Post on 18-Apr-2018
transcript
TAXATION OFINDIVIDUALINCOME
Ninth Edition
J. Martin BurkeProfessor of LawUniversity of MontanaSchool of Law
Michael K. FrielProfessor of Law and DirectorGraduate Tax ProgramUniversity of FloridaCollege of Law
LexisNexis*
TABLE OF CONTENTSChapter 1 INTRODUCTION TO FEDERAL INCOME TAXATION . . 1
I. PROBLEM . 1
II. VOCABULARY 2
III. OBJECTIVES 3
IV. OVERVIEW 4
A. A Brief History of Federal Income Tax 4
B. The Tax Practice 5
C. Resolution of Tax Issues Through the Judicial Process 6
1. Trial Courts 6
a. The Tax Court 6
b. Federal District Courts 7
c. The United States Court of Federal Claims 7
2. Appeals 7
3. Selection of Forum 8V. ANALYSIS OF THE COMPUTATION OF TAX LIABILITY OF TOM
AND CAROLINE TAXPAYER 8A. Basic Questions Addressed by an Income Tax System 8
B. Evaluating the Taxpayers' Tax Liability 81. Gross Income : 9
2. Adjusted Gross Income 113. Deductions 124. Calculating Adjusted Gross Income 15
5. Taxable Income 166. Tax Rates •:•••. 1 7
Chapter 2 GROSS INCOME: CONCEPTS AND LIMITATIONS . . . 21
I. PROBLEMS 21II. VOCABULARY '. ; '. - 22III. OBJECTIVES 22IV. OVERVIEW 24
A. The Search for a Definition of Income 24B. Income Realized in Any Form 26
C. Realization, Imputed Income and Bargain Purchases 27Commissioner v. Glenshaw Glass Co 33Cesarini v. United States 35Old Colony Trust Company v. Commissioner 38REVENUE RULING 79-24 40
McCann v. United States 41
ix
TABLE OF CONTENTSPellar v. Commissioner 44
AUTHORS' NOTE . 47
Roco v. Commissioner 47
Chapter 3 THE EFFECT OF AN OBLIGATION TO REPAY 51
I. PROBLEMS . •....'.-' 51
II. VOCABULARY 53
III. OBJECTIVES . ; , 53
IV. OVERVIEW , 54
A. Loans ; 54
B. Claim of Right , 55
C. Illegal Income 57
D. Deposits 58
North American Oil Consolidated v. Burnet 61
James v. United States '. .': : 62
Commissioner v. Indianapolis Power & Light Company 66
Chapter 4 GAINS DERIVED FROM DEALINGS IN PROPERTY . . 73
L PROBLEMS : 73II. VOCABULARY 75
III. OBJECTIVES 75IV. OVERVIEW 76
A. Tax Cost Basis 79
B. Impact of Liabilities 801. Impact on Basis 80
2. Impact on Amount Realized .' 81C. Basis of Property Acquired in Taxable Exchange 82
Philadelphia Park Amusement Co. v. United States 84
Chapter 5 GIFTS, BEQUESTS AND INHERITANCE 87
I. PROBLEMS •;...: 87II. VOCABULARY 88III. OBJECTIVES 89IV. OVERVIEW 90
A. What Is Excluded by § 102? : 901. The Nature of a Gift • 902. The Nature of a Bequest or Inheritance > 913. Statutory Limitations on the Exclusion — § 102(b) 92
B. Basis of Property Received by Gift, Bequest or Inheritance 941. Gifts of Appreciated Property . . . . . . . ' 94
x
TABLE OF CONTENTS2. Gifts of Property — Basis in Excess of Fair Market Value . 95
3. Basis of Property Received by Bequest or Inheritance . . . ' - . 96
C. Part-Gift, Part-Sale 98
Commissioner v. Duberstein 99
Wolder v. Commissioner 103
Oik v. United States . 104
Goodwin v. United States 107
Chapter 6 SALE OF A PRINCIPAL RESIDENCE I l l
I. PROBLEMS I l l
II. VOCABULARY 112
III. OBJECTIVES 112
IV. OVERVIEW 114
A. Ownership and Use Requirements of Section 121 114
B. Amounts Excludable Under Section 121 118
C. Principal Residence '. " 122
Guinan v. United States 124
Chapter 7 SCHOLARSHIPS AND PRIZES . . . . 127
I. PROBLEMS 127
II. VOCABULARY 128
III. OBJECTIVES 128
IV. OVERVIEW 129
A. Prizes and Awards . '.' 129
B. Qualified Scholarships .;'. .. 130
McCoy v. Commissioner 132
Binglery. Johnson 134
Chapter 8 LIFE INSURANCE AND ANNUITIES 141Part A: Life Insurance 141
I. PROBLEMS : ; 141II. VOCABULARY .....: ; 142III. OBJECTIVES •. 142IV. OVERVIEW 143
Part B: Annuities 148I. PROBLEMS : 148II. VOCABULARY 148III. OBJECTIVES 148IV. OVERVIEW : 150Part C: Individual Retirement Accounts 153
xi
TABLE OF CONTENTSI. PROBLEMS 153
II. VOCABULARY 153
III. OBJECTIVES 154
IV. OVERVIEW 155
Chapter 9 DISCHARGE OF INDEBTEDNESS 159
I. PROBLEMS 159II. VOCABULARY . . ^ 161
III. OBJECTIVES ~ 161IV. OVERVIEW 163
A. Specific Rules Governing Exclusion 1641. Discharge of Indebtedness When Taxpayer Is Insolvent 1642. Disputed or Contested Debts 1683. Purchase-Money Debt Reduction for Solvent Debtors 169
4. Acquisition of Indebtedness by Person Related to Debtor 1705. Discharge of Deductible Debt 1706. Discharge of Certain Student Loans 170
7. Discharge of Qualified Principal Residence Indebtedness 1718. Other Exclusion Provisions 172
B. Discharge of Indebtedness as Gift, Compensation, Etc 172United States v. Kirby Lumber Co 173
Revenue Ruling 84-176 174Gehl v. Commissioner 176
Chapter 10 COMPENSATION FOR PERSONAL INJURY ANDSICKNESS 179
I. PROBLEMS 179II. VOCABULARY 181III. OBJECTIVES 181IV. OVERVIEW 182
A. Damages 182
1. Business or Property Damages 1822. Damages Received on Account of Personal Physical Injuries or
Sickness 183
3. Supreme Court Limitations on the Pre-1996 Version of§ 104(a)(2) 185
4. The 1996 Amendments to § 104 1865. Punitive Damages 1886. Allocation of Awards 188
7. Periodic Payments 190
B. Accident and Health Insurance 190
xii
TABLE OF CONTENTSC. Previously Deducted Medical Expenses . 191
D. Workers' Compensation 192
E. Certain Disability Pensions 192
Commissioner v. Schleier 192
Chapter 11 FRINGE BENEFITS 197
I. PROBLEMS : 197II. VOCABULARY 199III. OBJECTIVES 200IV. OVERVIEW 201
A. Meals and Lodging 202B. Fringe Benefits and Section 132 204
1. No-Additional-Cost Service 205
2. Qualified Employee Discount ; • . . . . 208
3. Working Condition Fringe Benefits 2104. De Minimis Fringe Benefits . ; 2115. Qualified Transportation Fringe Benefits • 211
C. Valuation . 211Benaglia v. Commissioner . . . . ; . . . 212United States v. Gotcher : 214Statement by DonaldC. Lubick, Assistant Secretary of Treasury forTax Policy to House Ways and Means Committee Task Force on
Fringe Benefits 217Staff of the Joint Committee on Internal Revenue Taxation,Examination of President Nixon's Tax Returns for 1969-72 219
NOTE ON MISCELLANEOUS EXCLUSIONS . . . . . 223
Chapter 12 BUSINESS AND PROFIT SEEKING EXPENSES 229
I. PROBLEMS '.'.' 229II. VOCABULARY 231
III. OBJECTIVES 231IV. OVERVIEW : :. 232
A. Business Deductions —Section 162 2321. The Expense Must Be "Ordinary and Necessary" . ' . : . . . . 233
a. Is the Expense "Ordinary"? 233b. Is the Expense "Necessary"? 239
2. "Carrying On a Trade or Business" 247
a. What Constitutes a "Trade or a Business"? 247b. The "Carrying On" Requirement 248c. Section 195 and the Amortization of Certain Pre-Operational or
xiii
TABLE OF CONTENTSStar t-Up Costs 249
d. Applicat ion of the "Carrying O n " Requirement to Employees . . . . 250
B . Section 212 Deduct ions ' 253Welch v. Helvering 254
Higgins v. Commissioner 256Commissioner v. Groetzinger 257
Revenue Ruling 75-120 ' . . . . ' 260Pevsner v. Commissioner 261
Chapter 13 CAPITAL EXPENDITURES 265
I. PROBLEMS 265II. VOCABULARY 266
III. OBJECTIVES : 267IV. OVERVIEW 268
A. Deductible Expense or Capital Expenditure? 268B. Defining Capital Expenditure — INDOPCO . . . 269C. Selected Categories of Capital Expenditures 272
1. Cost of Acquisition and Costs Incurred in Perfecting and DefendingTitle 272
2. Repair or Improvement 274a. Historic Rules ; 274
b. Proposed Regulations: Improvements and Repairs 275
' 3. Intangible Assets 2784. Expansion Costs ...' 2815. Advertising Expenses . . .'.<. . •. 282
D. Purchase or Lease 283
Commissioner v . Idaho P o w e r Co: . . . . . / : . . . . . . . . . . ' 2 8 3Midland Empire Packing Company v. Commissioner 288Mt. Morris Drive-ih.Theatre Co. v. Commissioner . 291Revenue Ruling 2001-4 "...'.'. ". . . ."". .". 294
Chapter 14 DEPRECIATION 299
I. PROBLEMS 299II. VOCABULARY 300
III. . OBJECTIVES 301IV. OVERVIEW . .• . 302
A. Depreciation , 3021. Depreciable Property 3032. Recovery Period — The Useful Life Concept . 305
3. Depreciation Methods . .; 3074. Conventions 308
xiv
TABLE OF CONTENTSB. Computing the Depreciation Deduction 309
C. Amortization of Intangibles — Section 197 312
D. Relationship Between Basis and Depreciation 313
E. Section 179 — Expensing Tangible Personal Property 313F. The Relationship of Debt to Depreciation 315G. Conclusion 316
Revenue Ruling 68-232 316AUTHORS' NOTE . . . : . '. . 316
Simon v. Commissioner ....'. ' 316
Liddle v. Commissioner : 325Revenue Procedure 87-56 (Excerpt) 328Revenue Procedure 87-57 (Excerpt) 333
Chapter 15 LOSSES AND BAD DEBTS 341
I. PROBLEMS 341
II. VOCABULARY 343HI. OBJECTIVES , 343IV. OVERVIEW .-. 345
A. Losses : . . . . 3451. The Business or Profit Requirement for Individuals 3452. When is aLoss Sustained? - i - 3493. Amount of the Deduction : : 349
4. Disallowed Losses ' 350B. Bad Debts • 350
1. Bona Fide Debt Requirement 350
2. Worthlessness '.': 3503. Business or Nonbusiness Debts . . 3514. Amount Deductible 353
5. Guarantees 353C. Bad Debts and Losses: The Interplay Between §§ 166 and 165 353
Cowles v. Commissioner , 354
Revenue Ruling 2009-9 355AUTHORS' NOTE 359United States v. Generes 359
Chapter 16 TRAVEL EXPENSES _.; 365
I. PROBLEMS 365II. VOCABULARY •..:.-. 367III. OBJECTIVES 367
IV. OVERVIEW 368A. Commuting . . 368
xv
TABLE OF CONTENTSB. Other Transportation Expenses 372
C. Expenses for Meals and Lodging While in Travel Status 373
D. "Away from Home" 374E. Travel Expenses of Spouse 378
F. Reimbursed Employee Expenses 378G. Business-Related Meals 379H. Relationship to Section 212 379
I. Substantiation Requirements 380United States v. Correll . .-. 380
AUTHORS' NOTE 383Revenue Ruling 99-7 384Henderson v. Commissioner 388
Chapter 17 ENTERTAINMENT AND BUSINESS MEALS 393
I. PROBLEMS 393II. VOCABULARY 394III. OBJECTIVES 394IV. OVERVIEW 395
A. Business or Pleasure? 395B. Entertainment Activities 397C. Entertainment Facilities 399D. Substantiation Requirements 401
E. Exceptions 402
F. Business Meals 402Walliserv. Commissioner 404Moss v. Commissioner 408Churchill Downs, Inc. v. Commissioner 411
Chapter 18 EDUCATION EXPENSES 417
I. PROBLEMS 417II. VOCABULARY '. 418III. OBJECTIVES 418IV. OVERVIEW 420
A. Deductibility of Educational Expenses Under Section 162 420
B. The Skill-Maintenance or Employer-Requirement Tests of Regulation
§ 1.162-5(a) 421C. The Minimum-Educational-Requirements and New-Trade-or-Business
Tests of Regulation § 1.162-5(b) 423D. Travel Expenses 426
Takahashi v. Commissioner 426Wassenaar v. Commissioner 429
xvi
TABLE OF CONTENTSFurnerv. Commissioner 433
Revenue Ruling 68-591 436
Sharon v. Commissioner 436
NOTE: EDUCATION TAX INCENTIVES 444
Chapter 19 MOVING EXPENSES, CHILD CARE, LEGALEXPENSES ; 449
Part A: Moving Expenses 449
I. PROBLEMS \. :.'.'. 449II. VOCABULARY 449III. OBJECTIVES 450IV. OVERVIEW 451Part B: Child Care Expenses 454I. PROBLEM 454II. VOCABULARY 454
III. OBJECTIVES 454IV. OVERVIEW 455Part C: Legal Expenses 457
I. PROBLEM 457II. VOCABULARY .' 457III. OBJECTIVES 457IV. OVERVIEW ' 458
Chapter 20 HOBBY LOSSES 461
I. PROBLEMS 461II. VOCABULARY 462III. OBJECTIVES '. 462IV. OVERVIEW 463
A. Historical Development 463
B. Section 183 Activities 464C. Deductions Allowable Under Section 183 466
Dreicerv. Commissioner 467
Remuzzi v. Commissioner 470
Chapter 21 HOME OFFICES, VACATION HOMES AND OTHER DUALUSE PROPERTY 479
I. PROBLEMS 479II. VOCABULARY 481III. OBJECTIVES 481
IV. OVERVIEW 482A. Home Office Deductions 482
xvii
TABLE OF CONTENTS
B. Vacation Home Deductions 488
C. Other Dual Use Property 489
1. Computers and Other "Listed Property" 489
2. Passenger Automobiles 490
Popov v. Commissioner 493
Chapter 22 THE INTEREST DEDUCTION 497
I. PROBLEMS ,. . . ._.. 497
II. VOCABULARY 498
III. OBJECTIVES 499
IV. OVERVIEW 500
A. What is Interest? 500
B. Deduction of Personal Interest 501
C. Investment Interest 504
D. Timing Issues and Limitations 506
1. Section 461(g) 506
2. Section 263A 507
3. Payment Issues 507
Davison v. Commissioner 508
Chapter 23 THE DEDUCTION FOR TAXES 515
I. PROBLEMS 515II. VOCABULARY . . . • 516
III. OBJECTIVES 516IV. OVERVIEW 517
A. Historical Background 517B. Taxes Deductible Under Section 164 517C. Who May Claim the Deduction? 518
D. Special Problems Associated With the Deduction of Real PropertyTaxes and Assessments ; 519
1. . Are Real Property Assessments "Taxes" Under Section 164? 5192. Apportionment of Real Property Taxes Between Buyer and Seller . . 520
PRESIDENT REAGAN'S "TAX PROPOSALS TO THECONGRESS FOR FAIRNESS, GROWTH AND
SIMPLICITY" : 521AUTHORS' NOTE 525
Chapter 24 CASUALTY LOSSES 527
I. PROBLEMS , 527II. VOCABULARY 529
xviii
TABLE OF CONTENTSIII. OBJECTIVES ; ' : 529
IV. OVERVIEW . ' . . . ' -..'.'.., 530
A. Definitional Questions 530
B. Timing of the Loss 533
C. Amount of the Loss 533
D. Insurance Coverage , • • • • ' ^34
Revenue Ruling 72-592 . . 534
Popa v. Commissioner ...... ... . .,. , 535
Chamales v. Commissioner , .,, 539
Chapter 25 MEDICAL EXPENSES 547
I. PROBLEM 547
II. VOCABULARY . . 548
IE. OBJECTIVES 548
IV. OVERVIEW 549
Montgomery v. Commissioner 553
Revenue Ruling 78-266 . . 556
Chapter 26 CHARITABLE DEDUCTIONS 559
I. PROBLEMS 559
II. VOCABULARY 561
III. OBJECTIVES : 561
IV. OVERVIEW 562
A. In General . . . . ' . ' . . . . 562
B. Requirements for Charitable Deductions 562
1. Who is a Qualified Recipient? . . : . . . 563
2. What is a "Contribution" or "Gift"? : 564
3. Actual Payment Required . . : . . . . 566
4. Limitation on Charitable Deductions 567
C. Contribution of Services '. 567
D. Contribution of Appreciated Property 568
E. Contributions of Partial Interests in Property 571
F. Bargain Sale to Charity 573
G. Substantiation ....:.'. 573
Davis v. United States ••. 575
Revenue Ruling 67-246 , '. 583
Revenue Procedure 90-12 . . 585
Revenue Ruling 2003-28 • i . . .' 587
Sklar v. Commissioner : ; 590
AUTHORS' NOTE : 594
xix
TABLE OF CONTENTSChapter 27 LIMITATIONS ON DEDUCTIONS 595
Part A: Section 267 — Transactions Between Related Parties 595
I. PROBLEMS 595
II. VOCABULARY 596
III. OBJECTIVES 596
IV. OVERVIEW '. 597A. The Section 267(a)(l) Loss Rule 597B. The Section 267(a)(2) Matching Requirement 599
McWilliams v. Commissioner ." 600Miller v. Commissioner 604
PartB: Section 265 — Expenses Related to Tax-Exempt Income . . . 608I. PROBLEMS 608II. VOCABULARY 608
III. OBJECTIVES 608IV. OVERVIEW 610
A. Section 265(a)(l) 610B. Section 265(a)(2) 611
C. Allocation ' 612Revenue Procedure 72-18 613
Part C: . Section 1091 — Wash Sales 617I. PROBLEM 617II. VOCABULARY 617
III. OBJECTIVES 617IV. OVERVIEW 618Part D: Judicial Limitations on Interest Deductions 620
Chapter 28 CASH METHOD ACCOUNTING 623
I. PROBLEMS 623II. VOCABULARY 625III. OBJECTIVES 625IV. OVERVIEW 626
A. Income Under the Cash Method 6261. In General 6262. Constructive Receipt 626
a. Specific Factors Affecting Application of Constructive ReceiptDoctrine 627
b. . . . Specific Exceptions to Constructive Receipt Rules 6303. Cash Equivalency Doctrine * 631
4. The Economic Benefit Doctrine 6345. Deferred Compensation 635
a. . Non-qualified Deferred Compensation Arrangements 635
xx
TABLE OF CONTENTSb. Property Transfer Under Section 83 637
c. Section 409A and Revenue Ruling 60-31 638
6. Lottery Prizes 640
7. Prepayments 640
B. Deductions Under the Cash Method 641
1. In General 641
2. Cash Method Prepayments 643
Revenue Ruling 60-31 645
Ames v. Commissioner 650
Cowden v. Commissioner 653
AUTHORS' NOTE 656
Revenue Ruling 78-39 657
AUTHORS' NOTE 658
Chapter 29 ACCRUAL METHOD ACCOUNTING 659
I. PROBLEMS 659II. VOCABULARY 661III. OBJECTIVES 661
IV. OVERVIEW 663
A. The All Events Test 663
B. Accrual of Income ." 664
1. General Rules 664
2. Income Prior to Receipt: Accrual Issues . 665
3. Receipt Prior to Earning: Prepayments and the "Earliest o f Test . . . 667
C. Deductions Under the Accrual Method 670
1. General Rules 670
, 2. Premature Accruals 672
i 3. The Economic Performance Test — § 461(h) 674
4. Capitalization 675
I 5. Contested Liabilities 675
i D. Choice of Accounting Methods 676
Schlude v. Commissioner 678
Revenue Procedure 2004-34 681
United States v. General Dynamics 685
Revenue Ruling 2007-3 688
xxi
TABLE OF CONTENTSNOTE ON ACCRUAL METHOD ACCOUNTING 693
Chapter 30 ANNUAL ACCOUNTING ; 703
I. PROBLEMS 703
II. VOCABULARY , 704
III. OBJECTIVES 704
IV. OVERVIEW '. 705
A. Restoring Amounts Received Under Claim of Right 705
B. The Tax Benefit Rule 708
C. Net Operating Losses 711
Burnet v. Sanford & Brooks Company 712
Alice Phelan Sullivan Corporation v. United States 715
Hillsboro National Bank v. Commissioner 717
Chapter 31 CAPITAL GAINS AND LOSSES 723
I. PROBLEMS , 723
A. Definition of Capital Asset 723
B. Rate Preference for Long Term Capital Gains and Limitation on theDeduction of Capital Losses 724
C. Miscellaneous Capital Gain/Loss Issues 725
II. VOCABULARY 726
III. OBJECTIVES 726
IV. OVERVIEW 728A. Historical Overview 728
1. Preferential Treatment for Long Term Capital Gain 728
2. Limitation on the Deduction of Capital Losses 7313. Justification for Preferential Capital Gain Treatment 732
B. Current Law: Section l(h) 7331. Maximum Rates on Long-Term Capital Gain under the Current
Law 7332. The Components of Net Capital Gain: 28-Percent Rate Gain;
Unrecaptured Section 1250 Gain; and Adjusted Net Capital Gain . . . 734
a. 28-Percent Rate Gain: Collectibles Gain and Section 1202 Gain . . 735
b. Unrecaptured Section 1250 Gain — 25-Percent Rate 735c. Adjusted Net Capital Gain: 15-Percent and 0-Percent Rates 73^d. Adjusted Net Capital Gain: Qualified Dividend Income 738
3. Attribution of Capital Losses Included in the Computation of NetCapital Gain 739
C. Current Law: Application of the Section 121 l(b) Limitation on theDeduction of Capital Losses 741
xxii
TABLE OF CONTENTSD. Definition of Capital Asset ; 745
1. Section 1221(a)(l): Inventory, Stock in Trade, and Property Held
Primarily for Sale to Customers in the Ordinary Course of the
Taxpayer's Trade or Business . : . . . . . 745
2. Section 1221(a)(2): Property Used in the Taxpayer's.Trade or
Business 747
3. Section 1221(a)(3): Copyrights, Literary, Musical, or Artistic
Compositions, Etc 747
4. Section 1221(a)(4): Accounts Receivable for Services Rendered or
Inventory-Type Assets Sold 748
5. Section 1221(a)(5): Certain Publications of the U.S. Government . . . 748
6. Section 1221(a)(8): Supplies Used or Consumed in the Taxpayer's
Trade or Business '. 749
7. Judicially Established Limits on Capital Asset Characterization . . . . 749
E. The Sale or Exchange Requirement . . . . ' . 753
F. The Arrowsmith Rule: Characterization of Certain Gains or Losses
Dependent on Prior Tax Treatment of Related Gains or Losses 754
G. Holding Period : 7561 Bynum v. Commissioner . . . ' : , 756
Arkansas Best Corp. v. Commissioner 762
Hortv. Commissioner 767
Davis v. Commissioner • ; 769
AUTHORS' NOTE 773
Kenan v. Commissioner . . . . . ' . 774
Chapter 32 QUASI-CAPITAL ASSETS: SECTION 1231 779
I. PROBLEMS 779
II. VOCABULARY : . .... 780
III. OBJECTIVES 780
IV. OVERVIEW . . . : . . . . . -781
A. Definitions: Section 1231 Gains and Section 1231 Losses 781
B. The Hotchpot Analysis 783
1. The Preliminary Hotchpot Analysis 783
2. The Principal Hotchpot Analysis 785
C. Recapture of Net Ordinary Losses: Section 1231(c) 786
Chapter 33 RECAPTURE OF DEPRECIATION 789
I. PROBLEMS . . 789
II. VOCABULARY . . . . 790
III. OBJECTIVES . .' 790
IV. . OVERVIEW . . . : , 791
xxiii
TABLE OF CONTENTSA. Section 1245 Recapture 792
B. Section 1250 Recapture 793
C. Unrecaptured Section 1250 Gain 794
D. Section 1239 Ordinary Income . . .• 795
E. Other Recapture Provisions 796
Chapter 34 ASSIGNMENT OF INCOME 797
I. PROBLEMS . . , , , 797
II. VOCABULARY 798
III. OBJECTIVES 798
IV. OVERVIEW 800
A. The Progressive Rate Structure 800
B. Development of Rules Limiting Income-Shifting 801
C. Application of the Assignment of Income Rules 802
D. Income-Shifting Within Families and Between Related Parties 805
Lucas v. Earl 807
Helvering v. Horst . . 808
Helvering v. Eubank 811
Salvatore v. Commissioner 813
Stranahan v. Commissioner 816
May v. Commissioner 818
Chapter 35 THE KIDDIE TAX 823
I. PROBLEMS 823II. VOCABULARY :. 824III. OBJECTIVES • 824IV. OVERVIEW 825
Chapter 36 INTEREST-FREE OR BELOW-MARKET LOANS 829
I. PROBLEMS. 829II. VOCABULARY 830
III. OBJECTIVES 830IV. OVERVIEW 831
A. History: Pre-Section 7872 831
1. Early IRS Attempts 8312. Gift Tax Consequences of Interest-Free Loans 833
. 3. Post Dean/Johnson History 833B. 1984 Tax Reform Act — Rationale for § 7872 834C. Operation of § 7872 836
1. Treatment of Term Loans Other Than Term Gift Loans 837
xxiv
TABLE OF CONTENTS
2. Demand Loans and Term Gift Loans 839
3. Exceptions to the Basic Operating Rules 841
Chapter 37 TAX CONSEQUENCES OF DIVORCE 843
I. PROBLEMS 843II. VOCABULARY 846III. OBJECTIVES 846
IV. OVERVIEW '-, . . 847
A. Alimony: General Requirements 847
B. Child Support 851
C. Excess Front-Loading 852
D. Alimony Trusts 854
E. Dependency Exemption 854
F. Filing Status 855
G. Property Transfers 856
H. Special Rules Regarding Personal Residence — §121 859
I. Legal Expenses 860
Revenue Ruling 2002-22 '. 860
United States v. Gilmore 863
Revenue Ruling 67-420 866
Chapter 38 NONRECOURSE DEBT: BASIS AND AMOUNT REALIZEDREVISITED 869
I. PROBLEMS 869II. VOCABULARY 870III. OBJECTIVES 870
IV. OVERVIEW; 872
A. Crane v. Commissioner 872
B. Commissioner v. Tufts 873
C. Nonrecourse Borrowing and the § 108 Insolvency Exclusion 875
D. Nonrecourse Borrowing and Appreciated Property 876
E. Impact of Contingent Liabilities 879
Crane v. Commissioner 881
Commissioner v. Tufts ; 886
Revenue Ruling 91-31 892
Estate Of Franklin v. Commissioner . 894
Aizawa v. Commissioner 898
XXV
TABLE OF CONTENTSChapter 39 LIKE KIND EXCHANGES 901
I. PROBLEMS . . 901II. VOCABULARY 903III. OBJECTIVES . : . . : 904IV. OVERVIEW ; 905
A. Continuity of Interest 905
B. The Like Kind Requirement 906C. The Holding Requirements 908
D. "Solely" for Like Kind Property: The Presence of "Boot" 912E. Treatment of Liabilities 912F. Basis Calculations 913G. The Relationship Between § 267(a)(l) and § 1031 914H. Sale or Exchange? 915I. Three-Way Exchanges and Deferred Exchanges 915
J. Reverse Starker Exchanges 918
K. Interface of § 121 and § 1031 9181. Exchanges Qualifying for Both § 121 and § 1031 Treatment 9182. Section 121(d)(10) — Property Acquired in a Like Kind Exchange . 920
Revenue Ruling 77-297 922AUTHORS' NOTE 923Revenue Ruling 72-151 923Bolker v. Commissioner 925Bell Lines, Inc. v. United States 929
. . Revenue Ruling 90-34 . 932
Revenue Procedure 2008-16 934Revenue Procedure 2000-37 936
AUTHORS' NOTE 941
Chapter 40 INVOLUNTARY CONVERSIONS 943
I. PROBLEMS 943II. VOCABULARY 945III. OBJECTIVES 945
IV. OVERVIEW 946A. General Policy 946
B. The Mandatory and Elective Rules of § 1033 946C. Involuntary Conversion Events 947D. Similar or Related in Service or Use 948E. Time for Replacement 950F. Partial Recognition of Gain Under § 1033 951
G. Basis 951H. Holding Period of Replacement Property 951
xxvi
TABLE OF CONTENTSI. Involuntary Conversion of Principal Residence • 952
Liant Record, Inc. v. Commissioner 953
Revenue Ruling 64-237 955
Revenue Ruling 79-261 956
Revenue Ruling 89-2 958
Willamette Industries, Inc. v. Commissioner 961
Chapter 41 INSTALLMENT SALES 969
I. PROBLEMS 969II. VOCABULARY 971III. OBJECTIVES : 972IV. OVERVIEW . . . 973PartA: 973
A. Statutory Framework -973B. Payments and Liabilities 974C. Recapture Income 975
D. Electing Out of the Installment Method 976E. Exclusions 976F. Contingent Payment Sales 977G. Dispositions of Installment Obligations 979
Part B: 980A. Second Dispositions by Related Persons 980
B. Sales of Depreciable Property to Related Persons . : 982C. Special Rules for Nondealers 982D. Installment Obligations and Like Kind Exchanges 983
Burnet v. Logan 984Revenue Ruling 79-371 986
Chapter 42 SALE OF A BUSINESS AND SALE-LEASEBACKS 989
I. PROBLEMS 989II. VOCABULARY : 991
III. OBJECTIVES 991IV. OVERVIEW 992
A. Sale of a Sole Proprietorship — Sale of Single Asset or Saleof Separate
Assets? . . : 9921. The Standard of Williams v. McGowan 9922. Goodwill, Going Concern Value and Covenants Not to Compete . . . 993
a. Goodwill 993b. Going Concern Value . .: 993
c. Covenant Not to Compete 9943. Tax Consequences of Allocations of Purchase Price to Goodwill,
xxvii
TABLE OF CONTENTSCovenants Not to Compete and Going Concern Value 995
a. Historic Allocation Strategies 995
b. Section 197.— Amortization of Business Intangibles 996
B. Valuing Goodwill, Going Concern Value and Covenants Not To
Compete 997
C. Sale-Leaseback 1000
1. Sale-Leaseback Characterized as Financing Arrangement 1000
2. Sale-Leaseback Characterized as a Tax-Free Exchange 1001
Williams v. McGowan .7 1002
Annabelle Candy Co. v. Commissioner 1004
Frank Lyon Co. v. United States 1009
Leslie Co. v. Commissioner 1018
Chapter 43 ORIGINAL ISSUE DISCOUNT 1025
I. PROBLEMS 1025
II. VOCABULARY '. 1027
III. OBJECTIVES 1027IV. OVERVIEW 1028
A. Original Issue Discount: Introduction 1028B. ' Original Issue Discount: Debt Instruments Issued for Cash 1032
1. Determining the Amount of OID 10322. Current Inclusion of OID 10333. Deduction of OID : 1034
4. Gain or Loss on Sale, Exchange or Retirement 10355. Market Discount 1036
C. Original Issue Discount and Unstated Interest: Debt Instruments Issuedfor Property 1037
1. Determining Issue Price Under § 1274: Inadequate Stated Interest . 10372. Determining Issue Price Under § 1274: Adequate Stated Interest . . 10403. Adequate Interest Charged and Paid Currently: No OID 10404. Exceptions to § 1274 1041
5. Unstated Interest: § 483 10416. Special Rules: The Cash Method Election of § 1274A — The
$2,000,000 Rule 1043
7. Special Rules: Interest Rate Limitation on Qualifying Sales of$2,800,000 or Less 1044
8. Special Rules: Interest Rate Limitation on Certain Land TransfersBetween Related Parties 1044
9. Special Rules: Personal Use Property 1044
10. Coordination with § 7872 1045
11. Ordering Between §§ 1274 and 483 1045
xxviii
TABLE OF CONTENTSAUTHORS' NOTE: SECTION 467 RENTAL
AGREEMENTS 1045
United States v. Midland-Ross Corporation 1046
Chapter 44 LIMITATIONS ON TAX SHELTERS — SECTIONS 465AND 469 1049
Part A: Section 465 — The At Risk Rules 1049
I. PROBLEMS 1049
II. VOCABULARY 1050
III. OBJECTIVES 1050
IV. OVERVIEW 1051A. General Background 1051B. Operation of the At Risk Rules 1052
1. Activities Subject to the At Risk Rules 10522. Determination of the Initial Amount At Risk 10533. Qualified Nonrecourse Financing 1053
4. Adjustments to the Amount At Risk 1054Part B: Section 469 — Limitation on Passive Activity Losses and
Credits . . 1057
I. PROBLEMS . 1057II. VOCABULARY 1058III. OBJECTIVES 1058IV. OVERVIEW , 1059
A. Background 1059B. Section 469 — In General 1060
C. Passive Activities 10611. Material Participation 10612. Rental Activities 1063
D. Scope of Passive Activities 1063E. Treatment of Losses and Credits 1064F. Portfolio Income and Expenses 1065
G. Exception for Active Participation in Rental Real Estate 1066H. Disposition of Taxpayer's Entire Interest in Passive Activity 1066
Chapter 45 THE ALTERNATIVE MINIMUM TAX 1069
I. PROBLEM 1069II. VOCABULARY 1070III. OBJECTIVES 1070IV. OVERVIEW 1071
A. Mechanics 1071B. Determining Alternative Minimum Taxable Income 1072
xxix