UNDERSTANDING
FEDERAL INCOME
TAXATION
Fourth Edition
J. Martin Burke Regents Professor of Law University of Montana School of Law
Michael K. Friel Professor of Law and Director, Graduate Tax Program University of Florida Levin College of Law
IP' LexisNexis*
TABLE OF CONTENTS
Chapter 1 INTRODUCTION TO FEDERAL INCOME TAX 1
§1.01 A BRIEF HISTORY OF FEDERAL INCOME TAX 1 § 1.02 RESOLUTION OF TAX ISSUES THROUGH THE JUDICIAL
PROCESS 2 [A] Trial Courts 2
[1] The Tax Court 3 [2] Federal District Courts 3 [3] The United States Court of Federal Claims 3
[B] Appellate Courts 4 [C] Selection of Forum 4
§1.03 COMPUTATION OF TAX LIABILITY 5 [A] Basic Questions Addressed by an Income Tax System 5 [B] Evaluating Tax Liability 5
[1] Gross Income 6 [2] The Concept of Adjusted Gross Income 7 [3] Deductions 9 [4] Calculating Adjusted Gross Income 11 [5] Taxable Income 11
[a] Itemize or Elect Standard Deduction 11 [b] Section 67: The 2% Floor on Miscellaneous Itemized Deductions . . 12 [c] The Section 68 Overall Limitation on Itemized Deductions 12 [d] Personal Exemptions 13 [e] Calculating Taxable Income 14
[6] Tax Rates 14 [7] Credits 15
§ 1.04 CONCLUSION 15
Chapter 2 GROSS INCOME CONCEPTS AND LIMITATIONS 17
§ 2.01 THE SEARCH FOR A DEFINITION OF INCOME 17 § 2.02 INCOME REALIZED IN ANY FORM 20 §2.03 REALIZATION, IMPUTED INCOME AND BARGAIN PURCHASES . 21
[A] The Realization Requirement 22 [B] Imputed Income 24 [C] Bargain Purchases 27
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Chapter 3 THE EFFECT OF AN OBLIGATION TO REPAY 29
§3.01 LOANS 29 §3.02 CLAIM OF RIGHT 30 §3.03 ILLEGAL INCOME 32 §3.04 DEPOSITS 34
Chapter 4 GAINS DERIVED FROM DEALINGS IN PROPERTY . . 37
§ 4.01 COMPUTING GAIN DERIVED FROM DEALINGS IN PROPERTY ... 37 §4.02 TAXCOSTBASIS 40 §4.03 IMPACT OF LIABILITIES 41
[A] Impact on Basis 41 [B] Impact on Amount Realized 42
§4.04 BASIS OF PROPERTY ACQUIRED IN TAXABLE EXCHANGES 44
Chapter 5 GIFTS, BEQUESTS AND INHERITANCE 47
§ 5.01 EXCLUSION OF GIFTS FROM INCOME 47 [A] The Nature of a Gift 47
[1] Employer-Employee "Gifts" 49 [2] Business Gifts 50
[B] The Nature of a Bequest or Inheritance 50 [C] Statutory Limitations on the Exclusion — Section 102(b) 51
§ 5.02 BASIS OF PROPERTY RECEIVED BY GIFT, BEQUEST OR INHERITANCE 53
[A] Gifts of Appreciated Property 53 [B] Gifts of Property — Basis in Excess of Fair Market Value 55 [C] Basis of Property Received by Bequest or Inheritance 56
§ 5.03 PART-GIFT, PART-SALE 59
Chapter 6 SALE OF A PRINCIPAL RESIDENCE 61
§ 6.01 SECTIONS 1034 AND 121 BEFORE THE TAXPAYER RELIEF ACT OF 1997 61
§6.02 SECTION 121 AFTER THE TAXPAYER RELIEF ACT OF 1997 63 [A] Ownership and Use Requirements 63 [B] Amount Excludable 66 [C] Exclusion for Taxpayers Failing to Meet Certain Requirements 70 [D] Limitation on Exclusion for Depreciation Claimed 72 [E] Principal Residence 73 [F] Conclusion 75
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Chapter 7 SCHOLARSHIPS AND PRIZES 77
§7.01 PRIZES AND AWARDS 77 [A] Prizes and Awards Generally Taxable 77 [B] Employee Achievement Awards Exempt 78
§ 7.02 QUALIFIED SCHOLARSHIPS 80 [A] Limitation of Exclusion 81 [B] Scholarships as Compensation 82 [C] Tuition Reduction 83 [D] Educational Assistance Programs 84 [E] Gifts 85
Chapter 8 LIFE INSURANCE, ANNUITIES, AND INDIVIDUAL RETIREMENT ACCOUNTS 87
§ 8.01 LIFE INSURANCE 87 [A] Exclusion of Mortality Gains 87 [B] Death of the Insured 90 [C] Accelerated Death Benefit 90 [D] Surrender for Value 91 [E] Interest Income 91 [F] Transfer for Value 93 [G] Group-term Life Insurance 94
§ 8.02 ANNUITIES 94 § 8.03 INDIVIDUAL RETIREMENT ACCOUNTS 98
[A] Deductible IRAs 98 [B] Nondeductible IRAs 99 [C] Roth IRAs 100
Chapter 9 DISCHARGE OF INDEBTEDNESS 103
§9.01 HISTORICAL BACKGROUND 103 § 9.02 SPECIFIC RULES GOVERNING EXCLUSION 105
[A] Discharge of Indebtedness When Taxpayer Is Insolvent 105 [1] Case Law Pre-1980 Bankruptcy Tax Act 105 [2] The Insolvency Exclusion Under Section 108 106
[B] Discharge of Qualified Real Property Business Indebtedness 109 [C] Discharge of Indebtedness on Principal Residence Before January
2014 110 [D] Purchase-Money Debt Reduction for Solvent Debtors Ill [E] Acquisition of Indebtedness by Person Related to Debtor 112 [F] Discharge of Deductible Debt 113 [G] Discharge of Certain Student Loans 114
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§9.03 DISPUTED OR CONTESTED DEBTS 114 § 9.04 DISCHARGE OF INDEBTEDNESS AS GIFT, COMPENSATION,
ETC 116 § 9.05 INAPPLICABILITY OF SECTION 108 TO GAIN REALIZED ON
TRANSACTIONS INVOLVING DISCHARGE OF INDEBTEDNESS . 117
Chapter 10 COMPENSATION FOR PERSONAL INJURY AND SICKNESS 119
§10.01 INTRODUCTION 119 §10.02 DAMAGES 120
[A] Business or Property Damages 120 [B] Damages Received on Account of Personal Physical Injuries or Physical
Sickness 121 [C] Supreme Court Limitations on the Pre-1996 Version of Section
104(a)(2) 124 [1] What is a "Personal Injury"? 124 [2] When are Damages Received "On Account Of' a Personal Injury? .. 125
[D] Exclusion for Personal Physical Injury or Physical Sickness: The 1996 Amendments to Section 104 126
[1] Distinction Between Physical and Non-Physical Injuries 126 [2] Personal Physical Injury or Physical Sickness 128 [3] Emotional Distress 130 [4] Recoveries by Individuals Other than Individuals Suffering Physical Injury
or Sickness 131 [E] Punitive Damages 132 [F] Allocation of Awards 133 [G] Periodic Payments 134
§ 10.03 PAYMENT UNDER ACCIDENT AND HEALTH INSURANCE POLICIES 135
§ 10.04 PREVIOUSLY DEDUCTED MEDICAL EXPENSES 138 §10.05 WORKERS'COMPENSATION 138 §10.06 CERTAIN DISABILITY PENSIONS 139
Chapter 11 FRINGE BENEFITS 141
§11.01 MEALS AND LODGING 141 [A] The Treatment of Meals and Lodging Prior to 1954 141 [B] Section 119 — Meals or Lodging Furnished for the Convenience of the
Employer 142 §11.02 FRINGE BENEFITS AND SECTION 132 145
[A] No-Additional-Cost Service 145 [B] Qualified Employee Discount 149
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[C] Working Condition Fringe 151 [D] De Minimis Fringe Benefits 153 [E] Qualified Transportation Fringe 153 [F] On-Premises Gyms and Other Athletic Facilities 155
§ 11.03 VALUATION 155
Chapter 12 BUSINESS AND PROFIT SEEKING EXPENSES 157
§12.01 BUSINESS DEDUCTIONS — SECTION 162 157 [A] The Expense Must be "Ordinary and Necessary" 158
[1] Is the Expense "Ordinary"? 158 [2] Is the Expense "Necessary"? 162
[3] "Reasonable" Salaries 164 [4] Clothing Expenses 167 [5] Public Policy Considerations 168 [6] Lobbying Expenses 169
[B] "Carrying On a Trade or Business" 170 [1] What Constitutes a "Trade or Business"? 170 [2] The "Carrying On" Requirement 171 [3] Section 195 and the Amortization of Certain Pre-Operational or Start-Up
Costs 173 [4] Application of the "Carrying On" Requirement to Employees 175
§ 12.02 SECTION 212 DEDUCTIONS 177
Chapter 13 CAPITAL EXPENDITURES 181
§13.01 DEDUCTIBLE EXPENSE OR CAPITAL EXPENDITURE? 181 §13.02 DEFINING CAPITAL EXPENDITURES — INDOPCO 182 §13.03 SELECTED CATEGORIES OF CAPITAL EXPENDITURES 185
[A] Cost of Acquisition and Costs Incurred in Perfecting and Defending Title 185
[B] Retirement and Removal 188 [C] Repair or Improvement 189
[1] Historic Rules 189 [2] Temporary Regulations — Improvements and Repairs 191
[D] Intangible Assets 195 [E] Expansion Costs 197 [F] Advertising Expenses 199
§13.04 PURCHASE OR LEASE 200
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Chapter 14 DEPRECIATION 201
§ 14.01 DEPRECIATION 201 [A] Depreciable Property 201 [B] Recovery Period — The Useful Life Concept 203
[1] Historical Development 203 [2] Current Recovery Periods — Modified Accelerated Cost Recovery System
(MACRS) 204 [C] Depreciation Methods 206 [D] Conventions 209
§14.02 COMPUTING THE DEPRECIATION DEDUCTION 211 §14.03 ADDITIONAL FIRST YEAR DEPRECIATION 213 § 14.04 AMORTIZATION OF INTANGIBLES — SECTION 197 214 § 14.05 RELATIONSHIP BETWEEN BASIS AND DEPRECIATION 214 § 14.06 SECTION 179 — EXPENSING TANGIBLE PERSONAL PROPERTY .215 §14.07 THE RELATIONSHIP OF DEBT TO DEPRECIATION 218
Excerpt From REVENUE PROCEDURE 87-56 218 Excerpt From REVENUE PROCEDURE 87-57 220
Chapter 15 LOSSES AND BAD DEBTS 225
§15.01 LOSSES 225 [A] The Business or Profit Requirement for Individuals 225
[1] Personal Losses Not Deductible 226 [2] Conversion of Personal Use Property to Income Producing Property . 227
[B] When Is a Loss Sustained? 228 [1] Worthless Securities 230 [2] Theft Losses 230
[C] Amount of the Deduction 231 [1] Reimbursement 231 [2] Post-Conversion Losses 232
[D] Disallowed Losses 232 § 15.02 BAD DEBTS 233
[A] Bona Fide Debt Requirement 233 [B] Worthlessness 233 [C] Business or Nonbusiness Debts 234 [D] Amount Deductible 237 [E] Guarantees 237
§ 15.03 BAD DEBTS AND LOSSES: THE INTERPLAY BETWEEN SECTIONS 166 AND 165 238
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Chapter 16 TRAVEL EXPENSES 239
§ 16.01 COMMUTING 239 §16.02 OTHER TRANSPORTATION EXPENSES 243 § 16.03 EXPENSES FOR MEALS AND LODGING WHILE IN TRAVEL
STATUS 244 § 16.04 WHERE IS THE TAXPAYER'S "HOME" FOR SECTION 162(a)(2)
PURPOSES? 246 §16.05 OTHER CONSIDERATIONS 250
[A] Travel Expenses of Spouse 250 [B] Reimbursed Employee Expenses 251 [C] Business-Related Meals 252 [D] Limitations on Foreign Travel 252 [E] Relationship to Section 212 253 [F] Substantiation Requirements 253
Chapter 17 ENTERTAINMENT AND BUSINESS MEALS 255
§17.01 BUSINESS OR PLEASURE? 255 [A] Historical Background 256 [B] Percentage Cutback for Meal and Entertainment Expenses 257 [C] Business Meals and Entertainment Ticket Limitations 258
§17.02 ENTERTAINMENT ACTIVITIES 260 [A] "Directly Related" Entertainment 260 [B] "Associated with Entertainment" 260
§17.03 ENTERTAINMENT FACILITIES 261 §17.04 SUBSTANTIATION REQUIREMENTS 264 § 17.05 EXCEPTIONS 265 § 17.06 BUSINESS MEALS 265
Chapter 18 EDUCATIONAL EXPENSES 269
§18.01 CATEGORIZATION OF EDUCATIONAL EXPENSES 269 § 18.02 THE SKILL-MAINTENANCE OR EMPLOYER-REQUIREMENT
TESTS 270 § 18.03 THE MINIMUM EDUCATIONAL REQUIREMENTS AND NEW TRADE
OR BUSINESS TESTS 272 §18.04 TRAVEL EXPENSES 276 §18.05 EDUCATION TAX INCENTIVES 277
Chapter 19 OTHER DEDUCTIBLE PERSONAL EXPENSES 281
§19.01 MOVING EXPENSES 281 § 19.02 CHILD CARE EXPENSES 286
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§ 19.03 LEGAL EXPENSES 288
Chapter 20 HOBBY LOSSES 291
§20.01 HISTORICAL DEVELOPMENT 291 §20.02 SECTION 183 ACTIVITIES 292 § 20.03 DEDUCTIONS ALLOWABLE UNDER SECTION 183 296
Chapter 21 HOME OFFICES, VACATION HOMES AND OTHER DUAL USE PROPERTY 299
§21.01 HOME OFFICE DEDUCTIONS 299 [A] General Background — Bodzin v. Commissioner 300 [B] Enactment of Section 280A 303 [C] Principal Place of Business 303 [D] Convenience of Employer 305 [E] Limitation on Amount of Deduction 306
§21.02 VACATION HOME DEDUCTIONS 308 §21.03 OTHER DUAL USE PROPERTY 311
[A] Computers and Other "Listed Property" 311 [B] Passenger Automobiles 314
§21.04 CONCLUSION 316
Chapter 22 THE INTEREST DEDUCTION 317
§22.01 WHAT CONSTITUTES INTEREST? 317 §22.02 DEDUCTION OF PERSONAL INTEREST 318
[A] Trade or Business Interest 320 [B] Qualified Residence Interest 321 [C] Interest on Education Loans 324
§ 22.03 INVESTMENT INTEREST 324 §22.04 TIMING ISSUES AND LIMITATIONS 327
[A] Allocation of Prepaid Interest 327 [B] Capitalization of Interest 329 [C] Payment Issues 329
Chapter 23 THE DEDUCTION FOR TAXES 333
§23.01 HISTORICAL BACKGROUND 333 § 23.02 TAXES DEDUCTIBLE UNDER SECTION 164 333 § 23.03 PARTY ELIGIBLE TO CLAIM THE DEDUCTION 335 § 23.04 SPECIAL PROBLEMS ASSOCIATED WITH THE DEDUCTION OF REAL
PROPERTY TAXES AND ASSESSMENTS 336 [A] Real Property Assessments 336
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[B] Apportionment of Real Property Taxes Between Buyer and Seller .... 337 §23.05 PUBLIC POLICY CONSIDERATIONS 340
Chapter 24 CASUALTY LOSSES 343
§24.01 DEFINITIONAL QUESTIONS 344 [A] Casualty Losses 344 [B] Theft Losses 348
§ 24.02 TIMING OF THE LOSS 348 § 24.03 AMOUNT OF THE LOSS 349 §24.04 INSURANCE COVERAGE 351
Chapter 25 MEDICAL EXPENSES 353
§25.01 DEDUCTIBILITY OF MEDICAL EXPENSES 354 [A] Medicine and Drugs 354 [B] Counseling Costs 355 [C] Capital Expenditures 356 [D] Meals and Lodging 357 [E] Illegal Operations or Treatment 358 [F] Qualified Long-Term Care 359 [G] Transportation Expenses 359
§ 25.02 MEDICAL vs. PERSONAL EXPENSES 360
Chapter 26 CHARITABLE DEDUCTIONS 363
§ 26.01 IN GENERAL 363 § 26.02 REQUIREMENTS FOR CHARITABLE DEDUCTIONS 363
[A] Who Is a Qualified Recipient? 364 [B] What Is a "Contribution" or "Gift"? 367 [C] Actual Payment Required 370 [D] Limitation on Charitable Deductions 371
§ 26.03 CONTRIBUTION OF SERVICES 373 § 26.04 CONTRIBUTION OF APPRECIATED PROPERTY 374 § 26.05 CONTRIBUTIONS OF PARTIAL INTERESTS IN PROPERTY 377 §26.06 BARGAIN SALE TO CHARITY 380 § 26.07 SUBSTANTIATION 381
Chapter 27 LIMITATIONS ON DEDUCTIONS 383
§27.01 SECTION 267: LOSSES BETWEEN RELATED PARTIES 383 [A] Section 267(a)(1) Loss Rule 383 [B] The Section 267(a)(2) Matching Requirement 387 [C] Other Matching Rules — Section 404(a)(5) and Section 83 388
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§ 27.02 SECTION 265: EXPENSES RELATED TO TAX-EXEMPT INCOME . 389 [A] Section 265(a)(1) General Rule 389 [B] Section 265(a)(2): Tax-Exempt Interest 391 [C] Allocation 393
§27.03 SECTION 1091: WASH SALES 393 §27.04 JUDICIAL LIMITATIONS ON INTEREST DEDUCTIONS 395
Chapter 28 CASH METHOD ACCOUNTING 399
§28.01 INCOME UNDER THE CASH METHOD 399 [A] In General 399 [B] Constructive Receipt 400
[1] Specific Factors Affecting Application of Constructive Receipt Doctrine 401
[a] Distance 401 [b] Knowledge 403 [c] Contractual Arrangements 403 [d] Forfeitures or Other Penalties 403 [e] Relationship of the Taxpayer to the Payor 404
[2] Specific Exceptions to Constructive Receipt Rules 405 [C] Cash Equivalency Doctrine 406 [D] Economic Benefit Doctrine 409 [E] Deferred Compensation Arrangements 410
[1] Non-Qualified Deferred Compensation Arrangements 411 [2] Property Transfers Under Section 83 413 [3] Section 409A and Revenue Ruling 60-31 415
[F] Lottery Prizes 416 [G] Prepayments 417
§28.02 DEDUCTIONS UNDER THE CASH METHOD 417 [A] In General 417 [B] Cash Method Prepayments 420
Chapter 29 ACCRUAL METHOD ACCOUNTING 425
§ 29.01 THE ALL EVENTS TEST 425 §29.02 ACCRUAL OF INCOME 426
[A] General Rules 426 [B] Income Prior to Receipt: Accrual Issues 427 [C] Receipt Prior to Earning: Prepayments 430
§ 29.03 DEDUCTIONS UNDER THE ACCRUAL METHOD 434 [A] General Rules 434 [B] Premature Accruals 435 [C] The Economic Performance Test: Section 461(h) 437
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[D] Recurring Item Exception to the Economic Performance Test 439 [E] Capitalization 441 [F] Contested Liabilities 441
§29.04 CHOICE OF ACCOUNTING METHODS 443
Chapter 30 ANNUAL ACCOUNTING 445
§ 30.01 RESTORING AMOUNTS RECEIVED UNDER A CLAIM OF RIGHT . 445 [A] Appearance of a Right 448 [B] No Unrestricted Right 449
§30.02 THE TAX BENEFIT RULE 450 [A] The "Fundamental Inconsistency" Test 453 [B] Erroneous Original Deduction 454
§ 30.03 NET OPERATING LOSSES 455
Chapter 31 CAPITAL GAINS AND LOSSES 459
§31.01 HISTORICAL OVERVIEW 459 [A] Preferential Treatment for Long Term Capital Gain 460 [B] Limitation on the Deduction of Capital Losses 463 [C] Justification for Preferential Capital Gain Treatment 464
§31.02 CURRENT LAW: SECTION 1(h) 465 [A] Maximum Rates on Long Term Capital Gain Under the Current Law .. 465 [B] The Components of Net Capital Gain: 28-Percent Rate Gain; Unrecaptured
Section 1250 Gain; and Adjusted Net Capital Gain 467 [1] 28-Percent Rate Gain: Collectibles Gain and Section 1202 Gain .... 468 [2] Unrecaptured Section 1250 Gain — 25% Rate 469 [3] Adjusted Net Capital Gain: 20%, 15% and 0% Rates 469 [4] Adjusted Net Capital Gain: Qualified Dividend Income 471
[C] Attribution of Capital Losses Included in the Computation of Net Capital Gain 472
§ 31.03 CURRENT LAW: APPLICATION OF THE SECTION 1211(b) LIMITATION ON THE DEDUCTION OF CAPITAL LOSSES 475
§ 31.04 DEFINITION OF CAPITAL ASSET 479 [A] Section 1221(a)(1): Inventory, Stock in Trade and Property Held Primarily
for Sale to Customers in the Ordinary Course of the Taxpayer's Trade or Business 480
[B] Section 1221(a)(2): Property Used in the Taxpayer's Trade or Business 482
[C] Section 1221(a)(3): Copyrights, Literary, Musical, or Artistic Compositions, Etc 482
[D] Section 1221(a)(4): Accounts Receivable for Services Rendered or Inventory-Type Assets Sold 483
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[E] Section 1221(a)(5): Certain Publications of the U.S. Government .... 483 [F] Section 1221(a)(8): Supplies Used or Consumed in the Taxpayer's Trade or
Business 484 [G] Judicially Established Limits on Capital Asset Definition 484
§31.05 THE SALE OR EXCHANGE REQUIREMENT 488 § 31.06 THE ARROWSMITH RULE: CHARACTERIZATION OF CERTAIN GAINS
OR LOSSES DEPENDENT ON PRIOR TAX TREATMENT OF RELATED GAINS OR LOSSES 489
§31.07 HOLDING PERIOD 491
Chapter 32 QUASI-CAPITAL ASSETS: SECTION 1231 493
§ 32.01 IDENTIFYING SECTION 1231 GAINS AND LOSSES 493 § 32.02 THE HOTCHPOT ANALYSIS 497 § 32.03 RECAPTURE OF NET ORDINARY LOSSES: SECTION 1231(c) 499
Chapter 33 DEPRECIATION RECAPTURE 503
§ 33.01 SECTION 1245 RECAPTURE 504 § 33.02 SECTION 179 RECAPTURE 508 § 33.03 SECTION 1250 RECAPTURE 509 § 33.04 UNRECAPTURED SECTION 1250 GAIN 511 § 33.05 SECTION 1239 ORDINARY INCOME 512 § 33.06 OTHER RECAPTURE PROVISIONS 514
Chapter 34 ASSIGNMENT OF INCOME 517
§ 34.01 THE PROGRESSIVE RATE STRUCTURE 517 § 34.02 DEVELOPMENT OF RULES LIMITING INCOME-SHIFTING 518 § 34.03 COMMUNITY PROPERTY 520 §34.04 APPLICATION OF THE ASSIGNMENT OF INCOME RULES 521 §34.05 THE KIDDIE TAX 525
Chapter 35 BELOW MARKET LOANS 533
§35.01 HISTORY: PRE-SECTION 7872 533 [A] Early IRS Attempts at Taxation 533 [B] Gift Tax Consequences of Interest-Free Loans 535 [C] Post Dean/Johnson History 535
§ 35.02 RATIONALE FOR SECTION 7872 537 § 35.03 OPERATION OF SECTION 7872 538
[A] Treatment of Term Loans Other Than Term Gift Loans 540 [B] Demand Loans and Term Gift Loans 542 [C] Exceptions to the Basic Operating Rules 544
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Chapter 36 TAX CONSEQUENCES OF DIVORCE 547
§ 36.01 ALIMONY: GENERAL REQUIREMENTS 547 § 36.02 CHILD SUPPORT 552 § 36.03 EXCESS FRONT-LOADING 554 § 36.04 ALIMONY TRUSTS 559 § 36.05 DEPENDENCY EXEMPTION 559 § 36.06 FILING STATUS 563 § 36.07 PROPERTY TRANSFERS 564 § 36.08 SPECIAL RULES REGARDING PERSONAL RESIDENCE — SECTION
121 569 § 36.09 LEGAL EXPENSES 571
Chapter 37 EFFECT OF DEBT ON BASIS AND AMOUNT REALIZED 573
§ 37.01 v. 573 § 37.02 v. 574 § 37.03 NONRECOURSE BORROWING AND THE SECTION 108 INSOLVENCY
EXCLUSION 579 § 37.04 NONRECOURSE BORROWING AND APPRECIATED PROPERTY . 580 § 37.05 IMPACT OF CONTINGENT LIABILITIES 583
Chapter 38 LIKE KIND EXCHANGES 585
§38.01 CONTINUITY OF INTEREST 586 § 38.02 THE LIKE KIND REQUIREMENT 587 § 38.03 THE HOLDING REQUIREMENTS 589 § 38.04 "SOLELY" FOR LIKE KIND PROPERTY: THE PRESENCE OF
"BOOT" 593 § 38.05 TREATMENT OF LIABILITIES 594 § 38.06 BASIS CALCULATIONS 595 § 38.07 THE RELATIONSHIP BETWEEN § 267(a)(1) AND § 1031 600 § 38.08 SALE OR EXCHANGE? 601 § 38.09 THREE-WAY EXCHANGES AND DEFERRED EXCHANGES 602 §38.10 REVERSE STARKER EXCHANGES 606 § 38.11 EXCHANGES QUALIFYING FOR BOTH § 121 AND § 1031 606 § 38.12 SECTION 121(d)(10) — PROPERTY ACQUIRED IN A LIKE KIND
EXCHANGE 608
Chapter 39 INVOLUNTARY CONVERSIONS 611
§39.01 GENERAL POLICY 611 § 39.02 THE MANDATORY AND ELECTIVE RULES OF SECTION 1033 ... 612
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§39.03 INVOLUNTARY CONVERSION EVENTS 613 § 39.04 SIMILAR OR RELATED IN SERVICE OR USE 614
[A] Special Rule for Condemnation of Real Property Used for Business or Investment 617
[B] Federally Declared Disasters 620 § 39.05 TIME FOR REPLACEMENT 622 § 39.06 PARTIAL RECOGNITION OF GAIN UNDER SECTION 1033 623 §39.07 BASIS OF REPLACEMENT PROPERTY 624 § 39.08 HOLDING PERIOD OF REPLACEMENT PROPERTY 625 § 39.09 INVOLUNTARY CONVERSION OF PRINCIPAL RESIDENCE 625
Chapter 40 INSTALLMENT SALES 627
§40.01 STATUTORY FRAMEWORK 627 §40.02 PAYMENTS AND LIABILITIES 629 § 40.03 RECAPTURE INCOME 632 §40.04 ELECTING OUT OF THE INSTALLMENT METHOD 633 §40.05 EXCLUSIONS 633 §40.06 CONTINGENT PAYMENT SALES 634 §40.07 DISPOSITIONS OF INSTALLMENT OBLIGATIONS 636 §40.08 SECOND DISPOSITIONS BY RELATED PERSONS 638 § 40.09 SALES OF DEPRECIABLE PROPERTY TO RELATED PERSONS . . 641 §40.10 SPECIAL RULES FOR NONDEALERS 642 § 40.11 INSTALLMENT OBLIGATIONS AND LIKE KIND EXCHANGES . . 644
Chapter 41 SALE OF A BUSINESS AND SALE-LEASEBACKS 647
§41.01 SALE OF A SOLE PROPRIETORSHIP 647 [A] The Standard of Williams v. McGowan 647 [B] Goodwill, Going Concern Value and Covenants Not to Compete 648
[1] Goodwill 648 [2] Going Concern Value 649 [3] Covenant Not to Compete 649
[C] Tax Consequences of Allocation of Purchase Price 650 [1] Historic Allocation Strategies 650 [2] Section 197 — Amortization of Business Intangibles 651
§ 41.02 VALUING GOODWILL, GOING CONCERN VALUE, AND COVENANTS NOT TO COMPETE 655
§41.03 SALE-LEASEBACK 660 [A] Sale-Leaseback Characterized as Financing Arrangement 660 [B] Sale-Leaseback Characterized as a Tax-Free Exchange 662
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Chapter 42 AN INTRODUCTION TO ORIGINAL ISSUE DISCOUNT 665
§42.01 ORIGINAL ISSUE DISCOUNT: INTRODUCTION 665 §42.02 OID: DEBT INSTRUMENTS ISSUED FOR CASH 668
[A] Determining the Amount of OID 670 [B] Current Inclusion of OID 672 [C] Deduction of OID 673 [D] Gain or Loss on Sale, Exchange or Retirement 674 [E] Market Discount 675
§ 42.03 SALES AND EXCHANGES OF PROPERTY AND SECTION 467 RENTAL AGREEMENTS 676
Chapter 43 LIMITATIONS ON TAX SHELTERS 679
§ 43.01 THE AT RISK RULES — SECTION 465 679 [A] General Background 679 [B] Operation of the at Risk Rules 680
[1] Activities Subject to the at Risk Rules 682 [2] Determination of the Initial Amount at Risk 682 [3] Qualified Nonrecourse Financing 683 [4] Adjustments to the Amount at Risk 683
§ 43.02 SECTION 469 — LIMITATION ON PASSIVE ACTIVITY LOSSES AND CREDITS 686
[A] Background 686 [B] Section 469 — In General 688 [C] Passive Activities 689
[1] Material Participation 689 [2] Rental Activities 691
[D] Scope of Passive Activities 692 [E] Treatment of Losses and Credits 693 [F] Portfolio Income and Expenses 694 [G] Exception for Active Participation in Rental Real Estate 695 [H] Disposition of Taxpayer's Entire Interest in Passive Activity 695
Chapter 44 THE ALTERNATIVE MINIMUM TAX 699
§44.01 MECHANICS 699 § 44.02 DETERMINING ALTERNATIVE MINIMUM TAXABLE INCOME . . 702
[A] Section 56 and 58 Adjustments 704 [1] Depreciation 705 [2] Limitation on Itemized Deductions, Standard Deductions and Personal
Exemptions 705 [B] Section 57 Preferences 706
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§44.03 DETERMINING TAX LIABILITY 707 §44.04 CREDITS ALLOWED 708
Appendix A NOTE ON MISCELLANEOUS EXCLUSIONS 711
[A] TAX-EXEMPT INTEREST 711 [B] SECTIONS 109 AND 1019 712 [C] CREDIT FOR ADOPTION EXPENSES AND EXCLUSION FOR
ADOPTION PAYMENTS MADE BY EMPLOYER 713 [D] GOVERNMENT WELFARE PAYMENTS 713 [E] EDUCATIONAL SAVINGS BONDS 714 [F] FOREIGN EARNED INCOME 714 [G] FOSTER CARE PAYMENTS 714 [H] SECTION 126 PAYMENTS 714 [I] CERTAIN LIVING EXPENSES 714
Appendix B ADDITIONAL ACCOUNTING CONSIDERATIONS ... 717
[A] INVENTORY ACCOUNTING 718 [B] FINANCIAL VS. TAX ACCOUNTING 720
TABLE OF CASES TC-1
TABLE OF STATUTES TS-1
TABLE OF AGENCY DECISIONS TA-1
INDEX 1-1
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