclude that where a taxpayer withdraws funds from a corporation which he fully intends to repay and which he expects with reasonable certainty he will be able to repay, where he believes that his withdrawals will be approved by the corporation, and where he makes a prompt assignment of assets sufficient to secure the amount owed, he does not realize income on the withdrawals under the James test. h. Indianapolis Power & Light Co.in determining whether a taxpayer enjoys complete dominion over a given sum, the crucial point is not whether his use of the funds is unconstrained during the interim period, but rather, whether the taxpayer has some guarantee that he will be allowed to keep the money. i. Deposits that are advance payments are considered taxable income. ii. Because of the nature of the parties at the time of the deposit, and the fact that the customer still exercises some control over the property (with a choice to place it towards future bills or to have a cash return and receipt), does not lead to taxable income. i. Westpac Pacific Foodcash advances in exchange for volume purchase commitments, subject to pro rata repayment if the volume commitments are not met, are not income when received. 1. It is not an accession to wealth, but merely an advance against an obligation, repayable if the obligation was not performed. IV. Gains Derived from Dealings in Property a. Gain = Amount Realized Adjusted Basis 1. Gain is the excess of the amount realized over the unrecovered cost or other basis for the property sold or exchanged. 1.61-6(a). ii. Amount Realized 1. 1001(b)money received + FMV of any other prop received. iii. Adjusted Basis- 1011 (think of as unrecovered cost) 1. Basis of property - 1012 = cost 2. 1016requires a TP to adjust basis in prop to reflect any recovery of investment or any addl investment made in the prop.

3. Doylein order to determine whether there is a gain or loss, withdraw from the gross proceeds an amount sufficient to restore the capital value that existed at the commencement of the period under consideration. b. Tax Cost Basis i. 1.61-2(d)(2)(i). c. Impact of Liabilities i. Impact on Basis ii. Impact on Amount Realized 1. Recourse liabilities incurred by a taxpayer in the acquisition of prop are included in the taxpayers basis in that prop. 2. Recourse liabilities of a seller, assumed by a purchaser, are included in the sellers amount realized. a. Recourse liabilitybear the risk of loss. d. Basis of Property Acquired in Taxable Exchange i. Value of prop relinquished in an exchange generally equals the value of prop received; one may generally assume that the basis of prop received in a taxable exchange equals the value of the prop relinquished. 1. Assumption not always true; ii. Philadelphia Park Amusement Co.cost basis of property received in a taxable exchange is the fair market value of the property received, not the fair market value of the property given. 1. The basis of property shall be the cost of such property. 1012. V. Gifts, Bequests, and Inheritance a. What is Excluded under 102? i. 102- gross income does not include the value of property acquired by gift, bequest, devise, or inheritance. 1. Statutory Limitations on the Exclusion 102(b) ii. 102(c)- employer/employee exception (shall not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, an employee). b. The nature of a bequest or inheritance i. 102(a)case by case approach to characterization is necessary. 1. Lyeth v. Hoeyfor what is a bequest, etc., Congress used comprehensive terms embracing all acquisitions in the devolution of a decedents estate. c. 102(b)Statutory Limits i. First, the income from property that is excluded as a gift, etc., is itself not excluded. 102(b)(1) 1. (i.e. dividends from stock gifted to someone) ii. Second, no exclusion for gifts, whether made during life or at death, of income from property. 102(b)(2) d. Basis of Property Received by Gift i. Gifts of Appreciated Property 1. 1015substituted basis used for gifts. (transferred basis) 2. Taft v. Bowersappreciation inherent in gifts may ultimately be taxed. 3. Basically, can shift gain to another person via gifting. ii. Gifts of Property Basis in Excess of Fair Market Value a. Basically, 1015(a) doesnt allow for the shifting of losses via gifting. 2. If the FMV > AB, then the donors basis is the basis of the gift received. (AB wins if FMV is higher) 3. If the FMV < AB, then... a. 1015- if the basis is greater than the fair market value at the time, then for the purposes of calculating loss, the fair market value is used as the basis. (FMV wins if AB is higher)

4. Generally- whatever is the lesser of the two figures will be the basis under 1015. e. Basis of Property Received by Bequest or Inheritance i. 1014- fair market value of the property at the time of the decedents death is the basis for property received by bequest or inheritance 1. Pro-taxpayer; allows the step-up and will prevent a lot of taxable income. If the estate tax goes, so does the step-up proviso, and therefore there could be problems in the future. 2. Also, if prop decreased in value during the lifetime of the decedent so the decedents basis exceeded the value of the prop, 1014(a) negates the loss inherent in the property. a. This also occurs with other property decedent has, like joint tenancy and community property. 1014(b). f. Part-Gift, Part-Sale i. Reg. 1.1001-1(e) states that the seller-donor has gain to the extent that the amount realized exceeds the adjusted basis of the property. ii. 1.1015-4 provides that the donees basis will be the greater of the amount the donee paid for the property or the adjusted basis of the donor. 1. Consistent with 1015(A), note the limitation. For purposes of computing loss, the FMV of the property at the time of transfer is used as the basis to the donee. g. Dubersteina gift in the statutory sense...proceeds from a detached and disinterested generosity. i. Out of affection, respect, admiration, charity or like impulses. ii. The most critical consideration is the transferors intention. h. Wolderthe true test is whether in actuality the gift is a bona fide gift or simply a method for paying compensation. i. Look to the intention of the parties, the reasons for the transfer, and the parties performance in accordance with their intentions what the basic reason for [the donors] conduct was in fact the dominant reason that explains his action in making the transfer. ii. This was a method for compensation, in exchange for the legal services, thus taxable. i. Olkreceipts by taxpayers engaged in rendering services contributed by those with whom the taxpayers have some personal or functional contact in the course of the performance of the services are taxable income when in conformity with the practices of the area and easily valued. (Tokes, like tips, meet these conditions.) j. Goodwinthe special occasion gifts were made by the congregation as a whole, rather than by individual Church members...[there was a] highly structured program...[with] regularlyscheduled payments. i. ...the Church likely could not retain the services of a popular and successful minister at the relatively low salary it was paying...the congregation knew that the gifts enabled the Church to pay a $15,000 salary for $30,000 worth of work. VI. Sale of a Principal Residence a. 121- taxpayers may exclude $250,000 (or $500,000 for a joint return) of the gain on the sale or exchange of a qualifying principal residence. i. Principal residence- property owned and used for periods aggregating 2 years or more during the five year period. 121(a). ii. Can be used once every 2 years. 121(b)(3). 1. Need three things: (1) one of the spouses must satisfy the ownership requirement; (2) both spouses must satisfy the use requirement; (3) neither spouse has used the exclusion within 2 years. iii. Death ruleif an unmarried individual sells or exchanges property subsequent to the death of his or her spouse, the individuals use and ownership periods for 121(a) will include the period the deceased spouse used/owner the property. 121(d)(2)

iv. Spousal transfer ruleIf an individual receives 1041 prop (transfer between spouses), that individuals ownership period for 121(a) purposes will include the ownership period of the transferor. 121(d)(3)(a); 1.1221-4(b)(1). v. Divorce ruleif an individual continues having an ownership interest in the property but ceases living there because the spouse or former spouse is granted use of the residence via divorce/settlement, then the period that the spouse/former spouse is given is included in the use of the property. 121(d)(3)(b); 1.121-4(b)(2). b. Non-qualified use exception121(b)(5); subsection (a) shall not apply to so much of the gain allocated to periods of nonqualified use. i. Pro-rates and reduces the amount of gain to exclude. ii. Policy reason- 121 not designed for people to take advantage of a rental property by moving into it and getting the full exclusion under (a) (note: not retroactive before Jan. 1st 2009). iii. Equation 1. Years nonqualified use/years owned X gain = amount not eligible to be excluded under (a). 2. Ex: 5 years aggregate from 09-14; first year rental property, 3 years following were principal residence, year after that renting. The year after does not count in the non-qualified numerator, due to 121(b)(5)(C)(ii)I) (which does not include any portion of the 5-year period of (a) after the last date that the property is used as the principal residence; therefore, no post-principal residence non-qualifying years). a. Amount realized = 600,000; Adjusted Basis = 485,000. Gain = 115,000, but 15,000 is excluded due to depreciation (going over later). i. Therefore, 1/5 of 100,000 is 20,000 which cannot be excluded. iv. Impracticability ruleif a sale or exchange happens due to a change in place of employment, health, or unforeseen circumstances, and thus a taxpayer fails ownership and use requirements or the once every 2 year rule, then 121(c) still allows for some or all of the gain to be excluded. c. Principal Residence i. Residence that TP uses for majority of time = principal. 1.121-1(a)(2) 1. Nonexclusive list of factors: (1) TP place of employment; (2) principal place of abode of family members; (3) address listed on TP federal and state tax returns, drivers license, auto registration, voter regitration; (4) TP mailing addy for bills and correspondence; (5) location of TP banks; (6) location of religious organizations and recreational clubs that the TP is affiliated with. d. Guinanthe issue becomes one of whether the residence is a principal residence under 121: gross income shall not include gain from the sale . . . of property if, during the 5-year period ending on the date of sale . . . , such property has been owned and used by the taxpayer as the taxpayers principal residence for periods aggregating 2 years or more. i. The property that the taxpayer uses a majority of the time during the year ordinarily will be considered the taxpayers principal residence. 1.121-1(b)(2). 1. Factors to consider include, but are not exhaustive: location of recreational/other activities, childrens addresses, mailing address, banking area, vehicle registration, state tax returns, voting registration, drivers license. 2. Basically a balancing test spearheaded by majority of time. VII. Discharge of Indebtedness a. Overview i. Bowers v. Kerbaugh-Empire Co.the mere diminution of loss is not gain, profit, or income. ii. Merkelthe reasoning in Kirby Lumber has been called the freeing-of-assets theory. Under this theory, a taxpayer realizes gain when a debt is discharged because after the

discharge the taxpayer has fewer liabilities to offset her assets. The taxpayers existing assets, which otherwise would have gone toward repaying the debt, are freed. 1. Insolvency calculation date: it is more probable than not that he will be called upon to pay that obligation in the amount claimed. 2. Over 50% chance that you would have to pay out, then you would include it in the liabilities. If it is 50% or less, then it is not included. b. Specific Rules Governing Exclusion i. Discharge of Indebtedness when Taxpayer is Insolvent 1. Lakeland line of casesno income arises from discharge of indebtedness if the debtor is insolvent both before and after the transaction; and if the transaction leaves the debtor with assets whose value exceeds remaining liabilities, income is realized only to that extent. 2. 108(e)(1)except as provided, generally there is no insolvency exception from the general rule that gross income includes income from the discharge of indebtedness. a. However, no generation of income if it occurs in a bankruptcy/title 11 case, or, if the discharge occurs when the taxpayer is insolvent. 108. i. Insolvency exclusion limited to the amount by which the taxpayer is insolvent. 108(a)(3). ii. Insolvent means = excess of liabilities over the FMV of assets. 108(d)(3). 3. Merkel exampledebtors owes $100 to C, assets of $130, and another liability of $100. C discharges the debt in exchange for payment of $20. Debtor is thus insolvent by $70 ($200 - $130). a. Amount of exclusion under 108(a)(1)(B) is limited to $70, per 108(a)(3). b. Debtor, under 61(a)(12) realizes $80 of income ($100 - $20), and excludes $70 of that amount under 108(a)(1)(B) for net income recognition of $10. 4. Merkel ruleif a taxpayer claims to be insolvent for 108(a)(1)(B) purposes, must prove by a preponderance of the evidence that he/she will be called upon to pay an obligation claimed to be a liability and that the total amount of liabilities so proved exceeds the FMV of his/her assets. 5. 1017(b)(2)basis reduction limitation if insolvent/bankrupt; may reduce tax benefits like depreciation. ii. Disputed or Contested Debts 1. Generally, if the amount of the debt is disputed, settlement of the amount does not constitute a discharge of debt. 2. Preslarcontested liability rests on the premise that if a TP disputes an original amount of debt in good faith, a subsequent settlement of that dispute is treated as the amount of debt cognizable for tax purposes. a. Excess of original debt over the amount determined to have been due may be disregarded in calculating GI. b. Original debt must be unliquidated. 3. Zarinliquidated debt, if unenforceable, would implicate contested liability doctrine. a. When debt = unenforceable, then amount is in dispute. b. Any settlement is thus cognizable for tax purposes. c. If you pay the settlement, then there is no discharge of indebtedness income. (Zarin paid $500K in lieu of a potential 3.5mill gambling debt, which was unenforceable per state law). iii. Purchase-Money Debt Reduction for Solvent Debtors 1. 108(e)(5)if someone purchases property agreeing to pay the purchase price over a period of time, and refuses do to irregularities or defects, and then the two

parties resolve the dispute, no income resultsit is rather a retroactive reduction in purchase price. a. Basis of TP also reduced. iv. Acquisition of Indebtedness by Person Related to Debtor 1. 108(e)(4)if a person related to a debtor acquires the indebtedness, the acquisition shall be treated as an acquisition by the debtor. v. Discharge of Deductible Debt 1. 108(e)(2)forgiveness of a debt does not generate income if the payment of the debt would have been deductible. c. Discharge of Indebtedness as Gift, Compensation, etc. i. Jacobsongift exclusion not applicable where a debtor purchased his own obligations at a discount. 1. Sellers sought to minimize their loss but getting as high a price as possible for the bonds; TP, in contrast, sought to reduce his obligation by buying bonds cheap. ii. If a parent lends money to a child and subsequently forgives the debt, the forgiveness of debt would likely be considered an excludable gift under 102(a). d. Kirby Lumber Coif the corporation purchases and retires any of such bonds at a price less than the issuing price or face value, the excess of the issuing price or face value over the purchase price is gain or income for the taxable year. e. REVENUE RULING 84-176: if a cancellation of debt is simply a medium for payment of some other form of income, 108 does not apply. i. Income from COD does not automatically fall within the scope of debt discharge rules. 1. Again, medium for payment; if it is a medium for payment, such as a gift or salary, its treated like a payment and not a debt discharge. f. Gehlthe amount realized from a sale or other disposition of property includes the amount of liabilities from which the transferor is discharged as a result of the sale or disposition. Treasury Reg. 1.1001-2(a)(1). i. Section 108 grants an exclusion to insolvent taxpayers only as to income from the discharge of indebtedness. It does not preclude the realization of income from other activities or sources. g. 108(a)(1)(E)- you can exclude certain qualified principle residence indebtedness. VIII. Compensation for Personal Injuries and Sickness a. 104 and 105 exclude from GI certain amounts received on account of personal physical injury or sickness. i. 106(a)exclude from income employer-provided coverage under health/accident plans. b. Damages i. Business or Property Damages 1. Raytheon Products Corpwe ask in lieu of what were the damages awarded. a. Damages awarded on account of lost profits would be taxable; a recovery for property damage would be measured against the basis of the property to determine the taxpayers realized gain or loss. ii. Damages Received on Account of Personal Physical Injuries or Sickness 1. 104(a)(2)- gross income does not include 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. 2. Damages = tort or tort type recoveries. a. Historically, under 104(a)(2), they must be personal injuries, not nonpersonal. b. Threlkeldany invasion of the rights that an individual is granted by virtue of being a person = personal injury.

iii.

iv.

v.

vi.

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viii.

i. Economic losses also excludable; whether damages received are paid on account of a personal injury is the beginning and end of the inquiry. ii. Origin and character of the claim, not the consequences that result. Supreme Court Limitations on the Pre-1996 version of 104(a)(2) 1. Burkewhether the injury complained of is a tort-type personal injury. 2. Schleierwhether the damages receiver were on account of (actually compensated for) personal injury. a. Must bear a close nexus to the personal injury. b. No nexus = no exclusion. c. Lost wages on account of = excludable; Priv. Letter Rul. 200041022. 1996 Amendments to 104 1. House Committee Report: emotional distress is not to be treated as a physical injury or sickness, unless there is a related medical care expense. a. The term emotional distress includes physical symptoms which may result from emotional distress. b. First, if claim has its origin in a personal physical injury, recover for emotional distress may be excludable. i. Thus, the emotional distress must come after, not before, the physical injury. c. Second, if the claim has its original in physical injury, it is not necessary that the recipient of the damages is the individual who suffered the physical injury. 2. PLR 200041022-direct unwanted or uninvited physical contacts resulting in observable bodily harms such as bruises, cuts, swelling, and bleeding are personal injuries under 104(a)(2). a. Thus, (1) origin must be physical, and (2) emotional distress with physical symptoms is not excludable. Punitive Damages 1. Exclusion does not apply to any punitive damages in connection with a case not involving physical injury or sickness. 104(a)(2). 2. No exclusion was available for punitive damages arising out of non-physical injuries. 104(a)(2). Allocation of Awards 1. Service likely to scrutinize settlements carefully. 2. RobinsonTC can ignore a state court judgment allocation percentages of awards proceeds to tort-like personal injuries. a. Basically, TC decides what is personal and what is not for tax purposes. 3. Bagleysettle agreement is not dispositive to award allocation, Service can assess that, too. 4. McKaywhile they have the power to assess, sometimes they do agree with the allocation. Periodic Payments 1. Excludable under 104(a)(2). 2. Encourages injured TP to structure their settlements so as to exclude the interest component of periodic payments. 67 and Alternative Minimum Tax Issues 1. To the extent that an award is specifically excluded from income, deduction for costs in producing that income are denied. 265(a)(1). 2. TP can deduct attorney fees and associated costs in producing those awards. 212(1). a. Misc. itemized deduction, 2% floor under 67.

3. Benci-WoodwardTP must compare regular tax with a so-called tentative minimum tax. If TMT > RT, higher tax must be paid. 4. Kensethassignment of income principles prevent the injured TP from assigning part of the income from her award or settlement to attorney. 5. Banksgenerally, if a litigants recovery constitutes gross income, the litigant must include in GI the portion of recovery paid to the attorney as a contingent fee. 6. 62(a)(20)any deduction for attorneys fees and other costs paid by a TP in connection with an action involving a claim of unlawful discrimination will be ATL deduction, therefore not subject to 67 and the 2% floor. a. 62(e) defines unlawful discrimination; most non-physical personal injury actions will result in ATL deductions. c. Accident and Health Insurance i. 104(a)(3)payments received through accident/health insurance policies are excluded from GI, provided that the policy was not financed by the TP employer or by employer contributions not includable in TP income. ii. Therefore, employer-financed plans not exempt. 104(a)(3). 1. Instead, governed by 105, where 105(a) generally includes them as GI. 2. Exceptions: a. Medical expense reimbursements. 105(b) i. Limited to TP, spouse, and dependents, as well as to the actual expenses. ii. Contrast with 104(a)(3), payments that exceed medical expenses remain tax free. iii. Rev. Rul. 69-154if one policy is employer-financed and other is self-financed, then the excess reimbursement is allocated in proportion to the relative payments made by each party. b. Payments for permanent bodily injury/disfigurement. 105(c) i. These two exceptions are provided that the payments are computed with reference to the nature of the injury and not the period of absence from work. 105(c). ii. If such amounts are paid by employer, they are excluded by 104(a)(1). 1.105-3. iii. 105(c) could apply to, and exclude, any amounts paid in excess of the applicable workers comp act, since such amounts would not be excludable under 104(a)(3). c. Recall 106(a), which permits employer contributions to accident and health plans to be made on a tax-free basis to the employee, but 105(a) makes them taxable, except to the extent that the exceptions of (b) and (c) apply. d. Previously Deducted Medical Expenses i. Not excluded per 104(a) and 105(b). ii. Sometimes a payment for personal injuries or sickness, based in part on the TP medical expenses, may be made in the form of an undifferentiated lump sum. 1. Rev. Rul. 75-230lump sum award in personal injury suit settled out of court must be allocated between medical expenses and other components. a. Where no allocation is made, the settlement will be presumed to be attributable first to medical expenses previously deducted, and thus includable in income to the extent of the prior deduction allowed. 2. Rev. Rul. 75-232future medical expense awards may be excluded, but to the extent of the allocations to future medical expenses, the taxpayer may not deduct those future medical expenses under 213 when they are incurred. e. Workers Compensation

i. 104(a)(1) excluded from income are amounts received under workers compensation acts as compensation for personal injuries or sickness. 1. Also extends to payments under a statute in the nature of a workmens compensation act, but not to retirement payments to the extent based on age, length of service, or employee contributions, even where retirement is caused by occupational injury or illness. 1.104-1(b). a. Conversely, nonoccupational injury or illness compensation is not within 104(a)(1), even if the label of workers comp is placed on it. f. Certain Disability Pensions i. Military disability pensions and certain other govt disability pensions are excluded under 104(a)(4). 1. Limited by 104(b), to persons receiving compensation for combat-related injuries and to those who would on application received disability compensation from the VA. 2. Exclusion for disability income attributable to injuries suffered in a terrorist attack upon an employee of the U.S. engaged in performance of official duties outside the country. 104(a)(5). g. Schleiertwo part test: i. First, the taxpayer must demonstrate that the underlying cause of action giving rise to the recovery is based upon tort or tort type rights. ii. Second, the taxpayer must show that the damages were received on account of personal injuries or sickness. h. BANKSwhen a litigants recovery constitutes income, the litigants income includes the portion of the recovery paid to the attorney as a contingent fee. i. Attorney = agent, acting in the best interests on the principal (the client). Therefore, a principal relies on the agent to realize an economic gain, and the gain realized by the agents efforts is income to the principal. The portion paid to the agent may be deductible, but absent some other provision of law it is not excludable from the principals gross income. 1. Above-the-line deduction. 62(a)(20). IX. Fringe Benefits a. 61(a)(1) gross income includes fringe benefits. b. Meals and Lodging i. 119- convenience of the employer doctrine. c. 132 i. No-Additional-Cost Service (e.g. making excess capacity on trains available free to employees/families of). 132(a)(1) & 132(B). 1. Excludable but for a few restrictions: a. First, service must be one offered for sale to customers in the ordinary course of business. 132(b)(1). b. Second, service offered in the line of business of the employer in which the employee is performing services. 132(b)(1). c. Third, employer incurs no substantial additional cost. 132(b)(2). d. Fourth, no discrimination in favor of highly compensated employees (including officers and owners). 132(j)(1). ii. Qualified Employee Discount 132(a)(2) & 132(c). (excludes certain discounts that are given exclusively to employees). 1. Anti-discrimination provision. 132(j)(1). 2. Employee is defined in 132(h). 3. Up to 20% of services can be excluded as a fringe; excess is taxable. 4. Property is limited to gross profit percentage. Aggregate profit percentage of employer.

a. For example, if $1,000,000 of goods that cost $600,000 total, then 40% of the total sale is the amount of the discount that can be excludable. 5. What is qualified property or services? a. Same as above for no additional cost services. i. Real property/property held for investment does not qualify. ii. Reciprocal agreement rules do not apply. iii. Working Condition Fringe Benefits 132(d) 1. Any property or services provided to an employee of the employer to the extent that, if the employee paid for such property or services, such payment would be allowable as a deduction under 162 or 167. 2. No anti-discrimination limitation as above. iv. De Minimis Fringe Benefits- 132(e). 1. Any property or service the value of which is (take into account the frequency of smaller fringes) so small as to make accounting for it unreasonable or administratively impracticable. a. Occasional meal? Potentially. 1.132-6. b. Never cash. 1.132-6(c). c. Anti-discrimination rules do not apply. d. Small market value? v. Qualified Transportation- certain transportation on commuter highways, certain qualified parking, a transit pass. 132(f). 1. Limited to $100, unless qualified parking, which is $175. vi. On-Premises Gym and Other Athletic Facilities 132(j)(4). vii. Valuation- FMV value less any excludable amount less any amount actually paid. d. Gotchereconomic gain contains two distinct requirementsthere must be an economic gain, and that gain must primarily benefit the taxpayer. 61. i. Yet even if there is an indirect gain in the form of expense-paid items such as meals and lodging, the value of these items will not be gross income (even if the employee has an incidental benefit) if the items are primarily for the convenience of the employer. 119. ii. The personal benefit to the defendant (Mr. Gotcher) was clearly subordinate to the concrete benefits to VW. 1. The wife, however, had primarily a vacation, and the benefit went to Mr. Gotcher because he was relieved of paying for her. Therefore, he should be taxed to the expenses attributable to her. X. Business and Profit Seeking Expenses a. 162 and 212 are the workhorses; trade or business is 162, profit seeking is 212. Start up not allowed but for 195. i. Expense must be Ordinary and Necessary 1. Ordinary: a. Cost that is customary or expected in the life of a business (Welch v. Helvering) b. Ascertain the purpose/motive and whether there is a sufficient connection between expenditures and trade/business (Jenkins) c. Common or frequent occurrence in the type of business involved, also examine the nature and scope of the particular business (Dupont) 2. Necessary: a. Appropriate and helpful (Welch v. Helvering) b. Must be solely or primarily for the needs of the business (Henry) c. Need a legitimate connection to the trade or business (Dobbe) d. Reasonable Salaries: i. Independent investor test is whether an inactive, independent investor would be willing to compensate the employee as he was

compensated. Consider nature & quality of the services, as well as effects of the services on the return. (Elliots) ii. Factors: position held, hours worked/duties, importance of employee to company, past duties/salary with current, etc. (Elliots) iii. Posnerindirect market testhigher rate of return, the higher manager gets paid. If extremely high, extremely high pay. If low, then low. (Exacto Spring). iv. 162m- disallowing deduction of certain employee compensation > 1,000,000. e. Clothing: i. Deductible under 162 if (1) type specifically required as condition of employment; (2) not adaptable to general usage as ordinary clothing; (3) not so worn. (Pevsner) f. Lobbying: 162e disallows any deduction for amounts paid or incurred in connection with influencing legislation or any direct communication with a covered exec branch official in an attempt to influence. ii. Carrying On a Trade or Business 1. Trade or a Business: taxpayer must be involved in the activity with continuity and regularity and the taxpayers primary purpose for engaging in it must be for income or profit. a. 1.183-2a lists 9 factors for whether an activity is engaged for profit. b. Trader v. Investor (trader engaged in trade/business, investor is not). (Moller; Purvis) 2. Carrying On: prepatory trips not allowed; pursuit is not searching for, rather in connection with or in course of. a. Starting up gives benefits long after the business gets going. 3. Section 195 and the Amortization of Certain Pre-Operational or Start-Up Costs: a. Can pro-rate at an even level start-ups over a period not < 60 months. 2004, up to $5,000 in taxable year. Reduced by amount exceed $50,000. Remainder of expenses amortized over 180mos, beginning month trade/biz begins. 4. Carrying On to Employees? a. If expenses were incurred by an employee in finding work in the same trade or business, carrying on is satisfied. BTL, subject to 2% floor in 67. i. Carrying on as an executive (Primuth) ii. Possible to retain carrying on status while being unemployed (Furner) (one year period Rev. Rul. 68-591) b. 212- same as 162, except for collection/production of income c. Welch v. Helveringthe payoffs to the creditors of a bankrupt corporation (in order to strengthen his own standing and credit) are not allowable business deductions. It is not ordinary and necessary (appropriate and helpful). XI. Capital Expenditures a. 263 denies a deduction for capital expenditures (if they increase the value), allow a deduction if its merely a repair. 1.263(a)-1(b). Examples 1.263(a)-2(a). i. Provides a benefit that persists/generates income over a period of years. ii. Creates/adds basis. iii. Can be amortized/depreciated. b. Capital expenditure is a question of degree, not of kind (between deductions and CE). Consulting/legal fees had to be capitalized. (INDOPCO) i. Separate and distinct asset testif a separate and distinct asset is created, then it should be capitalized under 263. (Lincoln Savings) ii. Taxpayers realization of benefits beyond a year which it incurred is very important.

iii. If it is made in one tax year and its useful life extends substantially beyond the close of that year, then its a CE. (US Freightways) 1. One year items where it will never extend beyond a year, that meet all 162 criteria (ordinary, necessary, trade/biz) are deductible. Id. c. Selected Categories i. Cost of Acquisition; Costs incurred in Perfecting/Defending Title: 1. If the origin of the claim was in the acquisition of stocks, the costs were CEs (as the appraisals were). (Woodward/Hilton Hotels) 2. Costs incurred in defending or perfecting title are CE, thus not deducted currently. 1.263(a)-2(c), 1.212-1(k). 3. Legal fees incurred in resisting efforts to cancel registration of trademark are CEs, same in an infringement action. (Georator; Medco Products) Defense also CE, under regs. 4. If dispute does not relate to title but to income from it, then it is deductible. (Southland Royalty) (allowing deduction for costs to recover addl royalty payments, but none for determination of leasehold interest). 5. Disposing of asset, if it is simply retired/discarded, is deductible. Rev. Rul. 20007. 6. Cost of nonpracticing malpractice insurance policy for retired lawyer is deductible in the year the business ceases to operate. (Stegar) 7. Rental property and the creation thereof are CEs (Encyclopedia Britannica). a. 263A in response to Idaho Power, capitalization of indirect and direct costs. ii. Repair/Improvement 1. 1.162-4, 1.263(a)-1(b) say that expenditures for repairs/maintenance that do not materially add value to appreciably prolong life are deductible. Replacements and improvements are CEs. 2. One-year rule of thumb, CE if the acquisition has a period of useful life greater than a year. Guidepost, not dispositive. If its within a plan of rehabilitation, modernization, or improvement, then it is CE. If it stands alone, without plan, then deductible. (Wehrli) 3. See Rev. Rul. 2001-4. iii. Intangible Assets 1. Capitalization of amounts paid to acquire or create an intangible, to facilitate the acquisition or creation of an intangible, or to create or enhance a separate and distinct asset. 1.263(a)-4(b)(1). 2. Acquired intangible ex: ownership interests in corps, partnerships, etc.; debt instruments; options to provide/acquire prop; leases; patents/copyrights; franchises/trademarks. 1.263(a)-4(c)(1). MUST BE CE. 3. Created intangible: financial interests, prepaid expenses; ownership interests listed above; certain membership fees; amounts paid to create/terminate certain Ks for prop/services; amounts paid to defend title to intangible property. 1.263(a)4(d)(2). 4. Prepaid expenses = CE. (Boylston Market Association) 5. Facilitation of a transaction = CE. 1.263(a)-4(e)(1)(i). For those not CE, see 1.263(a)-4(e)(4). 6. 12 month rule, C not required for amounts paid for a right/benefit that does not extend beyond the earlier of: 12 mo from first realization of right/benefit, or end of tax year following the year of payment. 1.263(a)-4(f)(1). Ex: 1.263(a)-4(f)(8). 7. Facilitation of the acquisition of a trade/biz, or to change bizs capital structure = CE. 1.263(a)-5(a). Simplifying conventions. 1.263(a)-5(d). Amounts paid to investigate a transaction = facilitate = CE. 1.263(a)-5(e).

iv. Expansion Costs 1. Expenditures for the protection of income from loss/diminution are deductible, not CE. (Briarcliff Candy) 2. No property interest in credit card procedures by banks. Costs incurred in establishing the CC is deductible. (Colorado Springs Natl Bank). 3. Renewing certifications to maintain compliance with quality standards = deductible because mere ability to sell in new markets and to new customers does not result in significant future benefits. (Rev. Rul. 2000-4) 4. Downsizing; severance payments to employees are currently deductible v. Advertising Expenses 1. Generally, currently deductible. Rev. Rul. 92-80. 1.162-1(a), 1.162-20(a)(2). 2. Ordinary business advertising, even if long-term goals are the primary objective, are ordinary business expenses under 162 if the taxpayer can show a sufficient connection between the expenditure and the taxpayers business. (RJR Nabisco) d. Purchase or Lease i. Rental payments can be deducted with respect to the property used in a trade/business but only if the taxpayer does not take title and has no equity in property. 162(a)(3). e. Idaho Powerwhen wages are paid in connection with the construction or acquisition of a capital asset, they must be capitalized and are then entitled to be amortized over the life of the capital asset so acquired. f. Midland Empire Packing Comust assess the purpose for which the expenditure was made. If it is to restore/mend, keeping the property in an ordinarily efficient operating condition, then it is a repair and can be deducted as a trade/biz expense. If it is an improvement, alteration, etc., and prolongs the life of the property, increases its value, or makes it adaptable to a different use, the it is a capital expenditure and not deductible. g. Mt. Morris Drive-Indrain constructed = permanent improvement, thus not deductible as a capital expenditure. h. Rev. Rul. 2001-4three scenarios of repair; (1) a heavy maintenance visit without replacements, alterations, improvements, etc, that prolonged its useful life, but rather mere repairs to minor things, thus deductible; (2) replacement of skin panels on plan and installation of smoke detector system and other systems that materially improved the airplane, thus being a CE and not deductible; (3) involved replacements of major components that substantially prolonged the useful life of airframe; therefore, not deductible and is a CE. XII. Depreciation a. Costs associated with the wear, tear, and obsolence of the building/property in any given tax year. i. Need to measure the value of the building at the beginning of the tax year and the value at the end; the decrease in the value is deductible income. b. 167- a reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) (1) of property used in the trade or business (2) of property held for the production of income. i. 167e prevents fraud in carving out term interests in land and depreciating it. ii. Stock not subject to wear and tear, thus not depreciable. 1.167(a)-3. c. Need 4 key things i. Basis- 1.167(g)-1. ii. Recovery Period- 168(e)(3), others around there. iii. Depreciation Method- 168(b)(1). iv. Applicable Convention- 168(d)(1) 1. Be sure to use the tables provided after convention is found. a. Simply apply the total basis (unadjusted for depreciation) at every year on the table. The first and last years are half years (unless mid-month (straight line) or mid-quarter).

d. Recovery period/Useful life i. Asset by asset determination; longer the life, smaller the deduction. 1. 167m = asset depreciation range (selection of useful lives 20% longer or shorter than midpoint life). ii. ACRS- assigns all tangible property to one of five periods based on class life. 168(i)(1). 1. Must be placed after 12/31/81, but before 12/31/86 (MACRS). 2. Most real prop: 15 years, most tangible prop: 3 years or 5 years. iii. MACRS- after 12/31/86. Expands categories, periods, recovery. 1. Nonresidential real- 39; Residential rental- 27.5. Other than that, 3, 5, 7, 10, 15, 20. 168(e)(1). (class life = midpoint life of ADR) a. 168(e)(3)(B)(i)- 5 year property. iv. Automobiles that were in pristine condition but shown for a fee at shows are subject to obsolescence, thus depreciable. (Selig v. Commissioner). e. Depreciation Method i. Straight Line = Cost / Recovery Period. 1.167(b)-1. (Salvage cost = 0, 168(b)(4)). ii. Accelerated- permits larger depreciation in the early years of the period; front loads. 1.167(b)-2. 1. Double Declining (200%)- 168(b)(1). a. Switch over to straight line in the year SL yields a larger deduction. Automatically done in the tables. b. SL required for residential rental property and nonresidential real property. 168(3). f. Conventions i. Placed in service = placed in a condition or state of readiness and availability for the specifically assigned function 1.46-3(d)(1)(ii). 1. Half-Year: general classification for most property; property placed on July 1st/mid year at the beginning and end of the recovery period. 168(d)(1), (4)(A). 2. Mid-Month- residential rental property and nonresidential real property. 168(d)(2), (4)(B). 3. Mid-Quarter- use if prop placed in service during last quarter (3 mos) of the year, and if those props have a greater aggregate bases of 40% of all props placed into service in that year. 168(d)(3). ii. Note: 168 is general, 167 used for intangible property (unless 197 used). g. Amortization of Intangibles- 197 i. 15 year period. h. Basis and Depreciation i. Must adjust the basis of prop for depreciation. 1016(a)(2). Cannot do it less than the amount allowable. Even if you fail to claim depreciation, you must still reduce the basis! i. 179- Expensing Tangible Personal Property i. Allows taxpayers to deduct currently, immediately the cost of acquisition of certain depreciable business assets. 1. Elective, not mandatory. (why not? TV of $!) 2. Only applies to certain property. 179(c). 3. (1) is a limitation; limits the amount that can be expensed immediately with respect to the property placed in service during a certain year. (7) updates to 250,000. 4. (2) proviso for limitation in (1), reducing the payout with respect to the cost of the property > 500,000. (7) updates to 800,000. ii. Must adjust the basis immediately. XIII. Losses and Bad Debts a. Losses- 165(a); any uncompensated loss sustained during the year.

i. 165(c)- restricted to trade or business losses, losses in profit-seeking transactions, and casualty or theft losses. ii. Business or Profit Requirement 1. 165(c)(1) and (c)(2) require business/profit. a. Basically, 162 prop that is a loss = deductible; above the line. 165(c)(1). b. Losses of 212 prop are usually below the line, unless from sale/exchange of prop. 165(c)(2). i. The fact that she entered into profit does not change, even if loss inevitable. Still deductible. 1.165-9(a). 2. Main issue is usually the line between business/profit activities and personal activities. a. Can convert personal prop to income-producing. 1.165-9(b)(1). i. Newcombeoffered former home for sale but not rent; where the profit sought by the TP represents only appreciation which took place during the period the TP occupied the prop, it will not be deemed to have been held for production of income. 1. Period of time is a worthy factor to consider. ii. Austenprimary/dominant motive to be considered. iii. Gevirtzoriginal profit motive abandoned, and personal use dominant over future business use. 3. Not allowed a deduction that exceeds basis. 165(b). a. Lesser of rule FOR LOSS. 1.165-9(a)(2). i. Basis limited, for loss, to lesser of value at the time of conversion adjusted for depreciation, for period subsequent to the conversion of the prop for income-producing. ii. If converting from prop to biz use, 1.167(g)-1 determines that the FMV of date of conversion, if < AB of prop, is basis for depreciation. b. Estate of Millertax status becomes neutral (to heir) at DEATH. iii. When is a loss sustained? 1. Closed and complete transactions, fixed by identifiable events. 1.165-1(b). 2. WORTHLESS SECURITIES165(g)(2). a. Boehmdisputes over worthlessness bound to the result and when it occurred. i. 6511(d)SOL is 7 years. 3. Obsolescence or permanent abandonment = loss. 1.165-2, 1.167(a)-8(a)(4). iv. Amount of Deduction 1. Again, 165(b) limits to BASIS. v. Disallowed losses 1. Other provisions of the code, like 267(a)(1) (related party transactions) and 1091 (wash sales) may disallow losses. 165/166 are the ONLY loss granting provisions. Other code sections ride off of them (like CGs, etc.) b. Bad Debts166 i. Line between business and non-business bad debts. ii. Bona Fide Debt166 only applies to a BFD 1. Need creditor-debtor relationship, based on a valid, enforceable obligation to pay a fixed or determinable $. 1.166-1(c) iii. Worthlessnessno deduction allowed if not worthless? 1. 1.166-(2)(a),(b)no legal action needed to prove; factually determined. iv. Business Bad Debts166(a)(1) 1. Deductible in year they become wholly worthless. 2. For partial worthlessness166(a)(2).

v. Nonbusiness Bad Debtsmust be wholly worthless, not partially worthless. 1. Defined as a debt other than a debt created/acquired in connection with TPs business, or a debt the loss from the worthlessness of which is incurred in TPs business. 166(d)(2). 2. Buchananimportance of total worthlessness supported. 3. Deductible only as STCL. 166(d)(1). a. Remember the 3K limitation for capital loss deductions! 4. What about unrepaid advances to a closed corp? a. Whipplecontrolling shareholders organization, promotional, and managerial services to a corp did not cause loans to the corp to be classified as business debts. i. Cannot just be a return on an investment. 5. An employee can be considered to be the trade/biz of employment. 62(a)(1) a. Trentif loan needed to insure continued employment, then thats valid. vi. Amount deductible = debts AB. 166(b). 1. No BD deduction allowed unless such amounts have been included in income. 1.166-1(e). vii. Loan Guarantees 1. Treated as bad debts. Connection needed to classify them as nonbiz or bis. 1.1669. viii. 165 & 166 interplay 1. Mutually exclusive; where both applicable, 166 rules. Spring City. ix. Cowlesmere offers to sell or rent are insufficient to provide the necessary 212 foundation of profit-seeking, required by 165(c)(2). x. 2004-58abandonment losses for 165 (need (1) intention to abandon the asset and (2) affirmative act); 165 deduction only allowed if there is a closed and complete transaction fixed by identifiable events establishing that the property is worthless in the taxable year the deduction is claimed. 1.165-1(b), (d)(1). xi. Generesfocus on relation the loss bears to TPs business. If, at the time of worthlessness, the relation is proximate, then the debt qualifies as a bad business debt. 1. Need a dominant motive, not a significant motive. XIV. Travel Expenses i. 162(a) ii. 162(a)(2)- traveling expenses away from home, including amounts expended for meals/lodging other than extravagant amounts, in pursuit of a trade/biz. b. Commutingdue to choice of where to live being personal, generally nondeductible under 262. 1.262-1(b)(5). i. Three elements under Flowers: 1. Reasonable & necessary 2. Incurred away from home 3. Incurred in pursuit of business ii. Rev. Rul. 55-109where an employee having two separate employers is required to work on the same day at a different location within the same city for each, the expenses from Job 1 to Job 2 are ordinary/necessary. iii. Polleion duty status for police constitutes a deduction for costs of driving personal cars between homes and HQ. 1. When conditions of employment restrict an employees discretion with regards to typical personal choices = business expense. c. Other Transportation Expenses i. If you fly to another city to take a deposition = ordinary and necessary business expense. 1. Same with driving a car across town to visit a client. 2. Away from home requirement not necessary; 162(a) cures all yalls ills.

ii. What if there is a mixed vacationbusiness and personal? 1. If your primary purpose is business, you will be entitled to deduct what costs are business related. 2. If it is primarily personal, transportation expenses are not deductable, although any expenses incurred while at destination and allocable to business are deductible. 1.162-2(b)(1). iii. For cruises/luxury water transport- 274m. iv. No deduction for travel expenses for education- 274(m)(2). d. Expenses for Meals and Lodging while in Travel Status i. 274(n) limits deductions of meals to 50% of their cost. ii. Over night rule/sleep or rest rule (Correll). 1. Rides on duplication of expenses in maintaining an apt or home at his principal place of work and incurring additional expenses in securing lodging. (duplication supported by Glazer) iii. What is home? 1. Rev Rul 75-432home is the principal place of business for 162(a)(2) purposes. (factual determination) 2. Robertsonhome means vicinity of PPOB and not where personal residence is located. 3. Yet, Rosenspanhome means home? 4. Temporary jobs will give way to travel status if its away from home (Peurifoy). a. One year presumptionone year or less, temporary. More than year = indefinite = no deduction. b. Can be overcome if demonstrated that the job was going to last 2 years and return home. Blankenship. c. 162(a) now states-not be temp away from home if such period > 1 year. d. Rev. Rul 93-86 i. Realistically expected (and does last) 1 yr or <, then temp. ii. Realistically expected to last for > 1 yr (no expectation of less), then indefinite. iii. Initially 1 yr or less, but then realistically expected > 1 yr, then temporary. e. Ordinarily, seasonal employment = temp. f. Andrews- can only have one home for 162(a)(2) purposes. i. Major post of duty iv. Spousal Travel Expenses 1. Historicallyif bona fide business reason for spouses presence, then can deduct. 1.162-2(c). (had to be ordinary and necessary) 2. 274(m)(3) three requirements a. Spouse/dependent/other accompanying taxpayer is a bona fide employee of taxpayer b. Travel of S/D/O is for a bona fide business purpose c. S/D/O could otherwise deduct. i. Noteemployer paid expenses could be deductible under 274(e)(2). ii. Fringe benefit? 1.132-5(t)(1). v. Reimbursed Employee Expenses 1. ATL if 62(c) requirement is met. 62(a)(2)(A), (c). Unreimbursed, or those which fail the provisions, are BTL. 2. Amounts paid to an employee under an accountable plan are excluded from GI. 1.62-2(c)(4).

a. Three Part Test under 1.62-2(c)(2)(i): i. Reimbursement arrangement must provide reimbursements, advances, or allowances only for deductible biz expenses (business connection) 1.62-2(d)(1) ii. Properly substantiated. 1.62-2(e)(1) (amount, time, place and business purpose) 1.62-2(e)(2). iii. Must require employee to return any amount in excess of the substantiated expenses within a reasonable time. 1.62-2(f)(1). If they dont, excess = nonaccountable payment, includable in GI. 1.62-2(c)(2), (3). (check special rules 1.62-2(f)(2)). 3. Amounts paid to an employee under a nonaccountable plan are GI, deductible expense BTL (miscellaneous, itemized). 1.62-2(c)(5). vi. Business-Related Meals 1. May still be deducted as ordinary/necessary biz even if not away from home under 162(a). 1.262-1(b)(5). 2. Substantiation required. 274(a) 3. Taxpayer must be present at meal. 274(k) 4. Limits meal expense deduction to 50%. 274(n) vii. Limitations on Foreign Travel 1. 274(h)(1)determine whether it is reasonable for the convention, seminar, or meeting to be held outside the NA area. a. Cannot be deducted of ports of call outside US. $2000 a year limitation on cruise ships that meet 274(h)(2). b. N. Am. Defined 274(h)(3)(A), (5). viii. Relationship to Section 212 1. Clear from 274(c), (d) that such meals/lodging can be deducted under 212 subject to same rules under 172. a. Harrisallowed deduction for travel to maintain certain lots held for investment. 2. However, 274(h)(7) denies a deduction under 212 for convention, seminar, or similar meeting. ix. Substantiation- 274(d). x. Rev. Rul. 99-7 1. Three Examples a. Deductibledaily transportation expenses for between residence and temporary work location outside metro area where taxpayer lives/normally works. If within metro, unless next 2 exs apply, no dice. b. Deductibleif one or more regular work locations away from residence, may deduct daily expenses in going between the residence and temp work location in same trade/biz, regardless of distance. c. Deductibleif residence is PPoBiz within 280A(c)(1)(A), daily expenses incurred in going between residence and another work location in same trade/biz, regardless of whether other work is reg or temp or the distance. xi. Hendersonuse Flowers elements; (1) reasonable/necessary expenses; (2) be incurred away from home; (3) incurred while in the pursuit of a trade/biz. 1. To determine home: a. Business connection to the locale claimed home b. Duplicative nature of the taxpayers living expenses while traveling and at the claimed home. c. Personal attachments to the claimed home. XV. Entertainment and Business Meals a. Business or Pleasure?

i. Mossentertainment activities provide a necessary social lubricant. ii. 262 denies a deduction for personal expenses and most entertainment expenses. iii. Question becomes: when does 162 overcome 262? 1. Sanitary Farms Dairyfarm sent president/controlling shareholder on a big game hunt; intended and actually provided extremely good advertising at a relatively low cost, thus deductible. 2. Cohantaxpayer spend substantial $$ on tax-deductible entertainment, kept no records; Hand stated that the court must make a close approximation. iv. 274(a) imposes requirements in addition to those found in 162. 1. 274(d) substantiation requirements (intended to overturn Cohan). v. Due to a personal element and lavishness, 274(n)(1) limited the deduction for business meals and entertainment to 50%. vi. Alternative approach274(b). b. Entertainment Activities i. 274(a)(1)disallows any deduction for an activity of a type generally considered to constitute entertainment, amusement, or recreation unless (in addition to 162 or 212) taxpayer satisfies one of two tests: 1. Directly Related To (the active conduct of trade or business). a. Requires more than merely promote goodwill. 1.274-2(c)(3). b. Must anticipate some income or specific business benefit from the expense, actively engage in a business discussion, and be motivated principally by the business aspect of the business-entertainment combo. i. Not necessary to spend more time on business than entertainment. ii. See also clear business setting test 1.274-2(c)(4). c. No deduction if taxpayer not present and there are substantial distractions. 1.274-2(c)(7). 2. Associated With (the active conduct of the trade or business and directly preceded or followed by a substantial and bona fide business discussion). a. Need a clear business purpose, but this satisfied by having intent to maintain biz goodwill or obtain new business. 1.274-2(d)(2). b. Need to have a substantial business discussion that precedes or follows, and must be made with the purpose of obtaining income (or other business benefit), and it must be the principal aspect. c. Not necessary to spend more time on biz than pleasure, nor even the same day. d. Spouses1.274-2(d)(4). ii. Always remember the 50% limitation under 274(n)(1). iii. For extravagant/lavish meals, check 274(K)(1)no deduction. Also the taxpayer or employee of needs to be present. 1. Need to determine the extent of which is lavish, and only deduct what is not lavish. iv. Entertainment ticketsface value limitation under 274(l)(1). v. Therefore, for the limitations, apply all first and then the 50% limitation under 274(n). 1. The 50% limitation does not apply to employees who receive reimbursement from their employers, provided that the employee accounts to the employer per 274(d). 274(n)(2)(A), (e)(3). Employer is then subject to 50% limitation. c. Entertainment Facilities i. 274(a)(1)(B)generally nondeductible. 1. Ex: hunting lodges, swimming pools, airplanes, & vacation homes. 1.274-2(e)(2). 2. Exception: if used primarily for business purposes (more than 50% business) 1.274-2(e)(4)(iii)then only the potion directly related to the active conduct is allowed. 274(a)(2)(C).

d.

e.

f.

g.

a. Regardless, no deduction for club dues! 274(a)(3). 3. Harrigan Lumberno deduction for annual lease payments of a hunting lodge. a. Exclusive use and unfettered access = facility within 274(a)(1)(B). 4. On Shore Quality Controlno deduction for use of a ranch for hunting purposes due to friends and business acquaintances being able to use as well. Substantiation Requirements i. 274(d)need adequate records or sufficient evidence corroborating a statement of the following: 1. Amount of expense. 2. Time and place incurred. 3. Business purpose for the expense. 4. Business relationship to the taxpayer of the persons entertained. ii. Adequate records = account book, diary, or similar records with entries made at or near time of the expense, together with documentary evidence (bills/receipts) supporting entries. 1.274-5T(c)(2). 1. < $75, documentary evidence not needed. 1.274-5(c)(2). 2. If no adequate records, must establish substantiation by own statement together with corroborative evidence. 1.274-5T(c)(3). iii. Exceptions to substantiation: 1. An employee incurring reimbursed expenses does not have to report the reimbursement or the expenses if he makes an adequate accounting to the employer. 1.274-5T(f)(2). 2. Certain per diem and mileage allowances also exempted. 1.274-5(g). Excess still income. Exceptions i. 274(e)(2)(A) disallowance rule does not apply to the extent the taxpayers payment of an expense is treated as compensation to the recipient. ii. Substantiation required for 274(d) expenses, except to the extent waived b the 274(d) regulations themselves. Business Meals i. 162(a)(2) allows a deduction for ones own meals while away from home on business; 119 exclude meals furnished for the convenience of the employer; 132 excludes occasional supper money from income. ii. Suttercost of meals, entertainment, and similar items for ones self and dependents are a personal expense, nondeductible. 1. Can be overcome by clear and detailed evidence . . . that the expenditure in question was different from or in excess of that which would have been made for the taxpayers personal purposes. iii. Basically, under Rev. Rul. 63-144, a taxpayer cannot obtain a deduction for the portion of his meal cost which does not exceed an amount he would normally spend on himself. iv. Sibla/Cooperfiremen allowed to deduct contributions to a fund for daily meals at the station, whether or not they were able to actually eat said meals. v. Wellsdeduction denied for a public defender for costs of taking several staffers out once a month and other periodic lunches. vi. Fenstermakerno deduction allowed for expenditures on ground there was no showing that the expenses exceeded what would have been incurred for personal purposes. vii. Dunkelbergeremployee must show that the employer required or expected her to incur and bear the expenses without reimbursement. Walliserdirectly related to/associated with; directly related requires greater degree of proximate relationship. More than goodwill for directly related with standard.

h. Mossmeal itself should be an organic part of the business meeting, so as to reduce transaction costs due to growth of camaraderie and growing a rapport. It is different when all participants in the meal are coworkers already. Meal with outsider = social lubricant. i. Churchill Downsevents were mainly dinners, brunches, receptions, and are generally considered entertainment (and food and beverage), should be subject to the 50% limitation under 274(n). XVI. Charitable Deductions (Ch. 26) (be familiar with GENERALLY) a. General- 170: must be made to or for the use of a qualified recipient (170c); constitute a transfer of money or property made with no expectation of return; actually be paid to the recipient within the taxable year (170(a)(1)); not exceed certain percentage limitations (170b); be substantiated. b. Requirements for Charitable Deductions i. Who is a Qualified Recipient?- 170(c) provides a list 1. 170c2- exclusively charitable 2. TRIPP V. COMMISSIONER- specific individual is not an entity you can give charity to. (cannot earmark certain funds for a certain person). a. PEACE V. COMMISSIONER- can suggest to whom it goes? 3. DAVIS V. COMMISSIONER- LDS funds given to sons mission work not deductible. If gave to church, and church gave it to them, could have been. Not for the use of charitable organization...needs to be in a legally enforceable trust of that org. 4. Net earnings cannot benefit a private shareholder or individual. 170(c)(2)(c). 5. Lobbying/political limited 170(c)(2)(d). ii. What is a Contribution or Gift? Similar to DUBERSTEIN. 1. Allandetached and disinterested generosity. a. Cannot expect to benefit from this charitable donation. 2. Voluntary transfer of money with no expectation of benefit. a. Childrens private school? No. b. Facts and circumstances. 3. Hernandeznot allowed a deduction for church of Scientology fees because its a quid pro quo exchange. 4. American Bar Endowment1.170A-1(h)(1, (2). Charitable contribution is limited to the amount of the payment that exceeds the value when it is done in consideration for goods or services. a. Rev. Rul. 67-246tickets to concert examples. If reimbursed orchestra, face value for tickets, no deduction. If charity charged more than face value of tickets (and indicated), could take a deduction of excess. Have to go to concert. b. Unless religious org, have to provide info to charitable person that only excess can be counted. 5. If taxpayer donating to higher institution, in exchange for rights of tickets, only 80% amount contributed. 6. For cars, deduction limited to what the charity values it at. iii. Actual Payment Required- 170(a)(1) (within the taxable year in which the deduction is taken). iv. Limitations- 170e 1. Contribution base limitation of 50% (of the AGI). 170(b). 2. Capital gain property limitation 170(b)(1)(c). 3. Corporations limited to 10% of corps TI. 170(b)(2). c. Contribution of Services i. Cannot provide services and claim a deduction for their value. 1.170A-1(g). Can if you expend to render those services. d. Contribution of Appreciated Property i. FMV used. 1.170A-1c1.

ii. 170e states amount of deduction is the difference between the FMV and the amount of gain that would not have been long-term capital gain had the property not been sold. 1. Limits deduction to adjusted basis for ordinary income property. Ordinary income and short-term capital gain treated the same. 2. If I donate a Picasso painting to a Church that sells it the next day, deduction is limited to basis. 170(e)(1)(B)(i)(II). e. Contributions of Partial interests in Property- generally not allowed. 170(f)(3(A). i. Certain transfers in trust can. ii. If only interest is a partial interest (like a remainder interest), then you can have a deduction. 1.170A-7(a)(2)(i). 1. Cannot purposely divide property to create an interest and avoid 170(f)(3)(A). a. Exceptions: i. 170(f)(3)(b) remainder interest in personal residence or farm. 1. Can retain life interest. ii. 170(f)(3)(b) contributions of undivided portions of the entire interest in the property. iii. 170(f)(3)(b) qualified conservation easement. f. Bargain Sale to Charity: if you sell to a charity for less than its worth (bargain sale) i. 1011(b) requires apportioning basis of property between charitable portion and sale side to receive accurate gain. g. Substantiation i. In past, small donations did not necessarily need substantiation. XVII. Capital Gains and Losses (Ch. 31) a. Preferential Treatment for Long Term Capital Gain i. Investment type gains; tax at a lower rate due to fact it could be inflation; mobility of capital problems. ii. No preferential treatment = disincentivize savings? 1. Need regulatory scheme? Can handle inflation in another way? iii. Limitation on Deduction of Capital Losses iv. Justification for Preferential Capital Gain Treatment b. Section 1(h) i. Maximum Rates on Long-Term Capital Gain under the Current Law

1. NCG = NLTCG(LTCG LTCL) NSTCL(STCL STCG)

a. Only apply to the extent NLTCG exceed capital losses. b. STCG = ordinary rates. ii. Components of Net Capital Gain: 28% Rate Gain; Unrecaptured Section 1250 Gain; Adjusted Net Capital Gain 1. FIRST28%: Collectibles and 1202 Gain (if ordinary income bracket is < 28%, tax at ordinary rates; if ordinary brack > 28%, get bumped down) a. Collectibles Gain: sale or exchange of rug, antique, stamp, coin, etc., which is held for more than year. 1(h)(6) b. 1202 Gain: 50% of the gain from the sale or exchange of certain type of stock described in 1202. 2. SECONDUnrecaptured 1250 Gain25%: certain type of depreciation recapture (any gain attributed to depreciation), taxed at 25%. 3. ANYTHING LEFTOVERAdjusted Net Capital Gain: 15% and 5%/0% Rates a. If taxpayer in 10 or 15% bracket, and have room leftover in that bracket, starting 2008, rate will be 0 on any NCG. 1(h)(1)(b). i. Ex: 30K LTCG, 36K Ordinary I. 1. 4K of LTCG is taxed at 0 due to 40-36 = 4 (40 = bracket cap). 4. Adjusted Net Capital Gain: Qualified Dividend Income

a. Dividends (if qualified), taxed at 15%. At end of 2010 it expires. 1(h)(11)(b). Think of as something that gets CG treatment, but not CG. i. Corporations, basically. ii. This is added after NCG calculation. iii. Attribution of Capital Losses Included in the Computation of Net Capital Gain 1. NSTCL = STCL STCG 2. NLTCG = LTCG LTCL 3. STCL will reduce STCG. STCGs suck because they dont get any preferential treatment (OI). a. If any leftover, then attack 28% rate gain for collectibles. Then attack the 25%, then attack the 15%. i. Go in descending order according to category. 4. LTCL first applied to LTCG in the same category. If adjusted NCL, start with 15%, then up to 28% if that is eaten up. Then 25%, then 15%. a. Start with category where the loss is. c. Application of 1211(b) Limitation on the Deduction of Capital Losses i. If I a loss under 1211(b), can eat up all CG dollar-for-dollar, up until the CG is exhausted. 1. Code doesnt let deduct the excess as OI. Can deduct 3K of the excess right away against OI. Any leftover after that, carry over into future years (indefinitely) until we die or get used up. a. Can deduct, each year, 3K a year, unless you can get match up with more CG to eat up more. 2. Ordinary Losses > Capital Losses, but Capital Gains > Ordinary Gains. ii. 1211 not a deduction granting provision. In order to be deductible, have to use a loss provision like 165. iii. Thus, if you have a NCL at the end of the day, what are you carrying over? 1. 1212(b) determines the character of the carryover 2. Take STCG and net against STCL a. Then LTCG and net against LTCL. b. Cross match and net against each other to determine what category it is. c. STCL = deemed to be deducted for against the 3K OI offset. Make up phantom gain? d. What is a Capital Asset? Everything except what is listed! i. Section 1221(a)(1): Inventory, Stock in Trade, and Property Held Primarily for Sale to Customers in the Ordinary Course of the Taxpayers Trade or Business 1. Capital asset is everything except for what is listed in 1221(a)(1). If not on the list, it is a CA. List: a. Inventory or property held by the taxpayer primarily (of first importance) for sale to customers in ordinary course of business. i. Bynumlook to primary purpose of the property was at the time which it was being offered for sale, not at the time it was first bought. ii. Section 1221(a)(2): Property Used in the Taxpayers Trade or Business 1. Real or depreciable property used in the trade or business. 2. Can still get 1231 CG treatment. iii. Section 1221(a)(3): Copyrights, Literary, Musical, Artistic Compositions, etc. 1. Personal efforts by taxpayer who created it; or letter/memo of property produced by taxpayer. 2. Also denied if held by taxpayer in whose hands the basis is determined in whole or in part in reference to the basis of such property in the hands of the taxpayer who gifted it.

3. 1221(b)(3) can elect to have this not get treated as OI if youre selling or exchanging taxpayer created musical works. 4. 170(e) charitable limitation if donating musical composition to charity. iv. Section 1221(a)(4): Accounts Receivable for Services Rendered or Inventory-Type Assets Sold 1. People sell AR all the time. If related to services rendered or inventory type, not treated as CA. v. Section 1221(a)(5): Certain Publications of the U.S. Govt vi. Section 1221(a)(8): Supplies Used or Consumed in the Taxpayers Trade/Business vii. Judicially Established Limits on Capital Asset Characterization 1. Corn Productstaxpayer purchased corn futures; would take possession of Ks if necessary, or sell remaining Ks. Tried to claim them as CG. SCt said that the definition should be narrowly construed, intent of not classifying business income as CG. Taxpayer in business of selling corn; futures used to ensure corn supply not interrupted. 2. Windell Companysubstantial investment purpose makes it a CA, even if there is a business motive. 3. Arkansas Bestcapital stock held by a taxpayer; CA even though it was acquired for business purposes. Distinguished Corn Products as a broad reading of 1221(a)(1). 4. Ceneztaxpayer bought stock in corporation which runs an oil refinery. CA even though taxpayer sold petroleum products. Couldnt directly redeem stock for oil, unlike Corn Products. 5. Thus, buying something that can be directly converted into inventory, not a capital asset. If connection is more remote, then CA. 6. Azar Nuttaxpayer agreed to purchase a home of an executive when the executive was terminated from employment. Sold home for the loss. Wanted ordinary loss because home was used in trade or business under 1221(a)(2). Court rejected, said it has to be used, not just a business purpose. Actually have to use asset in a role in business operations. Was a CA, meaning CL, which blows. 7. Hortconsideration received by landlord in exchange to cancel a lease, then OI. Substitute for future rental payments, right to receive income that would be OI. 8. Davislottery winner; sold future annuity payments for a lump sum. Replacing OI, not a CA. e. Sale or Exchange Requirement i. Capital Gain = sale or exchange of a capital asset. ii. 1222 only gains or losses resulting from sale/exchange will be treated. iii. Freelandtax board says sale or exchange is extremely broad. iv. Keenanif youre satisfying a request for depreciated property, then thats a sale or exchange. v. Yarboroughabandonment could be sale or exchange vi. Helveringinvoluntary foreclosure sale could be sale or exchange. 1. Involuntary conversions. vii. 165(g)- worthless could be treated as a loss of a CA. viii. Amounts received in retirement of a debt instrument. ix. VERY BROAD INTERPRETATION. 1. Basically any disposition. f. The Arrowsmith Rule: Characterization of Certain Gains/Losses Dependent on Prior Tax Treatment of Related Gains/Losses i. Characterization can potentially change based on certain events that happened before in a similar transaction.

ii. ArrowsmithTaxpayers who are shareholders of a liquidated corp; forced to pay a judgment post-liquidation, held to be a CL instead of ordinary, because it would have been a CL if corp was still operating. iii. Skelly Oiltaxpayer forced to refund overcharge amounts that were previously in income. Had to give refunds, must be ordinary loss. Taxpayer had taken a certain type of deduction for portion of the amount, court relied on Arrowsmith, thus loss depends on how gain was treated in prior year. iv. Gains/losses could be characterized as capital gains or losses if the transaction spans more than one year even if it was not currently as capital. g. Holding Period i. Property must be held for more than one year before its sale or exchange to be long-term capital gain or loss. (> 1; 1yr or less = ST). ii. 1223 holding period of donor included. XVIII. Quasi-Capital Assets: 1231 (Ch. 32) a. Primary purpose of 1231 is to provide special, favorable tax treatment to the sale, exchange, or involuntary conversion of real or depreciable property used in the taxpayers trade or business. (1221(2) says not a capital asset). i. For 1231, these scenarios may be characterized as a capital gain 1. Loss = ordinary loss. b. First, identify the gains and losses that are subject to 1231. i. Result from the sale/exchange of prop used in trade/biz. 1231(a)(3)(A)(i). 1. Must be depreciable, in trade/biz. (basically what 1221(2) excludes) 2. Held for more than 1 year. 1231(a)(3)(A)(ii)(II). a. Also, > 1 year requirement. b. No short-term 1231 prop. 3. Prop in 1221(1), (3), (4), (5) = not applicable due to 1231(b)(1). ii. 1231 also arise from the involuntary/compulsory conversation of two types of prop per 1231(a)(3)(A)(ii): 1. Prop used in trade/biz 2. CA held > 1 year, for trade/biz or profit a. Note 165(h)(2)(B), other than trade/biz/profit and involuntary conversion. iii. Sum- consider two elements: the triggering event and the nature of the property involved. c. Second, Preliminary Hotchpot Analysis. (aka firepot) (1231(a)(4)(C)) i. Governs certain involuntary conversions. ii. Check above code to make sure that they are not certain involuntary transactions which, will be ignored for 1231, if the total of such losses > gains (and be OI). 1. Thus, if 1231 gains > losses, lump with other 1231 gains/losses in the Principal Hotchpot under 1231(a)(1), (2). d. Third, Principal Hotchpot Analysis (1231(a)(1), (2), (3)). i. Applies to all 1231 gains/losses, except for those disregarded via the Preliminary Hotchpot under 1231(a)(4)(C). ii. Compare the total 1231 gains and losses. iii. Net positive number = all gains/losses long-term CA gains/losses. iv. Net negative number (or gains = losses) = OI. e. Fourth, Recapture of Net Ordinary Losses (1231(c)). i. Effectively limits LTCG; may require some 1231 gains to be OI. ii. Need to choose what gains are characterized as 1231. XIX. Recapture of Depreciation (Ch. 33) a. Overview i. Excess depreciation is recaptured; taxpayer forced to give it back by recognizing it as income, via 1016 and 1001.

b. Section 1245 Recapture i. Recaptures as OI the gain on disposition attributable to depreciation deductions, as opposed to the gain resulting from the increase in the propertys value. 1. 1245(a)(1) OI = difference between the taxpayers AB and the lesser of: a. Recomputed basis, or b. Amount realized (or FMV, if not a sale, exchange, involuntary conversion). 2. Recomputed basis = AB + depreciation/amortization previously taken. (note 179 treated as amortization for this section). 1245(a)(2)(A), (C). a. Generally the original basis. But, note, you can add deductions taken by the original owner if it was gifted. b. Check 1.1245-6(a) to see if characterized as long-term gain when there is left over gain. ii. Section 179the conversation of an automobile from business use to personal use is not a disposition of the automobile. Rev. Rul. 69-487. 1. 179(d)(10)it has its own recapture provision; if 179 prop was converted to personal use (no used predominantly in trade/biz at any time during recovery period), then the taxpayer must give up the benefit that 179 gave. a. Benefit = difference between the deduction taken under 179 and the deduction that would have been allowed under 168 for the period of business use involved. 1.179-1(e)(1). b. Inapplicable when 1245 applies. 1.179-1(e)(3). c. Section 1250 Recapture i. Applies to depreciable real property, except for the limited cateogries of real property included within 1245. (1250(c)). ii. When 1250 property is disposed of and yields a gain, the depreciation subject to recapture and characterization as OI is generally only the depreciation taken in excess of SL depreciation. 1250(a)(1)(A), (b)(1). iii. Generallythere can be no additional depreciation on real property acquired after 1986, and 1250 thus threaters to become mere surplusage. d. Unrecaptured Section 1250 Gain i. Under 1(h)(1)(D), max rate of tax on unrecaptured 1250 gain is 25%. Thus, it has favorable treatment when compared to LTCG of collectibles (28%). Not as favorable as other CG, like stock, which 15%. ii. Definition1(h)(6) defines as the LTCG from 1250 prop attributable to depreciation deductions allowed to the taxpayer and not otherwise recaptured as OI. iii. Any time a taxpayer sells depreciable real property at a gain, the TP must determine how much of the gain constitutes unrecaptured 1250 gain. 1. Check on 121 exclusion rules a. 121(d)(6)gain attributable to depreciation allowed with respect to the residence is not excludable. e. Section 1239 OI i. Special characterization rule; not really recapture like 1245/1250. Predates those. ii. Mandates that any gain recognized on the sale/exchange of depreciable property between certain related parties be characterized as OI; none of the gain is eligible for CG treatment under 1231. iii. Principal related parties listed under 1239(b), (c). f. Other Recapture Provisions i. Note 1231(c); if gain escaped 1245/1250, which may be LTCG 1231(a)(1), can still be OI.