Tax Outline, Summer 1995
I. Non-Cash Benefits:
Income: the gain derived from capital, from labor, or from both
Personal Income: the algebraic sum of:
1. the mkt value of rts exercised in consumption &
2. the change in the value of the store of property rts b/t the
beginning & the end of the period in question.
Economic Power/Tax Base:
1. Consumption: mkt value of the goods & services used by tax unit
during the year to satisfy own wants
2. Gifts: mkt value of the goods or services given to other tax
units during the year
3. Current Saving = Change in net worth = Change in wealth: change
over the year in the mkt value of total net assets held by tax unit. A
positive or negative figure in any time period.
Gross Income: income realized in any form, whether money, property, or
***If services are paid for in property, the fair mkt value of the
property taken in payment must be included in income as compensation.
Annuity: a form of K under which payment is made now in return for a
payment, or series of payments to be made in the future.
1. Retirement Benefits: United States v. Drescher:
Issue: Whether to impose a tax in the year the benefit is bestowed.
Facts: P was officer & director of B & L Optical Co. who purchased,
each tax year, a single premium annuity K at $5000 naming P as
annuitant. D used $$$ as add'l comp rec'd by P in yr K was purchased.
J was for P.
The policy was to be retained until P was to retire at 65. P
reported on the CASH BASIS & D on the ACCRUAL BASIS. IRS Code used
D Contends: (Appellant) K's are taxable to annuitant in year of
purchase by employer b/c Sec 22(a) [now sec 61(a)] sweeps into gross
income "compensation for personal service, of whatever kind & in
whatever form paid, and income derived from any source whatever."
P Contends: Retirement annuity K's purchased for an employee gives rise
to taxable income only as the annuitant rec'd payments under the K; and
the entire amt of each annuity payment was includable in gross income
for the year of its receipt if he had made non contribution toward the
purchase of the annuity
Rules: Petitioner became taxable in 1941 upon whatever value was, by
delivery of the policy to him in that year, then unconditionally placed
at his disposal the then assignable value of the policy.
The cost to the purchaser is the correct assignable value of the
policy when rec'd by the taxpayer.
The prohibition against assignment doesn't prove complete absence of
Whatever present value the life ins. feature had to him IS taxable.
Deprivation of the ability to exercise the privilege would decrease the
value of the policy to the annuitant below its cost to the employer.
The burden of proving by how much he was overtaxed in on the P, b/c
he relied on the terms of the K to prove that it had no present value.
HELD: The 1939 policy did have a PV. The P didn't prove that the value
was less than $5000, so the J for P is
REVERSED & REMANDED.
1. Deferral reduces the PV of the tax burden.
2. Accrual method: advantage is accuracy
3. Cash method: advantage is simplicity
4. Present Law: employers may set up "qualified" pension & profit-
sharing plans to provide retirement benefits for employees. The
employer's contribution to the plan are deductible by it as they are
made. Employees aren't taxed until they begin to receive payments.
5. The plans (#4) cannot discriminate in favor of highly paid
6. Deferred compensation may be in the form of an unsecured promise
by the employer to make a payment in the future. These promises are not
income to employee or deductible by the employer until the year of
Wages: all remuneration for services performed by an employee for his
employer, including the cash value of all remuneration paid in any
medium other than cash
RULES: if the employer treats the benefit as income & withholds
taxes, an employee who wants to treat the benefit as nontaxable will
have to claim an exclusion & offer explanation.
Employers who fail to withhold the prescribed amts are liable for an
employee's taxes if the employee fails to pay them.
2. Food and Lodging: Benaglia v. commissioner p. 89:
Issue: Whether to tax, w/no aspect of the when to tax quest, when there
is an overlap b/t business & personal aspects of a taxpayer's life.
Facts: Husband & wife in Hawaii filed join income tax returns for 1933
& 1934. Husband was manager of many hotels & for convenience to
employer, he & wife lived in suite of one of the hotels & rec'd free
meals. His salary varied from $25,000 to $9,625 to $11,041.67. These
wages didn't reflect the meals & lodging as part of comp, nor did they
acct for them.
Pro: Commissioner added $7,845 each year to gross income to acct for
the fair mkt value of the rooms & meals furnished by the employer.
RULES: Under circumstance, the value of meals & lodging isn't income to
Neither the value of quarters nor the amt rec'd as commutation of
quarters by an Army officer is included w/in his taxable income
If occupation of the premises is imposed for the convenience of the
employer, then it is not taxable.
HELD: Reversed & J under Rule 50.
1. Lodging is excluded only if the employee is required to accept such
lodging on the business premises of his employer as a condition of his
3. Economic Effects: An Example:
Deadweight Loss: When there is a loss if a non $ benefit is given to
someone which results in a net loss to the donor.
eg. Employer supplies parking for employee which costs him $50, but is
only worth $40 to employee. If Employer were to give employee the $40,
then employee would be taxed & employer only pays the $40. By supplying
parking to employee, which costs $50 for a $40 benefit, theoretically
$10 is lost by employer. This $10 loss is a deadweight loss.
Subsidy or Encouragement???: when a manufacturer is allowed to deduct
the cost of raw materials.
Nominal & real interests are always the same = no inflation
(if diff, then inflation)
10% yr is mandatory when they're identical [fixed rate return]
1. no inflation, so no avail rate return would be that high
2. taxpayers prefer deductions sooner rather than later & be taxed later
rather than sooner.
b/c of time value of money
3. Nominal results are identical, but time value of money makes $1.10
today is more expensive than $1.10 a yr hence.
4. to fund today, must spend the amt, but the cost to pay the amt 1 yr
hence is .10 less ($1) PRESENT COST
Differential is the time value of money
Regardless of taxation or inflation b/c
1. Top rate tax is less than 100%
2. Lowest rate inflation is always more than zero.
Assume nominal rate 12% real world & 2-3% actual rates
2% is real rate of return. It allows you to keep up w/inflation.
There is always a positive real rate of return. Always can make $ by
Time value of $ is frequently taxed.
present cost v. future cost
Bank pays interest, but have interest income which is taxable Sec
61A4 income in the code.
Effective rate of return = Nominal Rate (i) -- i(tax rate)
Discount amts w/o regards to inflation & Don't care whether time
value is taxed.
***Very important to understand present value, future value, and all of
When reading cases be able to determine rates & see what the parties are
actually disputing & what the differences will/would be to each.
EFFECTIVE & NOMINAL RATES of TAXATION:
Sec 1 in IRS Code
the more income, the greater the rate of tax
Whether to give deduction for things of value.
Deductions are subtracted from income & then you apply the rates. These
are of more value to those w/more income. Contrast w/credit.
Credits reduce tax liability & not the tax bracket. Credits have the
same value to everyone.
Taxable income v. Economic income: usually coextensive or totally
Medium: 1 is a subset of the other (for each way)
Some things belong to both groups
Sec 61a: Gross income all income from whatever source derived
Income is not defined, use common sense.
If $50 is taxable, then immediate consumption is encouraged.
Would discourage savings, bad for economy.
If system doesn't distinguish after tax income & what is yet to be taxed
(after tax investment), then immediate consumption is encouraged.
After tax investment
eg. 10 from prior, 100 wages, 10 immediate consumption, & invests 100
annuity (k obligor pays obligee a sum fixed by terms of K annually for
per. time, certain or life terms. Life expectancy is 8 years.
Ins. Co. would pay??? 20 yr after its purchase.
Value is value of K/annuity.
2nd period beginning is 100, at end it is less than 100. (100-20=80)
***don't want to tax 80, b/c included in tax base in per. 1
How much of 20 payment is taxable in 2nd per???
Investment of 100 after taxes. If income is diff from what you get &
what you invest, then tax that diff.
eg. 160-100=60 60 is amt rec'd from investment, that is taxable
1. Tax the after tax investment 1st. Recovery 1st (of after tax
investment). Taxpayer pays tax later. Based on mortality, etc.
Rec'v annuity payments every yr until rec'd 100 (5yrs), then it is
Gov't waits to tax income until all capital is recovered.
2. Recovery Last: all is income until 5yrs are left of expectancy, then
receive them tax free. (pay tax until 5yrs remain)
***What if she dies early? No full investment is recovered, allow
deduction in last year. If not used, then use it for the estate.
***What if she lives longer? 1st doesn't matter. #2, more tricky. She's
got to include every annuity payment rec'd after 5yrs pass.
3. Ratable exclusion: allow taxpayer to recover a little out of each
payment. Take 100 (after tax investment)/expected payments until entire
amt is recovered.
eg. 100/8 Allows Co to pay more if recipient accepts smaller amts for
***Amt to be excluded from each payment to bear same ratio to total amt
payment that after tax investment should bear.
eg. 100 payment/160 expected return = 5/8(20)= 12.50 excluded & 7.50
included in each payment in #3 RATABLE EXCLUSION
Sec 72: any amt rec'd as an annuity (except exclusion ratio)subsec b.
Fits into Sec 61:
Annuities are included as income (diff b/t investment & what is
rec'd under the K.)
ENDOWMENT K: put it in bank & don't get annual interest, must wait until
fixed date in the future & then get a fixed sum.
eg. Wages 100, taxed, & immediate consumption (10-amt taxed), & then
buys an endowment for $100 for 10yr term at 10%
Won't get a penny until 10 years. What is the future value of the
100 invested at 10% for 10yrs???
What if 100 endowment is given to employee instead of wages???
She receives 100 Fair Mkt Value of an endowment K & she doesn't make
any investment b/c she doesn't have to. She won't get any $ until 10yrs
***Gov't will want to argue that she got income of 100 in per. 1, rather
than wait until yr 10. Gov't keep $10 that it wouldn't get if it waited
until yr. 10. Text p. 77 Sec 1.61-2d1***Very important Regulation!!!!
It is a Treasury Regulation. Income the yr. she rec's it from the
employer. (as if she bought it) The difference is in the 10th yr, the
yr of payment. Treatment is same as payment in kind & payment in cash.
Avoids tax avoidance by non cash payments. Uses treasury regulations.
Law & Intro Chapter: hierarchy presented. Refer to Chapter 1. p65
onward. Intro chapter is very important, & always cross reference.
Treasury Regulations: Result of congress. Actually signed off. 2
1. Legislative: when congress says in code section Art 26 US code.
Authority to Treasury to make certain rules. Resulting Regulations more
value than implemented regulations. Treasury has auth & makes most imp
rules for those topics.
eg. Sec 385a: Secretary authorized to det whether int of corp is stock
Leg regulations then Regular regulations. (hierarchy)
Property: things in which people have property. eg. desks, chairs,
bikes, etc. DOESN'T mean legal rights, only the things themselves & not
the right to them.
DRESCHER CASE: case law trumps treasury & IRS regulations. 16th
Amendment authorizes rt to tax people. Polleck Case, then the code,
then ct determined, regulations, then announcements of IRS (not approved
When gov't cites treasury regulation, well served. (good point)
If ct says no, then pay tax & sue ct.
(says can't tax Present Mkt Value (PMV))
Better Gov't argument is to tax $260, b/c no after tax investment if it
is given to her. So if Ct says no to argument #1, then $260 will be
taxed in yr 10 & not $160. Taxed in 1 lump chunk.
1. Drescher: Gov't won. FMV of K is included in gross income in yr
employee rec's it, then in yr 10 diff. is taxed. Total is 260.
ISSUE: When it will be included as income. Gov't sooner & Taxpayer says
2. Taxpayer wins: 0 inclusion in yr 1, but gov't not content to tax 160
in yr 10, RATHER it would tax $260 in yr 10. p 84-5 TEXT!!! (p58 also)
***Always true whether time value is taxed on taxpayer!!! (b/c always
less than 100%)
***Don't want to tax twice. Time value of FMV when rec'd is all that is
at stake b/c ultimate amt taxed is same, regardless of who wins.
DRESCHER: Where can you sue for tax issues & What is the procedure?
Taxpayer gets deficiency notice & has scheme of remedies to go thru
b/f can be a legal case. Taxpayer can pay amt & then bring refund
action in Dist Ct or Ct of Claims OR don't pay & petition US Tax Ct.
Time Value: if pays, then taxed on amt of deficiency. Tax ct
figures it is not paid, then need interest from not being paid.
Can not pay, use money in interim to get profit, then pay int on
deficiency go to Tax Ct.
If int on deficiency is high, then pay it & sue in Dist. Ct.
What's at stake??? Dist cts are of general federal jurisdiction. Tax
Ct consists of specialized judges, good for tricky tax arguments. Dist
Ct judges hate tricky cases. If it is a quest of fact, don't go to Tax
Ct b/c no jury & jury would be more sympathetic.
Dist ct is appealable to circuit. Tax Ct is appealable to circuit
in which taxpayer resides.
Circuits do what Tax Ct wants b/c they know what they're doing.
Tax Claims only appealable to circuit. Get dispute b/t 2 circuits &
then get to Sup. Ct. (was good until O'Connor got on it & knew tax b/c
used to always get the wrong answer re: tax law.
If Ct claims always get same issue, then pay deficiency & appeal is
always settled. (no dispute b/t circuits) Forum Shopping.
How Does Taxpayer Argue For It???
p. 80 text: case law trumps treasury decision & 2nd circuit Rules
apply as precedent.
WARD CASE: IF ASSIGNABLE VALUE, THAT IS AMT INCLUDED.
Taxpayer Argues: In Drescher, K was nonassignable, so no amt should be
included. No phys poss of K & only person who had K could assign, so no
assignment possible. Ward can't be overruled. p. 81.
Gov't Argues: Must be a present value, can't be $0. Why pay 100 for
something w/less value to employee if it is paid as compensation. They
wouldn't b/c no incentive!!! It is an impairment & is clearly valuable
to the taxpayer. See footnote 6 p. 83 & p. 85 2(b). Part of $5000 pd
was assignable, value of assignability is 'x', keeps it & passes on
5,000-'x'. Company won't vote to pay $ for something for themselves if
it isn't of the value paid for it.
Accrual v. Cash methods. p. 53 in Chapter 1.
Taxpayer includes it when he rec's it regardless (Cash method) of
Accrual: includes when paid, regardless of when rec'd.
II. Interest-Free Loans
1. May be necessary to tax the landers if they rec'd interest income
& tax borrowers as if they'd pd it, even if they didn't.
2. Sometimes it is a clever tax-avoidance scheme.
Sec7872: deprived scheme of its tax advantage by taxing the interest-
free loan as if the load had been made at arm's length w/provision for
interest at the applicable federal rate.
3. Sec163(d): limits the interest deduction to the amt of interest
earned. See p. 116
B. Imputed Income: When people use their property or own services
to provide benefits directly to themselves or to members of their
a. Owner-occupied home, the imputed income is the rental value of
the home. (a home is income & an investment)
b. Tax Rules:
1. Non-taxability of imputed income
2. Deductibility of the interest payment
a. The benefit of the services one performs for oneself is imputed
b. Sec 21: credit for child & household care
c. Sec 129: allows tax-free employer reimbursement for child-care
d. Sec 125: allows employers to offer employees a choice b/t tax-
free benefits & cash.
3. Psychic Income & Leisure:
REVENUE RULING 79-24:
RULE: IRC Sec. 61(a) & 1.61-2 [compensation for services]
Sec 1.61-2(d)(1): if services are pd for other than in money, the
FMV of the property or services taken in payment must be included in
income. If the services were rendered at a set price, then the price
will be presumed to be the FMV of the compensation rec'd, absent
evidence to the contrary.
Regs. Sec 1.6045-1(a)(4): taxable barter doesn't include
arrangements that provide solely for the informal exchange of similar
services on a noncommercial basis.
Rev. Rule 80-52m 1980-1 C.B. 100: people are taxable on credits
earned in a barter club.
Sec 6045: requires info returns to IRS from "barter exchanges".
Rev. Rul. 66-167, 1966-1 C.B. 20: an executor isn't taxable on statutory
fee that he waived, in a timely manner, where his son was the
Income means 'x' in sec 61. With an investment means the net return of
amt of investment.
Policy: tax when returned or tax when invest/rec orig $$$.
Income: net of after tax investment
Drescher: income in context of annuity. 3 possibilities (see
above) Time value of tax on net return of annuity is at stake.
Annuities involve several payments. Up front, End of payments, or some
recovery/tax on each payment. Series of payments creates confusion.
P would argue they don't get $$$ for 10 yrs, so no PV & should wait
Gov't says its compensation, in amt of $100 b/c that's what they
Ct says that PV may be less than the amt pd, but P would have to
prove it. Should be treated as income in amt of premium, under Sec 61.
Maj says: the amt she was "paid" must be less than what corp paid
for an assignable endowment K. Fact it is assignable is a component of
the value. If non-assignable, then should be less. Value must be 100 -
It is comp, some value is immed rec'd by P. What value should be
considered in yr premium is paid?
***Fact is P & a few others are officers, so wouldn't pay more for
something than what is worth to her.
Dissent: company won't pay comp to employees in kind if it isn't
worth that value to the employees.
Either didn't impair value or impairment was of value to employee.
Company is the taxpayer & will do as pleases w/the policies. Also argue
that it is unreasonable to think they would comp & pay money if it is of
less value to employee.
Features of the case:
assignable & co paid too much for it b/c it is worth less. Authors
are suggesting Gov't would be stuck w/this case.
Gov't 61a1, it is clearly compensation. P would have assigned it if
it were of less value to her than the amt paid.
Ct says value of the benefit is includable as GI of employee
If Drescher applies Ward, then it interprets Ward. Drescher says
assignable value is the amt paid for the K. (Value of K to taxpayer)
***Burden is on the taxpayer to prove the policy is worth less to
her than what the Co. paid for it.
If Gov't had lost, using Drescher facts, Gov't still wants time value.
Co is taxed at same rate as taxpayer. It has net income & is taxed at
10%. Could sue the company for amt deducted as income to taxpayer & get
the same 10%.
Drescher is good case to keep in mind. Keep list of cases w/similar
***Treatment by payor will not determine value to payee!!! (not
includable by payee).
Also doesn't work b/c payor isn't a party to payee's litigation.
May be governed by rule in 1 circuit & another by a rule in a diff
circuit. (P & Gov't can both be supported in diff circs.)
How do you argue Drescher under Banaglia???
Hard to argue room & board is of no value to employee.
If argue they're not wages & the amt wasn't deducted by co, 2 probs:
1. The K is not wages (Drescher)
2. Consistent w/ tax treatment of item by payor & payor isn't req'd
Issue is whether TP has income in both cases. Both are in kind
payments. Drescher & Banaglia can be distinguished.
If gov't says taxable of FMV or room/board same as FMV of K.
in Drescher, K value is comp, but in Benaglia the room & board isn't
They say it is a condition of the employment, so it isn't income/comp in
Benaglia. Necessity to keep him on the job site at all times, not as
Maj: necc condition of employment, wouldn't hire someone not
willing to say there. Not comp, not includable as GI
Factual problem is he wasn't at all 3 places & was absent for long
periods of time.
Taxpayer says it's not compensation, so not income. Implies that all
income is compensation.
Argument for saying that it is income: It is of value, b/c would have
to pay for it 'but for' the arrangement.
If benefit weren't conferred would have to pay room & board.
Never just for co's convenience, reciprocity makes the wages/other for
Intent of payor:
Drescher: value to payee.
Is employer doing it for labor value of employee. Employer convenience
argument is of no use.
Employers benefit employees all the time.
Dissent: Assuming it isn't compensation, doesn't mean that it isn't of
Letter says it is part of compensation. TP should argue he didn't
want to live there & was merely clarifying situation.
Gov't will say it's other income b/c it is an economic boom & saved
them $ they would otherwise have to spend.
Should only be taxed at the value to him & not the MV, not what
they're reasonably worth. Value to TP should be of
Taxpayer would argue it's forced consumption b/c he wouldn't have
bought it for himself.
Diff b/t benefits conferred to get labor & benefits conferred after
III. Windfalls and Gifts:
A. Punitive Damages:
Commissioner v. Glenshaw Glass Co.:
Issue: Whether money rec'd as exemplary damages for fraud or as the
punitive 2/3s portion of a treble-damage antitrust recovery must be
reported by a taxpayer as gross income under Sec22(a) of the IRC of the
1939 (predecessor of Sec 61)?
Pro: Ct App aff'd tax ct's separate rulings in favor of the taxpayers.
Facts: (Glenshaw) The Co was engaged in protracted litigation
w/Hartford-Empire co. Glenshaw demands exemplary damages for fraud &
treble damages for injury to its business by reason of Hartford's
violation of the federal antitrust laws. Settlement in 1947 by which
Hartford paid Glenshaw $800,000 & the total settlement of $324,529.94
was payment of punitive damages for fraud & antitrust violations.
Glenshaw didn't report it as income for the tax yr. Commissioner
determined a deficiency claiming entire sum (less deductible legal fees)
as taxable. Tax Court & Ct. App upheld the taxpayer.
(William Goldman Theatres, Inc.): Goldman suffered a loss of
profits of $125,000 & was entitled to treble damages in the sum of
$375,000. Goldman only reported $125,000 as gross income & claimed the
$250,000 was punitive damages & was not taxable.
RULE: Sec 22 Gross Income: includes gains, profits, & income derived
from salaries, wages, or comp for pers. service (whatever kind &
whatever form pd) or from professions, vocations, trades, businesses,
commerce, or sales, or dealings in prop (real or personal), growing out
of the ownership or use of or interest in such prop; also from
interest, rent dividends, securities, or transaction of any business
carried on for gain or profit, or gains or profits & income derived from
any source whatever.
Congress applied no limitations as to the source of taxable receipts
& the cts have given a liberal construction to definition (tax all that
aren't exempted specifically), Thus the fortuitous gain accruing to a
lessor by reason of the forfeiture of a lessee's improvements on the
rented property was taxable.
D' contend: punitive damages (windfalls) from culpable conduct of 3rd
parties, are not w/in the scope of the section.
HELD: mere fact payments were extracted from wrongdoers as punishment
can't detract from their character as taxable income to the recipients.
1. Case is consistent w/broad definition of income reflected in Simons
formulation & is favored by most modern tax experts.
2. Regs 1.61-14: $4,467 in old currency found in a piano purchased for
$15, was income in the yr it was discovered.
Look for govt's argument:
1. Employer taxed same rate as TP
2. Has income for tax yr. in quest.
Amt exposed to taxation if deny employer taxation. Already an amt
subject to taxation. Gov't doesn't care if included in Drescher's
income or if deny employer a deduction. Co did deduct in Drescher.
Gov't wanted time value of $$. Could get it from employer if deny them
a deduction for that amt or get it from employee when it is purchased.
Look at whether Co is allowed deduction. TP doesn't have an
inclusion for same tax period for the amt of the deduction, so it wasn't
properly deducted??? Can't connect TP & Co's tax reporting methods.
Accrual v. Cash method is reason you can't connect the 2 tax
reporting methods to draw conclusions.
Co isn't a party to litigation, 2nd reason not to connect 2 issues,
Legal Authority: Drescher. Co can deduct b/c compensation. TP can
argue value is less to them than what was paid & decrease amt taxed.
Includible by recipient or not properly deducted by Co.
Drescher & Benaglia: Motivation of payor, unlike deductions payor
takes, plays imp role in tax treatment of payee. Drescher dissent:
employer is paying comp to employee in kind to please the employee. If
that is the motivation & it is comp & amt of comp is amt expended by
employer. Tax amt of comp provided by employer. Maj in Drescher is
worried about case in which employer pays comp in kind to please people
like employee, not necc employee themself, so it is possible employee
will fall thru crack of employers good will eg. is term ins & not all
will benefit equally from such comp in kind, so necc to allow TP to
argue that comp isn't of such value as paid by the Co.
Benaglia: to please not even a class of employees, so it isn't
comp. Whenever for employer's convenience, not comp. (Spica doesn't
like this argument) Wages, however aren't always paid for the
convenience of employer, they benefit employee as well. Clearly comp
when paid to please a class of employees. When motivation is not to
please employee or class thereof, then it isn't compemsation. Better to
say if someting is paid, or benefit is conferred, & not price of
purchase of labor, then it isn't compensation. If inducement of
employment was free room & board, then it IS comp, b/c intent is to
obtain labor. If nothing to do w/obtaining labor, then it shouldn't be
treated as compensation. If employer isn't conferring as cost of
acquiring labor, then it isn't compensation. Sec 61 doesn't say income
= compensation. Argument could fail. Shouln't be taxed under 61a1. Is
it other kind of income, b/c gross income includes income from all
income whatsoever. May be an economic benefit, should be included in
61a1. 3 problems w/dissent's argument.
1. Can't take seriously unless dissent means amt to be included is
value of benefit to TP & NOT mkt value. If TP was left to provide own
room & board, would provide less expensive than at hotel, so shouldn't
pay mkt value of hotel. Amt avoided is less than hotel, unless would
have provided same for self. Gets confusing when you consider clothing
(uniforms), air conditioning, etc.
2. Necessity argument: doesn't work always, b/c many things are
benefits, but not all taxable. eg airconditioning, mineral water in
office, uniforms, etc. Dissent contemplates what they would pay
3. Dissent has a legal problem: should fit w/relevant authorities.
p93 (bottom). Dissent doesn't distinguish diff b/t employee in Benaglia
& employee in Tennant. In fact, description of employee in Tennant by
dissent is identical to employee's description by Maj.
Bennaglia: Case is in BTA (Board Tax App = US Tax Ct). Only
acquiesces only in tax cases, & only in cases in which it loses.
Acquiescence is not to make argument which lost. Notice to gov't &
employees not to do 'x' based on old case law in which gov't loses.
Argument used to win for gov't & now it is wrong. If non-acquiescense:
then waiting for it to go to Sup Ct US. Means service will keep arguing
this point & pull your claim/return & sue you on it. (Unless you sue in
Sec 119 IRC: excludes accomodations & room & board provided by
employer for employee for employer's conveneience. (used b/61 what is
Changes scope of prase "convenience of employer"
footnote 8. Sec 119(a) says it should be excluded from gross
income if for the convenience of employer. Doesn't say not comp, says
not income. Dissent wouldn't work under Sec 119.
May be other income, but not Gross Income. Gross income is
includable in economic income. Drescher finds it to be economic income
& gross income.
Sec 119 & Benaglia show income can fall outside gross income & still
be economic income.
Story about Peggy. Look at diagram as Eco income & Gross are separate
sets which cross over each other.
Peggy is taxed at 20% & Sam is taxed at 10%. Sam needs 15000 for
school, which is what Peggy earns in interest on her investment of
200,000. Peggy's tax is 3,000 w/ income of 15,000. If P gives S money,
it is a gift, may be subject to gift tax. Sam has income of 0, under
Sec 102 which says value of gifts are excluded as Gross Income.
Tax cost of Sam's edu needs in 3,000. If P gives S 200,000, P has 0
income & 0 tax. It isn't a gift, it is a loan, b/c it is expected to be
paid back. S puts it in the bank & earns the 15000 he needs for school.
Income tax is 1,500 b/c only taxed 10% v. 20% of mother's tax. P's cost
if keeps 200,00 in taxes is 3,000 & S's cost w/200,000 is 1,500.
Congress enacted 7872 to take care of this problem. Shows you the
right diagram of non-eco income which is includable in GI. Gift tax is
w/in Title 26 of Income tax.
p. 617 of Tax Code: It is a loan in the nature of a gift. All
interest earned is gone. Applicable Federal Rate is set at an
unrealisticallly high rate, punitive effect. Treated as a gift to
borrower of amt of Applic Fed Rate. Then it is treated as interest
under 61a4 and taxable income. Back as interest from payee to payor.
Payee has interest under 61a4 b/c actually earns interest. Payee
treated as having transferred interest in Applic Fed Rate back to Payor.
This is deductible under 163d as investment interest. Results in a
negative amt of income to payee. Total tax loss is much greater than it
would have been otherwise.
Results in amt of $$$ counted as GI, that isn't earned or paid by
anyone. No eco income, but counted as GI.
Sec 61 is false under imputed income theory b/c it is eco income that
isn't included as GI & no explicit provision which excludes it.
Imputed Income: Has FMRentalV.
eg. Own tuxedo, have imputed income in amt of fair rental value of
****Can include FMRV of house as his income or can give B a deduction in
****Want to buy things (non-rent & no tax expenditures of 45,000each)
Horizontal equity: if similarly situated, same tax bill.
***Spica says problem is illusory.
Vertical equity: real problem w/C who has no interest & must borrow &
pay interest to purchase a home.
Benaglia Dissent: income if room free of charge, b/c but for provision,
would have to provide it themself.
Does someone w/a home have income b/c they provide themselves a home???
No, imputed imcome & non-taxable.
Room in Benaglia, recipient avoids cost would otherwise have to bear.
Is homeowner in the same position??? If provision of room would be
purchased w/after tax dollars, then poss that person who has a home has
Sec 61: except as otherwise provided .
GI includes: room & board (Benaglia)
Inheritence is excluded as GI
Interest on bonds: Secs 61(a4): GI doesn't include income from gifts or
property referred to (gifts).
Argument: 100,000 isn't GI & interest is income under 61a4.
Sec 102a is a falsehood, can do things w/inheritence that causes it to
be taxable to you.
Use it w/immediate consumption to prevent taxation on your
Sec 262: personal consumption is not reason for deductions, unless
specifically excluded from this section.
eg. charitable gifts are deductable.
***You cannot deduct the amt of income tax paid!!!
eg GI = 58,000, tax 10% = 5,800, the 5800 ISN'T deductible.
Eco income is GI, unless specifically excluded. (Reasoning of Dissent in
Not true that unless otherwise provided b/c room & board if provided
by oneself is not explicitly excluded (imputed income), yet it isn't
Horizontal Equity: similar eco position, yet the indivs pay diff taxes
due to diff lifestyles led by each indiv. Results from difference on
how income is taxed. FMV of house v. income from interest earned on
Self-correcting b/c other indiv could sell the bonds & buy a house.
Each has an equal freedom to buy a house/invest.
To make each indiv equal, you can allow investor to deduct rent.
Could tax homeowner on their imputed income (FMV) of their home.
Not Horizontal equity, but vertical equity does exist.
Vertical equity is the treatment of indivs in diff. eco positions.
Rent/imputed solution offered above for horizontal equity problem may
help superficial taxpayer C
C has no inheritence, no investment, no house, & earns no interest.
Wages of 58,000, owns nothing to appreciate, & no FMV attributable to
home, & spends 45,000yr.
Taxes are 5,800. Will have exactly 7,200 to spend on housing.
Problem is B had choice to own home or invest. C doesn't have the
same choice b/c no inheritence, can't necc buy a home (or one of same
value) like A or invest like B.
If C can borrow at same rate that B can earn (8%)
7200 = 8% of 90,000, C could buy a home of value at 90,000. This means
a diff eco position than A or B.
FMRV imputed income is 7,200 (8% of 90,000). C can't put self in
same position as A (or B).
How can we put C in same position as A or B???
eg. investments which earn interest or home w/imputed income.
1. Tax A on FMV of home (tax 5800)
2. Give C deduction (not for rent b/c not renting) for interest pd for
borrowing money to buy a home.
3. Give C deduction for buying something of value like B did.
Tax 5,000, she buys house 100,000, FMV is 8000. By borrowing is put
in same position as A or B.
Proceeds of a loan are not includible as Gross Income b/c they are used
to invest & investments are encouraged by gov't v. immediate
Foregoing tax w/o foregoing value of that cost.
Buying a car is imputed income. Buying a tux has same effect.
Renting a tux isn't imputed income b/c it is nondeductible. Buying a
washing machine is imputed income. Repairing one's own car is imputed
income. Enjoyment of work/leisure is not imputed income.
Work is imputed income in the sense that you would purchase such
enjoyment, but some purchase enjoyment w/after tax $$ & others don't.
Can't assume after tax expenditures, so can't assume someone enjoys work
is avoiding after tax expenditures.
Rev Rul. 79-24 :
Don't involve imputed income. Analagous to A who decides to rent
his home rather than live in it. A case of payment if paid in cash
would be income in a form other than cash.
Similar to Drescher & Benaglia: rent paid in cash or other income.
Rent is not comp for services, but rather comp for use of property.
Principle: genral; if would be income if paid in cash, then it is still
income if paid in kind.
Rent is income Sec 61a5.
Not imputed income: if comp is clearly for services, then it IS
income, regardless of how it is paid (cash/kind).
Should both report income for babysitting services exchanged on the
Distinguishable: not ordinarily offered in mkt transactions. Not
concerned w/babysitting services, b/c neither is doing w/o, but both
Imputed Income by babysitting for oneself, & exchanged services are
still imputed income for yourself. Imputed is not GI under Sec 61.
Depends on whether commune is more value than barter club or family
exchange. If not family interest & merely barter club, then the result
is taxable income at FMV's.
Rent is pd for w/after tax dollars, & given that, A's choice is
preferable to B's & C's.
In form of punitibe & treble damages resulting from tort actions for
Interests vindicated for lost profits & punitive damages/treble
damages. (both are penalties)
Treble: to provide suff. motivation for P to bring the action.
***Only the punitive/treble damages are at issue. Comp for income lost,
Sec 61 (formerly 22):
Taxpayer: punitive are not compensatory & 2/3 are not taxable as
Windfalls aren't included under the rule when provided by 3rd
parties. See Code; definition of GI.
Common sense: sec 22, relevant sense of income & punitive/treble
aren't the traditional meanings/sources of income b/c you didn't do
anything to get the income. Income is usually what you get for doing
something. (see footnote 15 on).
Supported by case law: Eisner v. Macomber b/c if punitive were
capital, then it would not be taxable.
Macomber is cited for proposition that income is the gain derived
from capital, labor, or both. It just fell into their lap, so not
income by definition in Macomber.
Govt: Ct was describing fact pattern in terms which ct thought made
clear on why should/shouldn't be income. Facts must be analagous to use
Damage awards are not analagous to stock dividends. Unless stock
dividends are analagous to damages, then Macomber is useless.
Sec 122 excludes windfalls as income.
Glenshaw: TP uses language which seems to support his contention, but
he doesn't analogize cases as he should to support his position.
What govt sought to tax???
If TP cites Macomber & concedes no constitutional impediment, then tax
items in question in Macomber, Macomber has been demoted & no longer
seriously taken as infringement on 16th amendment.
Income is not capital, labor, or both anymore.
If not capital, labor, or both, then can't be taxed w/o apportionment.
(TP referring to punitive damages)
In Macomber it was tax dividends & in Glenshaw it was punitive
eg. Corporation. TP puts in $100 in stock, is it taxable???
No Sec 351 says cash for stock isn't a taxable event.
Result is 100 in corp & TP has stock w/FMV in stock in corp, TP also
has investment of 100 for tax purposes.
Taxable gain is nothing!!! Corp does business & is successful, gets
100 addl in bank account as earnings.
What if FMV of stock bought for 100 = 200. Is anything taxable as a
1. tax 100 gain to corp
2. ignore 100 gain to TP & tax when he sells it
3. wait & see if corp distributes share as dividend & then tax as
income under sec61 as GI.
IRS Code adopts above 3 things to tax it as income. Corporate earnings
are always taxed twice. Corp pays tax on income to corp & it is taxed
when it pays the amt to TP.
To tax to corp it has to be earned. To tax TP it must be a dividend
or must sell the stock.
Issuance of dividend is taxable, but if not distributed by corp & merely
held as addl stock, then it isn't taxable.
Shareholder in Macomber wins initally b/c taxing stock dividend is not
taxable as income & only a new expression/form of TP's investment. Not
taxable until surplus & separated from TP's surplus.
Macomber is still good law regarding taxability of dividends from stock
as not taxable GI. Macomber is irrelevent w/regards to Glenshaw.
Macomber doesn't define GI generally, only in the context of dividends.
Cases only determine law regarding cases that are factually on point.
(or if analogized to stock dividend) Distinguishes b/t capital &
earnings on capital.
Macomber offers a characterization of a windfall.
Punitive or 2/3 treble damages aren't analagous to stock dividends.
Cases don't set out rules or define law only sets out attributes which
make it fall outside interpretations.
Imputed income proves Macomber definition of income as a false or wrong
definition & merely a characterization of income which falls outside
statutory definition of income.
DUBERSTEIN & STANTON: Sec 122c (sec made to fix what ct decided)
Donee gets car, & it is not a gift, but is taxable for FMV of car
when he wasn't an employee. (Duerstein)
Result in Duberstien is consistent w/above conclusions of law.
Govt: not gifts in the ordinary common sensical way.
TP: amts rec'd were gifts for tax purposes. Wasn't compt b/c not
wanted, asked for, or worked for. Not w/in contemplation of services
rendered or employment.
CT: considers past services & past decisions. Intention of parties
(donor) is considered for which payment has been made. Obligation/lack
thereof is unimportant. Qustion is why payment was made.
Duberstein: payment w/hope of continuing beneficial eco
relationship. (has income)
Stanton: (has gift) no expectation of continuing eco
***Could have argued it was payment for past services & is comp
therefore. (if consider intent of donor)
A corp other than a church would have similar actions considered as
other than gifts.
If ct says standard is clearly erroneous, then can say inconsistent
answers can stand & that is what trier of fact found. (jury found yes,
taxable or no, gift; results were not clearly erroneous, so could
Ct doesn't find gift in stanton, but rather that standard of review is
clearly erroneous, so jury's decision still stands.
Quote could MISTAKENLY be used as definiton of gift for tax purposes.
REFUTE: Duberstein can't be read as setting out definition of gift
for tax purposes. B/C standard of review was considered as clearly
erroneous. No reas juror standard (p135), unappropriate to give to jury
to begin with.
If it were a quest of law, then Sup Ct would have had to comment on it,
but b/c it was quest of fact it avoided this issue.
Duberstein: lists things on (bottom) Doesn't matter if things were
deducted by payor, doesn't reflect on how to treat item as payee.
Gift taxes aren't always taxes as personal income near bottom.
***Glenshaw is inconsistent w/idea that income doesn't include gifts.
eg. imputed & punitive
TP was trying to say that income was defined as the return of effort
as capital or labor.
Gifts are like punitive/treble damages b/c no investment of capital or
labor. THAT ARGUMENT LOST (Glenshaw)
Why is something that is income excluded when it could be had as tax by
Note c Children & parents aren't taxable on support that you give
Limit it so it stops short of Duberstein & Stanton.
Result is 102c
***Only win by prohibiting deduction by corp if corp is taxable, but in
Stanton the corp is non-taxable (church)
2. Sec 274b
How do you justify taxing on gifts as income? Eco benefit, measure as
capacity to pay tax. If you have gift, increases capacity to pay tax.
If gifts taxable to recipients & deductible by donors. Would revenue
rise or fall?
Gifts would go in direction of lower tax rates. (no gift, less
3. If gifts are included as GI of donee, not deductible by donor.
After Glenshaw, no income as investment. No impediment (like
dissent in Benaglia) If recipients are taxed, should donor get a
Should deduct. If gift & don't report & no deduction allowed, then no
way to trace & increase way of flagging a non-reporter.
More expensive to give deduction than to force inclusion as taxable
If for inclusion, tax base will increase. Donor deductability &
capacity to tax will be decreased. If that were true, then an
expenditure was to be deductible, then all personal consumption would be
deductible. Consumption is not an alternative to paying tax.
Gift giving is a form of consumption b/c it is disposable income for
someoneelse. Consuption isn't taxable. (or deductable)
Consumption deductability would allow voluntary avoidance of taxation.
Gifts should be included as income: nuisance to distinguish b/t
wncouragable support & gift giving.
Is a tip from 1 time customer taxable income?
If not a gift, then it is income. It is an eco gift. It is
characterized by gov't as compensation for services, so unless it is a
gift & is proven, then it will be taxable comp income.
Intent of Ellen is to better the services rendered while increasing
his income. (based on services rendered) Not a gift, but it is a comp
for services rendered.
Must read donor's intent as more than giving an economic benefit.
Whether tips are (in quest 1) distinguishable from Tokes (Olk case)
How do you argue that Tokes are different than tips?
(weak): tips pay roll in compensation of waiters & cost of labor.
Employer glad, pays them less. Tipee glad b/c income, & tippee is glad
b/c gets good service in future.
Are Tokes different?
Tokee gets increased income. Employer isn't glad b/c if not played
in casino, then not money earned by casino & no chance to earn it back &
dealers aren't likely to gamble in casino. Tipper can't expect
increased service by paying toke b/c tokee can't benfit/treat toke payer
differently by rules of casino.
tips are taxable income b/c they are for services rendered.
Under Duberstein: intention of tippor to comp for services rendered
which makes the tips taxable.
Distinguishable from tokes. Ordinary tips pd w/in scheme of
expectation of mutual benefit. (Beneficial to tippee, better income;
beneficial to tippor, better service; employer pays less for emps
Tokes: employer rathers tokes aren't pd b/c less income for casino.
Tokes are gifts (Duberstein) b/c no mutual scheme of expectation. No
incentive, b/c dealer can't do anything more for getting a toke than he
could do w/o it. Less likely that they're paying for services rendered
b/c dealer doesn't do anything. Mutual expectations are fewer that it
will be engaged in, less likely for it to happen. Expectation tokes
will be paid is less than expectation that tips will be paid. Payor's
intention w/tokes is to make a gift.
After Duberstein, if TP wins at the trial level by saying tokes are
gifts for income tax purposes. (factual issue of payor's intent) At
appellate, insist that under Duberstein, that trial judge can only be
overturned if the issue of fact can be determined that the decision was
clearly erroneous if by judge or clearly unreasonabale if by jury.
If you are the trial ct & you agree tokes are gifts for tax purposes
based on donor's intent, but although sufficient facts to say it was a
gift, but those specific facts must be stated as a basis for coming to
that conclusion. (Duberstein: Stanton section)
Make sure you lay out the basis (based on Duberstein) to draw your
conslusion of fact to be sure your decision isn't overturned.
Olks: draws out analysis from Duberstein to make sure that the decision
isn't overturned. P152. App Ct comes to conclusion that tokes aren't
gifts, but rather income which is taxable.
Ct said it wasn't a question of fact, but rather a finding of law.
Language comes from Duberstein, but app ct is reading Duberstein as if
it sets out a definition or rule & then treating it as setting out such
a rule where gift is flowing out of a detached & disinterested
generosity , then it was a matter of law/legal conclusion & is treated
as such at the app ct.
In Olks App ct determines that tokes aren't gifts b/c people were
paying w/the hopes of benefit from the gods/out of superstition. This
is dumb b/c if true altruism were necc for the giving of a gift, then
there would be no gifts.
Ct in Olks also looks at expectation of donee, not donor, b/c
receipient of tokes comes to expect it eventually which makes the tokes
income & therby taxable.
Two differences from Duberstein.
1. treat Duberstein as setting out legal def. of gift
2. focus on feature that Duberstein determines to be irrelevent.
When A gives to B, does A have a gain?
Gain of 100 b/c invested 100 & it is worth 200. A gave somebody
200, when he purchased it for 100. Has made a better gift & a gift is
consumption. Consumption is a gain.
Taxed on previousl unrealized gain & B has 200FMV prop. A should
have used prop paid 100 for to make gift of 200.
No gain, not receiving income, etc. Look at 1001, no amt realized.
Don't want to tax A under assumption that he has other assets from which
to pay the tax.
Under Code, it is not taxable to A. 1001 & 61A3
Does B have income?
Doesn't have income at T2, b/c of Sec 102: gifts aren't income.
If B sells to C for 200?
B gets 200 for the prop. No basis b/c it cost her nothing.
Amt realized, 200. If 0 in & 200 out, then gain = 200.
Sec 1001: basis defined in 1011 to 1015: if gift, then the basis is
same as donor's basis. (last person who invested in the property, not
acquired by gift) B's basis is 100. Gets 200, so gain is 100.
A bought asset for 100 & tranbsfers to B when the prop is worth 200.
A is taxed as if sold it for 200; taxed on 100. (amt realized -- adjusted
basis.) Sec 1001, 61a3
100 = basis
100 = gain
What if A doesn't actually sell the asset & just transfers the thing to
B/ It doesn't matter, b/c of the regulation.
Sec 11001b: notwithstanding , the amt realized is 200, eg the amt of
indebtedness. We still treat the situation as if A had sold the thing.
***See regulation, the regulation that fills the hole for what Sec 1001b
doesn't tell us.
Drescher: Whether receipt of prop/cash will not cause it to be treated
diff from compensation.
Sec 61ab = compensation = income
Property & payments in kind should be included thru other sections
of the code. The scheme is more complicated when disposition of prop.
We can say B has income based on Drescher. We don't need to use the
The quest is whether A has income. The answer is Sec 61a3: gain
derived from prop; Sec 1001 tells us how to determine the amt of gain.
(you'd find that by looking at index in the code.)
Drescher: tells us that if it is paytment "in kind", = compensation.
But for A, we have to look at Reg.: discharge of obligation; causes us
to include it in amt realized. Compare 61a3 & 61a1: Drescher is
authority for the latter (61a1).
(Begin w/p.159 TAFT Case:)
In Drescher, once we say payment in kind v. cash in sec 61, which says
comp is income, then w/more elaborate def/explanation, then comp as GI,
really is just what is in 61a1. Once we decide comp can be rec'd in
kind under 61a1, then we just apply principle in Drescher. Use
regulation. Does payor have income??? see Sec61a3!!! Paying in kind is
comp to payee, but what about payor???
That's where Sec 1001 & 1001b comes in, providing formula to
determine amt realized & amt taxable.
***has to do w/61a1 & 61a3. Drescher uses/explains 61a1.
T1 T2 T3
A buys asset for 100 A gives to B B sells to C
FMV 100 FMV 200 for 200
Can we say 'a has no income? The 100 is an after-tax investment. A has
no income for purposes of 1001b. O is the amount realized, thus the
1001 gain is 0, and there is no income. But what about the 2nd 100??
Let's say it is generally assumed that the 100 is not invested in such
a way as to produce taxable income.
Then we say B has no income when she sold it to C. And we treat B as if
= after tax investment of 200/if a sec exists saying that basis = F<V of
gift on day rec'd, then there is no tax for B.
Is gift giving the same as consumption?? ie. not deductible. Why should
A's consumption in the form of gift-gifing be supported by govt?
Policy problem: This would be a way of Fed govt subsidizing gift-
giving!! If we didn't tax the 100 gain & siimply gave it to B, then
we'd be avoiding tax on appreciation!!! If we let it go untaxed, that
would be vertical INequity.
Vertical Inequity: when TP's in diff eco situations. This tax scheme
would only benefit the rich!!
eg. People who can afford to tie up $$$ which would otherwise be
disposable income in appreciating assets & then giving them away as
gifts. (concentration of wealth.)
1. Tax A on 100 at T2, when A makes the gift. While ther's no
conceptual problem w/this, there is a practical problem, if we tax A on
appreciation, we are assuming A has income from other sources!!!
2. Tax B on 200 at T2: B is certainly 200 better off, thus it is an "eco
increase". But, if B doesn't have enough income to pay the tax, we'd be
forcing a SALE, eg an interference in eco activity. The govt wants to
interfere as little as possible so this is a problem.
NB: It's easy to drive eco w/the tax code. We could just give
deductions. Congress does it all the time. But Spica is concerned w/a
tax system that will interefere as little as poss.
3. Tax B on 200 at T3: when B sells to C. (B;s Basis is 0). Sec 1012:
Basis = Cost/after tax investment. B's after tax investment is 0, so B
has a gain of 200.
4. Tax B on 100 at T3: But B's basis at T3 = 100. We just tax the
appreciation. Exclusion of 102a would prevent B from being taxed at T2.
A's after tax investment of 100, however would be excluded in income
Do we want to tax anything?
A has no amt realized at T2 under 1001b = 0
1001 gain = 0; no taxable income
***Basis for taxing when receiving a gift is the FMV of gift when rec'd.
Amt realized = 200 for B
gain = 0 b/c basis is 200. (for B)
Only the rich would benefit from such a system. .
Could tax A: 100 at T2,whe whe makes the gift.
Assume a has income from other sources, practical matter/problem.
Could tax B for 200 at T2
Don't like to force sales for prop ich will case eco. Problem, don't
want to force salss of assets.
Could tax B 100 at T3.
Must be sure B's basis is 100. Exclusion of 102a, prevents taxation
when gift was wainver.
TAFT p159: Don't want to tax the appreciation prior to time of gift to
taxpayer. B is taxed at T3. Amt realized is 200, basis for determining
gain is 100. (b taxable at T2)
Two casaes consolidated. 1. In 1916, A purchased 100 shares of stock
for 1000, which he held until 1923 when the fmv was 2000. He then gave
them to B who sold them during 1923 for 5000. Who pays tax on 4000
gain? B says its only the 3G gained during her ownership. (16th
Amendment). Ct says too bad for B b/c Congress has that power. As long
as its income, doesn't matter in whose hands. She accepted the gift
w/knowledge of teh statute & thus suffers no hardship.
Appreciated property was transferred to the TO who sold it again. In
Taft v. Bowers there was appreciation throughout. TP agreed that there
should be tax at T3, but only for the appreaciation value.
eg. like the 100 in our hypo.
Or no gain for TO b/c she got FMV 200 & sold it for 200. Sec
61a3??? B never fixed anything, etc.
Sec 1015: says for purposes of determining gifts, TP basis, as gift =
After going thru Sec 1001, it is clear what Congress intended. That B
pays for appreciation b/t the time A gave the gift, & the time B sold
TP in Taft v. Bowers tries to trump the Code.
Apportionment: In constitution, taxes must be apportioned. eg. States
that are more populous have greater contribution thatn non-populous
The 16th Amend says Congress has the power to collect tax from
whatever source w/o apportionment among the several states.
So TP in Taft v. Bowers argues not that the code doesn't provide
liability, but instead, argues that Congres can't impose that tax w/o
apportionment b/c its not income. eg That congress lacks the power.
Purposes of determining gain:
B subtracts 100 from 200 = 100 taxable gain.
***See sec 1015.
TP: (in Bower): argues Congress can't impose tax w/o apportionment &
income. Too difficult. Argues that it is not income.
Not income unless you work for it (MACOMBER)
Refer to Glenshaw Glass (stock dividends???)
TP has authority to say income means gain derived from capital, labor,
or both combined, proveded it be understood to include profit gained
thru a sale/conversion of capital assets.
TP argues the last part implies ther is actually GAIN.
The 200 is his capital. Macomber says income is return on capital, not
capital itself.: "it is said the gift b/came a capital asset of the
donee to the extent of its value when rec'd & therefore, when diposed of
by her no part of that value could be treated as taxable income in her
hands." (That's the TP's argument)
To make Macomber work, the gift here must be analogous to stock
The TP in Taft v. Bowers lost. What's at stake?? = interpretation
TP is arguing, " I don't have any gain, eg from capital/labor/or
"In truth, the stock represented only a single investment of
capital that made by the donor "
Ct in Taft v. Bowers says "Yes, you do." How??
The TP assumes must find taxable income to her in order to tax w/o
apportionment. She can show she has no income according to Macomber.
She has no income from her capital/labor.
16th allows govt to tax income. Is 100 income, b/c it derives from
A. There was an investment, but it was A's not TP's.
CT says TP has no income w/in meaning described in Macomber. Macomber
doesn't say YOU must have income to be taxed, but rather there must be
income in order tax. Big Difference!!! Ct says its fair b/c bottom
p159, she rec'd orig investment plus appreciation, yet she was only
taxed on the appreciation.
1. Macomber is treated in Taft as constitutional authority. Ct thinks
it must be reconciled w/Macomber. At Glenshaw Glass, Macomber is no
longer considered constitutional authority. Macomber is then only cited
as explaining definition of income in sec 61.
Ct thought it had to reconcile the 1015 rule that the TP takes the
donor's basis as her basis, w/Macomber in order for the treatment to be
permissible under the 16th A of teh Constitution. By the time GLENSHAW
was decided, Ct said that Macomber didn't create a constitutional
impediment. Macomber in Glenshaw was only cited for definition of
income. Thus, no longer a constitutional issue.
Taft represents limitation on Eisner. Macomber doesn't say it must be
income to TP to be taxable, only that it must be income to be taxable.
Taft shouldn't be read as limiting Macomber, it is entirely consistent
1015 rule: constitutional under Taft. B is taxable at T3.
The author of the casebook says Taft b. Bowers is a limitation or
partial rejection of Macomber's concept of income. Spica disagrees b/c
the ct in Macomber never said it had to tax the income of TP, as it was
just "income" that it would be constitutional to tax. Thus, Spica says
Taft v. Bowers is consistent w/Macomber, not limiting.
If code treated inheritence same way as it treated gift, then there
would be no income, no problem.
(Taft v. Bowers): constitutional to tax as gift at 100, it is a tax on
income, just not yours.
Only restraint is that there be a tax on income. Does code tax B or
Sec 1014a: (note 7): property rec'd from a decedent, or estate,
has a basis equal to FMV at time of decedent's death, or at estate tax
Prop rec'd from decedent: either the value on the date of death or
the estate tax valuation date. (The estate tax is a separate tax where
the value = on date of death, unlesss executor elects to value it 6mos
Sec 1001: It is the diff b/t the amt realized & B;s basis for
determining gain or loss. Unless otherwise provided, basis for
determining gain/loss = cost. (see 1014, 1015, etc.)
For estate tax purposes: tax base is value of prop at time of death,
Unless executor makes it so it is valued 6 mo. later.
Here, value is 200 at time of death. No gain at time T3. Amt realized
is 200, basis is 200, & difference is 0. No income, no tax. Rules
61a3, 1001, 1011, 1014, & 1015.
1a. 2, 500. Subtract basis, ie the cost to A 1000, from sale price.
b. 500. amt realized & basis.
Assuming A pd for it b/f giving it to B. If A got it as a fift, we
want to know what A;s donor pd for it. We keep going back in the chain
until we find the original capital investment.
2a. 500 gain
b. 500 loss Different rule:
***b. 500 loss (not 1500) The rule says that if inherent loss,
we cause it to disappear. Sec 1015: Donors basis is used for gain. But
if it's a loss, we use either:
1. donor's basis or
2. FMV on date rec'd whichever is lessor.
c. 0 if sells for less than donor's cost and greater than amt of FMV at
date of gift, then it is always zero.
1015-1a2, under 61a3: if no gain, can't use 1015.
***Loss is more complicated.
3a. Give it to Anna b/c she is taxed at a lower level/rate. Let Anna
sell it (transfer it to her first) rather than Ernesto liquidating b/c
while same basis for both, she is in a lower tax bracket.
b. Ernesto should sell & then give it to Anna. Ernesto, b/c here it's a
loss deduction which will be worth more to Ernesto. (& wasted on Anna).
c. transfer asset b/c no gain if he gives her cash. He's been taxed on
80,000. If sell asset, then tax is on 60,000. He could hope to die,
b/c if he gives away cash, then if he dies, the asset can be given to
Ana. Don't transfer asset, but rather use cash.
Use the savings of 80G (already taxed) Otherwise E would have to
pay ta on 60G. He could die, so leave the stock, if you don't have to
transfer an asset, hold on to it. Sec 1014.
d. Sell prop, take loss, & hold stock w/hope of not having to pass it on
b/f death. Sell stock w/higher basis. (no tax on gain).
e. Borrow against the asset, hope would be that he die & Ana's basis
will be 80,000 & no gain will be recognized. Proceeds of a loan are not
income b/c they have to be repaid.
If you have highly appreciated assets & a very dear friend who is very
Terminally ill friend who will be of any help she can be. You also
have highly appreciated assets. What can you do??? Is it allowed under
Answer: give it to your dying friend & then have them will it back to
You have no income tax by making the gift. Amt realized will be
zero. No gain in 61a3 b/c don't tax donor on what they give away.
Friend has no income by way of receiving the gift. Friend dies & says
it is willed back to you, & under sec1014 there is no tax on the amt of
2 things which prevent it:
1. (if dies w/in 1 yr) Statutory argument: Govt will say 1014e, sets
out arbitrary 1yr rule, if acquired by decedent by gift 1yr prior to
death, then donor/spouse thereof, then the basis to donor will be
adjusted basis of decedent, immediately b/f death of friend.
Basis is value you paid for it/fmv at time of transfer.
2. (if doesn't die w/in yr) Non-Statutory argument: Sue decedent's
estate. Argue it wasn't a gift b/c they wanted it back. Under
Duberstein, look at donor's intent. Income b/c eco benefit under 61a1.
Bound to will it back, should be treated as a loan. Argue it was never
B's, it was merely passing thru B's hands. A's mkt value is the value at
date of B's death.
Accrual: pays income in final yr, b/f it goes to the estate. Not
included in Estate tax. Only X$ is included, but deductions are
allowed. X -- Fed Tax on X, b/c deductible to estate when Estate pays
tax in D's last taxable yr
Cash: taxes items into GI, regardless of when earned. It would be paid
after D's death. Estate would argue that you have a payment of X, that
your're arguing is not income.
D had a rt to it when he died.
What do you do about Fed income tax (v. estate tax)?
Deduction for accrural method (f) state tax provision. Rt to X b/c
it derived from D.
Govt: estate didn't earn X. Rt to receive X, as a chose in action
(property), a rt to sue obligor for property. Basis will be value of X
at time of Death = X itself. If value is X, then no income for tax
purposes. Sec 1014(c)/Sec 691:
Sec 691 puts accrual & cash methods on same footing by saying the
basis for cash exists & recognize the full amt as income, just like
decedent would have had he not died.
Accrual: D owed X, prior to death. If Cash, no deduction b/c pays
taxes when paid, regardless of when owed. In accrual, pay when owed,
regardless of when paid. Accrual gets deduction b/c deducts when owed,
regardless of when paid.
61ab: puts accrual/cash on unpaid expenses, by cash estates get a
deduction for tax purposes. Doesn't involve 1014. 1014 creates 691
p.164 & 65 in case book has the same explanations/discussions.
1014 generates accounting tax problem, generating 691 which presents the
A has prop basis of 100 & fmv 200 (1011), which she transfers to B as a
gift. (that B will leave prop to A upon their death)
b/c A had appreciated property, to give to B & after B's death A
could claim gift from B, w/fmv at date of B's death.
If B dies w/in 1 yr from gift, then value of prop, then value is B's
basis of prop immediately preceeding B's death, then use 1015, B's basis
would be A's basis, 100.
then that would be A's basis at time of death.
If B dies after 1yr, then not a gift, but a windfall (Glenshaw). If
estate argues no income b/c of gift b/c of 102, then Duberstein says
gift is quest of donor's intent. A intended to get prop back, not a
gift, not excludable under 102, not includable, then offsetting FMV had
to be paid to A. Analagous to loan, b/c offsetting obligation to repay.
No inclusion if not a gift. Assuming obligation to repay/will prop to
A, then B has a good argument.
Govt can attack A's position, made a gift & no amt realized. Say no
gift, but still no amt realized. 1014 becomes crucial, B never had
opportunity to transfer, got title from B & under 1014, it is FMV at
time of death, 200 or more.
Makes 1014 inapplicable.
What is 1014c neccessary for amts earned, but not paid by decedent.
(earned by TP, not paid prior to death) TP earned rt to receive amt X,
amt was paid, but paid to D's estate.
(paid after death)
Accrual: X included as income, taxed when earned, regardless of
Cash: taxed when paid, regardless of when earned. Inclusion is
when paid to estate. Estate argues rt to receive prop from decedent,
assuming when earned. If can be said to have any income, must be
reckoned in terms of prop b/c recieved by estate, sec 1001 is relevant.
Rt to recieve X in terms of payment. Subtract amt realized (X) from amt
of TP's basis (0). Cost is 0, unless as otherwise provided.
1014 describes situation of estate. No amt gained, Accrual has it
included as income & cash method has no income in this amt. Better to
be a cash method taxpayer in this situation. Sec 691 defines income in
respect to decedent.
If (691) item of income re: decedent, then estate/person to get
payment, must treat full amt of payment as income. 1014c is consistent
w/691 b/c 1014a doesn't apply to prop in sec 691, so argument of Estate
would be (benefit to 691) is foreclosed.
RECOVERY OF CAPITAL:
Don't tax capital, so distinguish after tax investment & return thereof.
If return of after-tax investment, then 3 alternatives :
1. recover capital upfront, all excludable up to amt of after tax
2. recover at end of investment return & then allow to calculate
3. apportion out of each return payment of investment.
Recover of capital last is imbedded in the code's distinction b/t
capital appreciation & ordinary income.
After tax recovery: taxable by A or B whenever asset is sold/disposed
Only gain concerned w/was inherent gain re: asset. Appreciation is
only 1 form where income is realized by TP's investment, appreciation
neccessarily applies an election to dispose of asset. (61)
yr 5, income of 25 & when sells stock for 100 is there any 61a3
income?? Go to 1001: subtract amt realized in determining gain or
loss. Use basis in 1012 or other applicable section.
1012: says cost of stock is the basis for determining gain.
100 -- 50 = 50 gain.
50 + 25 = ???
Time value of 25 given to gov't, by making A wait until sells stock to
get investment return of capital. (Return on investment dividends)
No reason to distinguish b/t divident income/capital investment/wages.
Tax later rather than sooner on capital returns.
What did A pay for when paid 50 for stock?
Stock w/no dividends yrs 1-5? Pay more or less for such stock?
Less, b/c when purchsase stock, get rt to receive dividends.
Value of an asset at T time = present value of rt to dispose of
asset at any time at T prime.
Asset can be divided equally to give rts to others to use asset &
dispose of it at a future time.
If A paid 50 for rt to dividends, then interest in dividends, not just
Can make TP wait to receive investment or let TP recover capital
1. immediate deduction of 50 (value of asset) rt away.
2. treat 5 each yr as recovery of capital & not income, then attack
the sale of stock for 100 (amt realized) from basis (25) from
Sec 1001 refers to adjusted basis, always adjusted under 1016 to feflect
recovery of capital. Basis shrinks by amt of the recovery of your
capital. (Basis = amt left to be recovered to get amt of investment)
ie. 100 -- 25 = 75. 75 is the gain, it is the amt that you want to
Could allow TP to recover investment a little bit out of each payment.
If assets' value is dividable into 2 components, then what is ratio
of rt to receive income b. amt of investment.
Say 30 was paid for rt to receive income & 20 was paid for rt to dispose
Exclude 3/5 of each payment: get 10 at end of 5yrs b/c 2 will be
taken each yr. Then in yr 5, when sold, then subtract basis (35) from
the 100. 10 taxed & 35 recovered b/f sold. We've still taxed 75 dollars
100 -- 35 = 65
65 + 10 = 75 (amt taxed)
Govt adopts worst method for TP.
63a7: all taxable. Time value of 25, is allocated to govt & no good
reason for it, except practical. Allocation method assumes amt of rts
to receive income & rt to sell asset, too difficult b/c must speculate.
If TP were allowed to recover after tax investment out of everything
that is ordinary income, then wouldn't need (p167) appreciation
deductions or depletion.
What if asset must consume itself in order to be productive. If make TP
wait to recover after tax investment, then always give her a loss & hope
she has $ to cover it.
2. Income 1st: make tax payer wait to recover capital.
Tax all amts recieved as dividends when received. (61a7) Time for
allowing to recover after tax investment here is yr 5.
Ask what amt is yet to be recovered? All of it b/c dividends have
been included as GI.
3. Pari Passsu: if non-divident stock cost 20 & dividend paying stock
costs 50, then 30 is paid for rt to receive dividends>
The Govt uses option two, Income 1st method.
Who gets the time value for income earned prior to disposition of
the asset? Govt gets time value of tax paid on that item.
Don't like to assume income from other sources.
Option 2, if taken to extreme, there would be more deduction than income
to cover it, so never recovers capital.
Inherent risk that capital will never be recovered.
25 taxed 61a7. 100 -- 50 = 50. 50 + 25 = 75 total taxed. Does
recover after tax capital investment.
Value of an asset can be divided into interests presently & future
Interest of income beneficiary has rt to income for life, unless
under age of 4 when income becomes less & less.
eg. Machine w/life of 5-6yrs, pie crust maker.
earns: 15yr 1 & 2, then 5 yrs 3-5.
sold: end of 5yrs for 5.
Govt taxed 45 as income & TP has no income from its investment.
Will TP get his money? Yes, if he has other income to which he can
apply the 45 deduction; otherwise, NO. (if no, then it is tax on
Rt to dispose at future time (t prime) is less than rt to receive income
in this case b/c 45 rec'd as income & only 5 was rec'd when sold, so
3/5ths wouldn't be proper ratio if option 3 were used in this case.
If option 1/3 were used, don't have to worry about a loss in this
situation like we do with option 2 in this situation.
Appreciation deductions & allowances for depletion are allowed in the
In general, for investments, income 1st is the method used for taxation.
If assests consume themselves b/f disposition, reduces result that
capital can be recovered & less chance net loss will be offset by
Gen rule: income 1st. But assets expected to consume substance while
producing income. Allow after tax income periodically.
Able to recover useful life of asset.
Appreciation deduction allows recovery of after tax investment instead
of deductions for net losses. Used for narrow class of assets which
consume themselves producing income.
***Exam: know why it is necessary for appreciation deductions, & how
solves when deducitons & tax will be done.
eg. PARTIAL SALES: 100 shares of stock for 50.
Later sells 10 shares for 20.
Amt realized is 20. What is TP's basis? What is recovered now?
Results in options 1-3 to chose from.
INAJA LAND CO. v. COMMISSIONER:
Govt argues: stay away from 61a3. Income is recognized 1st. If
characterized as sale of prop, then it is income. If other
characterization, like rent, then different scheme.
Argue that 49,000 is income under 61a2 (business income), so income
from fishing lodge is income under 61a2. What about lost income, what
is it under 61a2?
If compensated for lost business earnings, then taxed on income as if
it were business earnings. (Glenshaw, treble damages.)
Compensation for an amt that would be included in GI, is included as
It is GI b/c it is comp for lost earnings. Allowed to recover after tax
investment when it is sold. Scheme is Income 1st.
TP: if it is income, then it is income under 61a3 b/c TP in worst case
will be able to recover some of after tax invetment b/c it is an amt
realized for real property. Claims no income at all.
Dispute: Does settlement represent lost business earnings or sale of
real prop rts.
It is a transfer of real prop rts.
Govt should now argue: some portion of 49,000 is taxable as gain on
disposition of real property. When less than all is sold, some must be
taxed under apportionment, option 3. If TP makes no allegation, then
under Drescher, TP has burden of proving that Govt is wrong & that
no income was earned. TP made no allocation that less than 49,000 is
Result in case: none is includable as taxable gain.
***Shows limits that burden is on the TP.
TP's winning argument: settlement is amt realized for transfer of
property rts. Gain to be included under 1001. Subtract basis from amt
realized. Wants to subtract form basis of sale. TP argues that the amt
realized is too difficult to be made, b/c no such allocation could be
***TP cites authority that burden is on TP to show govt is wrong is
has reas basis for assertion. If no reas basis for govt's assertion,
then mere speculation means no amt realized. Pure speculation that rts
given to city were paid for when prop was purchased & that could have
gotten similar property w/o rts for the 49,000 less. bottom. Gain from
transfer was mere speculation on part of govt.
Value of annuity was value paid, under Drescher.
Annuities consume themselves as they yield income. Means recovery
of capital, if code uses gen. scheme (option 2, income 1st) b/c annuity
is worth nothing if held until end of term/life, means loss at end.
eg. 2 yr annuity. TP wants $115 1yr & 2yrs from today. How much must
she put away???
she can invest at 10%
If invests 200 at 10%, then 20 interest.
option 1: tax 0 yr 1 & 30 yr 2.
230 -- 200 = 30 to be taxed, total income.
option 2: yr 1 tax 30 & yr 2 0.
b/c interest yieds 20yr 1 & 10yr 2. Tax 30 in yr1.
The rest is recoverable as capital.
i. 15 yr 1, 15 yr 2 OR (annuities, exclusion ratio)
ii. 20 yr1 & 10 yr2 (Allocate after tax investment evenly (i) or as it
is earned (ii)
SEC 69 implememted w/72, & 61a3 is implemented w/1001.
Annuties under sec 69 & 72.
Partial sales acquired by a single lot.
Apportionment of after tax investment (1.61-6,).
eg. TP pays 50 for 100 shares of stock at T1
sells 10 shares for 20 at T2
Under code, must wait, pay tax on income 1st, recover cost at
disposition of asset or by deduction if it becomes worthless.
all of 20 would be taxable as GI.
Regulations don't take it that seriously. 1.61-6, basis must be
allocated for lot sold at an equitable basis w/ partial sales.
Result: allocate $5 for 10 shares
B/C 10 shares are 10% of 100
10% of 50 is $5
What if amt realized of 10 shares were in excess of $50???
say 10 shares were sold for $70
$5 are still taxable, so there is $65 of gain.
Always use % sold, regardless of amt realized.
Problems w/depreciating value w/respect to timing of recovery. Can
recovery depreciation by deduction only.
To recover after tax investment, but deductions only work when the
TP has other income from which to deduct the net loss on the investment.
Get depreciation deductions from annual proceeds from production of the
machine, b/c represents recovery of capital.
Could allow depreciation deductions for annuties.
Simple Scheme, Sec 72:
Same prob as depreciating assets, but w/annuities.
Exclusion ration for after tax investment from income actually produced
by the investment.
If don't let TP include all income from annuities, then all payments
would be included when received, then TP would have to claim a deduction
when the annuity becomes worthless.
Sec 72: Mechanical Analogy, implements 61a9 same way 1001 implements
72 tells you how annuities are includable as gross income.
72: provides that a portion of each payment which bears same ration as
payments recieved from annuity.
eg. X/Payment = After Tax Investment/Total Expected Return
X = After Tax Investment/Total Expected Return(Payment)
Portion of payment TP is allowed to recover as capitl.
If life is the measure of annuity, use expected life span in the
formula, otherwise multiply amt of payments & use that number in the
How do we tax the payments from the annuity?
1. tax 30 1st OR
2. tax 20 yr1 & 10 yr2
If TP buys an annuity, then she will be taxed 15 on 1st return & 15 on
2nd return, more favorable to TP b/c TP always wants to pay tax later,
rather than sooner.
Means annuities are tax-favored.
Income from annuities are taxed in a way which make them a more
Annuitant is allowed to pretend that the income is being earned
evenly (equal payments each yr.)
***Effects the mkt for annuities by creating tax benefits & effects
economy. Eco basis for the tax treatment of annuities, makes TP's want
to invest in annuities b/c of the tax benefits.
what is diff b/t a person who legally bets the hrses & a person who
trades in the commodities mkt?
If you lose more than you win, the it is not deductible.
Wherever there are gambling losses, then there is also gain somewhere
b/c somebody wins & that is taxable income. Gambling proceeds are
legally income. For everyone who loses, then there is someone who wins.
Every dollar will be taxes, but only losses can be claimed up to the
amt of the winnings.
Every gambler is taxed on their capital investment, and every winner
is taxed on their income.
Net gambling losses are not deductible. In CLARK look at recovery for
TP got bad tax advise & was told to file joint v. separate tax
return. After you file joint/sep, then you can't change your mind
The stat limits never runs on a fraudulent TP, otherwise it has run once
the return is filed.
A deficiency brought case to light. Audit exposed lg amt of money
that was taxable, but lg portion of it wouldn't have been had separate
tax returns been filed.
Tax advisor feels bad about giving wrong advise, pays to TP the
20,00 that TP had to pay as a result of the error. TP doesn't include
the 20G in GI, & govt finds that such comp was received & wasn't
reported, but is includable as income.
TP should argue that payment wasn't rec'd as comp for services. Argue
that it wasn't paid as compensation.
CT: makes factual distinction, says payment was not a payment of tax.
It wasn't a payment of anything like services, compt, etc. Analagous to
personal injuries, which are not taxable. Uses Macomber, not capital,
labor, or both combined,; supporting exclusions w/in code b/c fit w/in
definition of Macomber.
Direct opposition to teaching of Glenshaw, says Macomber is
irrelevant if there is no analogy b/t punitive damages, & 2/3 treble
damages to stock dividends, etc.
Items in Glenshaw (punitive damages) don't fit under Macomber
definition. Recovery of tax loss in Clark is more analogous to
punitive/treble damages/windfalls. Not enough to cite Macomber, but
must ask if it makes sense after Glenshaw.
TP: This isn't anything other than a representaiton/replacement of
capital. TP in Macomber, when rec'd stock she had nothing more than b/f
she rec'd stock, similar to TP in Clark b/c in Clark the payment was
merely a replacement of TP's capital.
Not gain on capital, just capital.
If TP deducted loss, then actual recovery in 2nd period would be
income & taxable b/c deduction allows TP to recover the amt by deducting
it from total taxable income.
Since TP in Clark didn't, nor couldn't, take a deduction for the amt
of the amt rec'd, then by receiving the amt it is not income, but merely
a recovery of lost capital. Excludable as a receipt of capital.
How do you distinguish Macomber???
If company had b/c worthless in Macomber, what can you do w/ loss in
stocks? You could deduct the loss of capital investment.
TP tries to argue analogous to Macomber & Glenshaw.
TP in Clark can't deduct the loss.
1. If you lose paycheck, too bad, still taxable. Loss can't be
2. No. Amended return only used when facts at time it was filed, they
didn't support position taken when filing the return.
Would include amt in pay envelope when you find it as GI. You've
already recovered lost pay if you got a deduction for that amt, so when
you find the ck, then it is like a windfall.
If you use a deduction to offset income, then entire amt of deduction is
includable as GI if the income/amt is recovered.
3. Clark suggests that it is not income b/c not deductable & not
recovered in prior periods, so it is after tax investment money/capital.
4. Same as TP 'C' in above graph/eg.
When find someone else's envelope, then it is includable under
Glenshaw. Clark was wrongly decided b/c otherwise ct is 2nd guessing
CLARK: & why it was wrongly decided
TP argument is that payment of taxes b/c of faulty tax accountant is
not income, but repayment. No deduction, so it was a loss of capital.
When amt in quest was recovered it was just return of capital. Taxing
what should have been his capital by now b/c already paid tax on it.
Look at page 187 & 88.
Irwin b. GAVIT:
Sec 102 is the subject of GAVIT.
Bequest to TP of 100,000 & is put in bank acct in yr it was rec'd &
earns 8,000 on it in interest. Amt of 102 exclusion is 100,000 & the 8G
is taxable as income b/c it isn't the value of the prop, but rather the
interest earned thereon (dividends).
Sec 61a7 & 61a4
eg. Inheritence 100G FMV is transferred to T (trustee).
Trustee is to transfer to H (husband) & D (daughter) upon death of
If T transfers 8G to husband, is it excludable as a gift?
No, it is income. 102b2.
All income is taxable & none will be excluded.
If you were arguing for TP w/o 102b2, then how would you argue for the
Got something from decedent, a bequest which earns 8G p/y. It is
described in 102a. Value should be excluded under 102a. Argue that it
isn't income from the property, but rather the property itself. (TP
didn't actually get the prop, only the interest that it earned.)
Gov't: (using Bowers): it is income of from property referred to in
subsection a. It just isn't prop given to H, but it is interest earned
TP would response: fairly complex just try to see the analogy.
Suppose TP had won in Gavit:
A TP comes to you & wants to leave 100G to one child & 100G to child
2. Wants to pay as little tax as possible. What to you advise him.
Donor will have to pay estate taxes on what he gives to the
children. What about the inheritences? What do you recommend if Gavit
had been decided in favor of the taxpayer?
Could set up the money w/trustee & pay the kids the int earned each
yr to the kids. The income (from int) would not be taxed.
Give an income interest & remainder to each child.
Same situation as in Gavit, assuming Gavit was decided for TP
Suppose payments in Gavit were to be to H for life (w/expectancy of
15yrs left of life). How much do we tax?
Suppose D sells int shortly after he acquires it. What could he sell
his interest for it? & to be received when?
Rt to amt to be received in 15yrs.
If H sells for 68G & D sells for 32G, then how do you argue that there
was no income?
If income, then it falls under 1001. Once in 1001, then you should
see how to avoid a gain in this situation.
No gain under 1001:
1. amt realized is zero
2. amt realized equals basis
Indiv int aren't equal to amt of prop as a whole.
Value of D's int, a remainder int, is 32G. That FMV is 32,000, not the
total amt of the property. That is D's basis.
32,000 amt realized -- 32G(D's basis) = 0 so no GAIN
SEC 1014***same argument for H, but w/68G.
1014-5a3: if you have divided int in prop & you sell the int, then your
basis is the portion of FMV of prop on date of decedents death, which
bears same ratio as total value of prop on date of death, which bears
same ratio as FMV on date of the sale as FMV of your int.
Everyone is Wrong in Gavit b/c what rec'd on date of death is the value
of their interest. 102 exclusion is allocated to remainder person when
remainderman rec's much less from decedent. 102 exclusion should be
allocated proportionately b/t divided interests. EG. 32 & 68 of above
Want to tax 120,000, assuming the property doesn't appreciate at all. H
will get 8Gyr for 15yrs.
Want to tax all 8G, is b/c that is what would happen if H & D were
the same person.
We don't have any reason for wishing thru income taxation to encourage
people to divide interests in property & avoid taxation. No incentive
to divide property & divide income interest in the property.
Answer in Gavit, regarding to whom it will be taxed, & the answer was to
tax it all to H, the income beneficiary, on 120,000 & the remainderman
would be taxed on 0.
Achieved by allocating Sec102 exclusion entirely to the
remainderman. No amt income beneficiary rec's from inheritance in
exludable under 102. 100,000 of asset distributed to remainderman, will
be excluded from gross income.
Treats income beneficiary, H, as if; for purposes of 102, as if he
has received nothing of considerable value from the decedent. Gavit
gives non- commonsensible argument & reading of 102. Present value of
Remainderman is of more value than income beneficiary's interest.
Forces us to ignore nature of property interest received from the
If all 120G is taxed to H, then must prevent H (that otherwise entitled
to do if he had bought the interest)
If H immediately sells his interst, rt to 8Gyr for 15yrs, at 68G.
Asset is worth 100G, rt to receive income & rt to dispose of it = 68G.
If someone else holds the rt to dispose of it, then you will pay much
less for it.
14.583Regulation: H has basis on partial interest in property. If he
sells interest for 68G, H has no gain. He can buy rt to receive 8Gyr
for 15yrs for 68G.
Suppose he buys it & 1st yr he receives 8G. Part of it would be
recovered under exclusion ration of 72b.
Go into code & see if something like an annuity is depreciable like
an annuity. It is a wasting asset, will eventually depreciate, so part
is recoverable as capital, under SECTION 167a2.
Life interests are includaable under Sec167a2.
***p.191-192 example of this point.
Could get 68G, after tax-investment & get taxed on only 58G.
Must be a section in code, based on Gavit (102b2), that says that H
can't recover anyhting out of the payments, he can't depreciate it.
***Sec 273: You aren't treated as if you have anything to depreciate on
Gives us a reason to see how Gavit was decided wrong:
Tells us H should sell it & buy an interest that depreciates,
similar to an annuity or an annuity.
Then pays 52G in tax v. 120G in tax.
Buyer can recover capital b/c it depreciates. You also get FMV from
date of death. Pay tax on difference b/t 120,000 & 100,000 OR 20G
Hypotheticals w/same numbers, based on examples above:
We've only taxed 52G so far & need to tax D 68G. D gets 32 from
decedent & has something worth 100G at end of payments. Has gained 68G.
That is the amt that we need to tax & have taxed the 120 w/o placing all
of it on H. How do we tax the remainderman?
$$$ is earned every year, don't know how exactly.
Don't know at what rate their interest will earn their value. H's
interest is less valuable at a decreasing rate. If H's interest becomes
less valuable at X rate, then we know that D's interest increases at a
rate of X.
H's interest is rt to receive int until T prime. D's present value
is rt to dipose of it at T prime.
Could tax D on 4,500G each yr, since that is the amt that D's
interest increases each yr.
Implies that you want to force people to sell their interests. Don't
want to tax H anymore. Postpone reckoning. Still tax remainderman, D,
but later than we could do it, so wait until D gets the income.
Defer payment of tax on 68G (D's taxed), but not until she sells the
asset. We give her a basis of 32G, sells for 100G. 100-32=68G & that's
the amt that we want to tax her.
When she sells the asset, ask what amt of total basis (100) bears
same ration to that total as the FMV of D's interest bears to underlying
asset on date of sale. (100). What is D's interest on the date of sale
If H is dead, then D has all of the interest in the asset, 100G. When H
dies & their iterest extinguishes, so remainder interest in property has
to equal the value of the asset once all of the outstanding interests
Basis rules regarding division of prop interests are independent of
1. Gavit doesn't involve sales
2. allocate basis b/t income beneficiary & remainderman on intuitive
Difference b/t 102 allocation & the way basis allocates is independent
of Gavit. In 16th yr, H is dead & D sells asset for FMV on date of
death. Treasury Regulatio says D's basis is the portion of total basis
of property same ration to total vaule of asset on date of sale as does
the value of the interest sold.
It makes sense for D's basis to be 100. Received worth 32G & paid tax
on 68 which totals 100G. It has been taxed to D, the remainderman. If
add 1014 basis to what she's been taxed, she has 100,000. If has to
sell asset to pay 4,500 tax each yr, then we (govt) must defer tax, so
must change regulation b/c need a new basis for determining gain. If
make her basis the FMV on date she rec'd it.
32FMV on date rec'd. Sells for 100G. Gain = 68,000. H paid 52,000
in tax. D paid 68,000 in tax. 52 + 68 = 120, which is what we (govt)
set out to tax.
Asset is wearing out, it is a depreciating asset.
Under Gavit, the depreciation deductions are given to H b/c hook up
income stream from asset w/the depreciation. H doesn't bear risk of
depreciation in this scenario. That is the result in the code under
SEC 167d: prop held by 1 for life w/remainder to another, life holder
gets the deduction.
Gavit is weird:
1. b/c treats income beneficiary as if nothing of consid value from
2. income beneficiary well advised to sell immediately & buy the same
3. compelled to prevent income beneficiary from recovering capital out
of payments clearly capital in part
4. forced to give depreciation deductions to party who doesn't bear the
risk of depreciation in this situation.
even though depreciation risk is on the remainderman.
Sec 167d: deducitons tie wear & tear of income stream to income stream.
Under annuity model, depreciation can be channelled to remainderman
& deferred until remainderman sells the asset. In that case we can make
sure remainderman gets benefit of depreciation deduction under a regime
that says H taxed on 52G as he gets it, & remainderman taxed on 68 when
it is sold by applying deductions when remainderman sells it by
increasing basis by amt of depreciation, in this case 1,000.
Practicality: don't want to force sales, so fix remainderman's basis by
using FMV on date remainderman receives it.
Difficult to det what the value is for the rt to receive income on
this asset, for purposes of determining basis &
depreciation .valuation issues.
Gavit avoids issues of valuation, a complex situation is avoided.
Simple Mistake: failing to distinguish case in which one point of
experience is involved .many cases experience
Money in an acct is taxed as it comes in, as are dividends from
stock, same result in this case where rt to dispose & rt to receive have
been split. When you split intereests you get a very different result
when it comes in.
One pt gets both hardship & benefit, & the other gets benefit while
others get only the hardships.
BURNET v. SANFORD & BROOKS CO.:
TP: net income must be income under the 16th Amendment.
Expenditures were made w/after tax income & then in a later taxable
period, there is a recovery of the after tax expenditures.
They cancel each other out & so TP argues that there is no net income.
If TP in tax period 1 has a 20 expense that is deductible, then he has
alread recovered the amt & so in period 2 the 20 recovered is taxable
b/c it has already been deducted/recovered.
For TP to argue that there was no gain/profit, then must be arguing that
expenditures weren't deductible or that there was no other source from
which to apply the deductibility.
Clark: non-deductible eco burden is compensated, then it is income. If
it is deductible, then in period 2 it is a recovery which constitutes
inocme that IS taxable.
CT: they were deductible business expenses, so in period 2 the recovery
constitutes a net profit/gain which is considered taxable inocme.
To be net income it must be income determined on a set period. Next
period as result of same business transactions TP has a net gain b/c
income exceeds the amt of expenses.
If accrual method, Sanford wouldn't have had net losses that occurred as
a result of using the cash method of accounting. Cash method TP can't
complain about distortions that result from using the cash (v. accrual)
Periodic accounting method, cash, will result in this type of
1. If there is a problem, say Clark was wrongly decided.
Inconsistency: (b/t Clark & Sanford):
Sanford says when loss or expense for taxable period, then it may be
a deduction. Sanford says it is a deduction & Clark says it IS NOT a
Sanford says life begins anew for you in each new accounting period.
Deductions are only relevant if it is available & it offsets income.
If in Sanford, the ct had allowed period 2 recovery to offset period 1
expenditures, then would be doubting Congress's decision not to allow
deductions to apply to other tax periods (this yr or not at all).
To accept TP's argumentin Sanford would allow TP to offset income in
one period & losses in another.
Sec 172: net operating losses, gifts to TP's from govt.
ways of making logical effects of periodic accounting go less hard
against the TP.
state time into future/back to past, where TP can ignore periodic
accounting for purposes of deductions.
Only deductible expenses can be carried forward.
1. Govt can tax 30G in 1995. see 172(b)(1)(A)(ii)c
TP can ignore effects of periodic accounting for a long time into the
Situation of a net operating loss from a business; personal expenses
are NOT deductable, but busines losses ordinarily are.
We can't count the 6,000 for personal exemptions; Sec172d2- 4:
won't allow the deduction for personal exemption, and requires us to
ignore the 15G in non-business deductions.
Bob had 60G in wages in 1995, and a 20G net loss that can be carried
back to 1994 (80G ordinarily, non-cpital business loss minus the 60G
salary; NOT 41G)
2. No, although it is a remedy for distortions like those in Sanford, it
doesn't adopt TP's position in Sanford b/c TP in Sanford was arguning no
profit based on the K. Here net losses of totality can be carried
forward to offset in future tax periods for up to 15yrs.
Expenses & recovery on same K is ignored in Sec 172.
????3. TP will argue loss is 86G. After reducing after tax income, 41G
of 80G will not be used, wants to carry it back to past tax yr. B/C of
172c,d3&4 ASK SPICA????????
4. Can go back 3yrs or ahead up to 15.
Corp: no adjustment problems like above. How do we allocate the
1992 loss of 3G to the other yrs? We begin by going back the 3 yrs, as
set out in the code, & just start spending the deductions.
You can't choose the yr to begin allocating to, if by chance taxes
are much lower that yr. You MUST go back the 3yrs & begin there. You
can't elect to go forward rather than back. (either)
1916, 1917, & 1922: (North American Oil Consolidated v. Burnet)
TP wanted to include it in 1916 or 1922, Govt says 1917.
B/C of excess profits, that was the concern
p203, rates of tax are described.
CT: it doesn't matter (p203) which accounting method TP used, result
is still 1917; b/c company was entitled to receive the money in 1917.
1917 rt yr b/c when TP was entitled to & did receive the money in that
yr. Fact that gov't didn't agree that TP had rt to retain that money is
irrelevant. TP held it under a claim of rt in 1917.
it is the combination of receiving & holding it under a claim of rt
that makes dispute relevant. Nothing entitled to in 1916, no inclusion
if accrual & if cash ????ASK SPICA
Way of govt to insist upon periodic accounting. Not a reason to wait &
see how things turn out. If receive money, then it is income for that
period & then if later it is a loss, you can deduct it in a later tax
Coupled w/Sanford & Brooks, suggests that loan proceeds should be
included in a cash basis/method as income.
How do you argue that the proceeds should be includable in T1 b/c TP is
on the cash method?
allows you to tax cash method TP's on loan proceeds.
1. Why not include loan proceeds?
There is no net income b/c you have to pay it back.
2. Is that consistent w/Sanford & Brooks?
No, b/c it does increase your income for that yr/tax period, & you
can worry about your loss(es) later.
You have money to hold for that period under a claim of rt.
It would be consitutional to tax a TP on a cash method basis for the
tax yr that the loan is received.
***Couldn't tax accrual method payer on loan proceeds. Accrual accrues
when obligation to pay arises, not when they're actually paid.
Loan proceeds: as an exception, w/cash method payers.
W/respect to loan proceeds, all TP's are on the accrual method.
Effect is, accrual realizes no income for loan proceeds & tax payers
usually don't either LOAN PROCEEDS ARE NOT INCOME
If think of loan proceeds as putting TP's on accrual method
KIRBY LUMBER CO. CASE:
CT: including forgiveness of indebtedness as income.
1. Suggests that Kirby is decided wrongly.
How do you buy your bonds for less than their Face Value?
Interests rates went up high, & co is forced to purchase bonds at
amt less than they were worth.
CT: 200 saved is income b/c it frees up 200 in co's assets that but for
purchase, would have been devoted to paying the debt.
When buy for 800, lose 800 of assets, but extra 200 is free & you
are 200 to the good.
eg Buy bonds for 1,000. Sell them for 1000 & then repurchase for 800,
saved 200, so 200 of assets are freed up.
Could amend T1 return & tax on X once it is known that the debt is
Don't file amended return unless or in case you were entitled to
take position you took at the time the deduction was taken or return was
filed. If as of time return is due, you are entitled to deduction, but
you weren't based on facts found later in another Tax per, then don't
amend, you adjust your current return for current tax period.
What can you do in T2 that will have the same effect as amending later
You include X as income for current return & pay taxes on the amt to
offset the amt of the deduction taken in a prior tax period.
Amt by which it turns out to be false (amt you thought you had to
repay that you no longer have to) becomes taxable for that amt your
deduction amt should equal the amt of includable taxable income.
***Sec 108: Forgiveness is not taxable for insolvent debtors.
Plays a role in Zarin Case:
There is borrowing that is used to gamble. (Important to note that
inclusion of indebtedness ignores whether assets are freed up & ignores
what was done w/loan proceeds, when debt is forgiven..in discussion
In Zaring, what the proceeds were used for/spent on is considered by
the ct b/c the loan proceeds were used for gambling. Ct isn't clear on
exactly what is said.
Note, failure to tax forgiveness as income will effect making expense
pre-tax dollars, instead of after tax dollars, which is what govt wants
If comp isn't included in income, then it is dedutible & payable out of
pre-tax dollars. If not deductible, shouldn't let compensation change
the result just b/c it wasn't contemplated.
Had a gambling loan of 3.5 million & only repaid .5 million. To forgive
the indebtednes is to allow someone to gamble w/pre-tax dollars. OK as
long as net gambling losses are deductible .Sec 165(d) says they
Allowing Zarin to borrow to gamble/finance gambling losses & then only
repay 1/7th of what he borrowed, allowes him to deduct amt that he
borrowed, in effect.
Zarin: Sec 61a12: income from discharge of indebtedness
3million was discharged.
Why it wasn't taxable:
1. Any indebtedness for which tax payer was liable, but Zarin was not
liable in this case for the debt.
If extend credit in violation of the regulation, the debt is
2. If you incur a debt in acquisition of property, ct determines playing
chips are not property, so TP doesn't have indebtedness under 108d1b or
Ct: shows TP has no indebtedness under 108d, which excuses indebtedness
for insolvent tax payers.
Here TP is not saying that he is insolvent, so he isn't arguing
If Zarin isn't arguing that he is insolvent, then why argue under 108d?
61a3 gains w/respect to prop & 1001
61a9 annuities & 72
go to 108d to determine if any indebtedness from 61a12
This is wrong b/c 108d only refers to those things defined &
contained w/in that section & 108d has nothing to do w/61a12.
Linkage implied by ct b/t 108d & 61a12 doesn't exist. Bigger problem,
suppose 108d defines indebtedness for purposes of 61a12, then no
indebtedness b/c debt was unenforceable under the sec 108 b/c of
insolvency provision. If debt isn't debt b/c it is unenforceable, then
it was never a debt, casino wasn't making a gift. Casino loves to have
big spenders at the table, so loaned him the money to entice others to
spend money. Never an excuse for excluding amt borrowed from casino.
Maj: (very unclear)
no indebtedness, no forgiveness of indebtedness, no
says it was a disputed debt, so when settle for amt, then amt must
have been what the amt actually borrowed was.
p.243 (top), cancellation of indebtedness provisions of code don't apply
to settlement b/t casino & Zarin.
Ct: does follow if settlelment was the amt of the loan, but that wasn't
actually the case. Ct says no loan & no indebtedness for tax purposes
in sense that there is no income for discharge of indebtedness. Was tax
on justifying proceeds offset by the obligation to pay. Amt of loan was
500,000, properly excluded in yr proceeds were paid, but wasn't until yr
of settlement that we knew how much the loan was for.
Assuming that this is true, ct says no income from discharge b/c
under the code there was no indebtedness. No income when rec'd b/c no
income for purposes of indebtedness income, but there was income for
purposes of having something to repay.
Read 108d: forgiveness of indebtedness, not definition for borrowing
Amt of income undetermined until settlement occurred. Amt was properly
excluded b/c offset by obligation to repay (500,000)
No loan for purposes of forgiveness of indebtedness
provision. Was a loan for purposes of proceeds generally, when
rec'd amt of loan was equal to amt Zarin paid, just didn't know how much
loan was for until they actually settled.
The idea that the mkt price doesn't set the price is a big problem.
Where there is a mkt, legal gambling, tax consequences must be set
by prices of the mkt. Argument by Zarin is that it wasn't worth that
amt to him b/c he is addicted to gambling.
Ct thinks that b/c it was settled for an amt, then that was the amt of
Legal arguments by Ct: (authority)
1. 108d, indebtedness is defined
2. Sobel case: p243
Ct is arguing for taxpayer. TP gave note for amt from bank, sued for
recission arguing that the bank was in violative of state law & bank
failed to follow thru w/certain promises, so later settled. Settlement
price was considered the amt of the loan/indebtedness.
In Sobol, didn't know amt of debt until they settled.
Debts in Sobol & Zarin are different b/c in Sobol bank didn't perform
promises, but in Zarin there were no promises by obligor.
Imagine people argue amt of debt. TP argues it effects amt obligee
should pay back b/c of promises made & what the stocks were actually
worth in Sobol.
In Zarin, no analogy, so Sobol is distinguishable. The value of
something that can be valued is in dispute. In Zarin & Casino, only the
amt of debt is in dispute.
Economist would say not transfer of prop, nothing to argue value of, so
when casino took less than amt of loan, they settled b/c they figured
out the face value. Settled for 1/7th amt of loan amt b/c real
transaction costs to collect, better chance of getting a settlement. It
was worth 3.5million. casino though there was a 1/7th chance of
Sobol: they could argue the amt of the property rec'd. The value of the
stocks were in dispute, realistically. Settlement wasn't based on
likelihood that the bank would be able to collect.
No dispute over what was given to Zarin & the obligation to repay, which
distinguishes Zarin from Sobol.
3. Hall case: amt of cattle was the amt owed, but value of the cattle
was in dispute.
Ct: in effect what ct in Hall held. Holds that when settlement was
made, that was the amt of indebtedness b/c amt of debt was in dispute
from time loan was made, similar to Sobol case.
Rationale in Hall wasn't that the settlement fixed the debt. No
forgiveness of indebtedness income. TP suffered a net los from gambling
from borrowing the funds & what was done w/the fund was a net loss.
Hall ct should be diregarded., Kerbaugh-Empire Case description. Hall
has been discredited. Treats loan as indeterminite until the time of
settlement. Kerbaugh was wrongly decided. We shouldn't care what is
done w/the funds when determining whether it is income.
1. thinking 108d has anything to do w/61a12
2. thinking Sobol is the same argument
3. thinking Hall was good law
1. borrows, gambles, loses, & pays it back. Net gambling losses are not
deductible. If non-deductible, can't let effects of borrowing change
the results. Zarin pays for 300,000 worth of gambling w/pre-tax
dollars. Amt of indebtedness being less than what it actually was.
Zarin argues he is a compulsive gambler. Borrows 3.5million. Would
have gambled it up in a matter of hours. Says it wasn't worth that amt
to him. No good argument that amt is less than 3.5million.
No reason to tolerate result just b/c of 108 provision.
165d: losses from wagering transactions only allowed for gains from such
a transaction .
Suppose Ct had said it was forgiveness of indebtedness, clearly a
gain, & must be treated as income.
Zarin could argue 165d: A gain from wagering, 165 doesn't say gains
from winnings from gambling, but rather only to extent of wagering
All that is at stake is an inclusion of income in Zarin.
165d, makes gambling losses non-deductible. Nothing had to do
w/forgiveness of indebtedness & income derived therefrom.
Can't rationalize conclusion in Zarin by changing lang of 165d. It
mistakes logic of treatment of forgiveness of indebtedness.
TP could have come out 2X as well in Zarin if could prove that
forgiveness of indebtedness is not included in gross income. In Zarin,
forgiveness of indebtedness represents net losses from gambling, not
deductible. If indebtedness is gains from gambling losses, then they
could be included in gross income & would be deductible, as a gain from
gambling transactions. Then the net losses would be deductible up to
Sec doesn't say net losses aren't gambling to extent of winnings, but
rather gains from gambling, so TP could argue that the forgiveness of
indebtedness was a gain from gambling & deductible to that extent.
Why Hall case is bad policy:
cited as support for Zarin case, idea that an amt of indebtedness
may be indeterminate until time of settlement.
Hall treated indebtedness as a net loss, where
TP suffered a great loss from gambling. Total transaction was a net
loss. Contrary to Sanford & Brooks, & cases where people win a windfall
& invest it in a flop. Fact that badly invested doesn't affect whether
it was windfall under Glenshaw glass or income under Glenshaw.
Whether somebody invests in a complete flop, gambling loss/venture,
shouldn't affect whether that amt is income.
DIEDRICH V. COMMMISSIONER:
Assume A buys 100,000 shares of stock & does so for 50,000G (.50 a
share) & FMV is 300,000. When A gives them to B, B pays 60,000
inconnection to Fed Gov't as result of transfer as a gift tax. Transfer
is gratuitous & tax is on amt of FMV. What is treatement of A in this
Best result for A would be :
All 60,000. Gov't can argue that when you pay obligation of TP, then TP
has income in amt of tax paid. If govt uses Old Colonly Trust, it is
arguably distinguishable b/c it was compensation in lieu of wages, & an
employer was paying 61a1 income for purpose of discharging indebtedness.
Here we are not arguing that we are paying comp for wages/services.
Eco benefit under 61a1. Govt can argue 61a12 which mentions
discharge of indebtedness, then donor is liable for amt of discharge of
indebtedness b/c it is an item listed in 61a12 & amt liable for is
If in T1 TP is taxed on 60G under 61a12, then at T2, when B sells it,
B's basis is 50 b/c of donor & add 60G that he must pay to get it, so
B's basis is 110,000. 300 -- 110 = 190.
Authority for this is Sec 1016-2: cost or other basis is reduced for
cost of expenditures. If add B's after tax investment to A's after tax
investment (60 + 50 = 110) & subtract that from FMV 300 -- 110 = 190.
A taxed on 60, B taxed on 190 = total of 250 taxed.
If inclusion under 61a12, when A pays 60G, then A can net it against
proceeds when he sells the investment. Recovery under 61a3 & leads to
1001, & recovery must be from proceeds of sale. Here there is just a
discharge of indebtedness.
Govt treats cases NOT as discharge of indebtedness in Dietrich, but
rather as if there was a sale to B of property for 60,000. If A gets
all 60G included at time T1, then can't argue 61a3 b/c then he would
have a basis & recovery of capital. Govt must argue that there is a
discharge of indebtedness which measures the amt of income to A. 61a12
doesn't lead to 1001, but 61a3 does. If A is taxed on 60G, then what is
B shouldn't have to recognize full amt of 300,000 as a basis.
In scenario #2 we have a 1015 basis & a 1012 basis:
when A pays tax on 60,000 & B pays tax on 190,000.
Govt actually did what in Diedrich?
A paid tax on: 10,000 under 61a3
B paid tax on: 240,000
total taxed was: 250,000
Gain is 240. 300-240 = 60
60,000 is B's basis in the actual case.
TP had recovery of 60,000 on investment that he had paid 50,000 for, so
ct treats donee as if he purchased the property which gave A a gain of
10,000. If A is taxed on 10,000, & we know that we want to tax 250,000,
then the diff from 250 -- 10 =240. 300(fmv) -- 240(diff b/t taxes) =
Govt prefers not to tax TP on assumption that they have other income
from which to pay the tax on something if they don't actually earn it &
get it to put it in the bank acct.
eg. Assume A pays tax on 60,000 when he does't actually rec'v 60G,
govt assumes A has other income from which to pay tax on 60G.
In Diedrich, govt assumes A has other income from which he can pay tax
on 10,000, by treating gift as a sale.
This is the law, based on Diedrich. But it is very unrealistic
w/eco reality see p243.
Realistically, A has sold a section/portion of his property. 300 -
60 = 240 1/5th
A would have to sell 20,000 shares to earn 60,000. If A sells 20,000
shares, what is the gain under 61a3, 10001?
1/5th of 50,000 = 10,000 (20 is 1/5th of 100)
Under 61, must be allocation of basis w/partial sales. Stock requires
TP to wait for sale to get disposition of gains at time of sale.
Reg 1.16-6: allocation of cost will be required w/partial sales.
If B pays tax on 60, & use partial sale formula:
A sold 1/5th (20,000 shares) for 60,000. 10,000 is cost for 1/5th of
prop. 60 -- 10 = 50
A could be taxed on 50,000 61a3
B could be taxed on 200,000
Total tax would be 250,000 & B's basis would be 100,000. Sec1015
Rationale for taxing forgiveness of indebtedness is that there was a
prior item excluded from gross income, that the forgiveness suggests
should not have been excluded.
1. eco: 20 wages, 20 loan, (20) expenditure T1
2. tax 20, 0, (20) deductible T1
can change T2 tax or amend T1 return Generally fix it in T2
Indebtedness is non-recourse.
Forgiveness wouldn't be an issue if it weren't for depreciation.
Depreciation deductions involve same proplems as forgiveness of
Not economic, TP got dep. deduction b/c thought it would come out in
ultimate sale of the house.
House was becoming less valuable. That's why he gets the deduction.
If it isn't deducted, then can only recover loss/capital investment if
he has other income from which to deduct the dep. loss.
When TP sells house he gets FMV at time he purchased. (Bought for
4,000 & sells for 4,000), but we've already allowed 300 worth of
deductions that weren't taxed that would have been taxed had we known
the sale price.
Can give back depreciation deductions & file amended returns.
Requires 3 returns to be filed.
***Can tax in yr 3 on 300 gain on sale of property based on false
assumptions of 100 loss per yr.
Make Basis 3,700 = (4,000 -- 300 dep. ded)
Under sec 1016. (1011 & 1012)
Sec 1.016-3a: requires cost basis be adjusted downward for depreciation
allowances, by the amt of such allowances.
Depreciations are allowed so TP can recover after-tax investments.
Adjustment to basis for dep. deductions functions ww/respect to
those deductions, in exactly the way that forgiveness of indebtedness
income functions w/respect to the exclusion of loan proceeds from Gross
Purchases for 4,000. Operates asset for 3yrs. Net eco income for asset
is 200yr, 600 for 3yrs. Each yr a 100 dep. ded. is allowed, so 300 in
How much do we tax on the sale. There is no inherent appreciation. Only
question of gain re: value of prop, no gain is to be taxed as an
investment appreciation. There is a gain b/c put in 4000 & got 4600
out. Don't tax 600 b/c taxed already. 300 is in TP's pocket as a gain
from income. Want to tax the 300 b/c would have been taxable annually,
but for depreciation deductions. B/C she took the dep. ded., but they
were based on false assumption that prop was becoming less valuable.
Onr solution is to say no gain in yr of sale, but turns out that
assumption was false, so must file amended return for 3 yrs preceeding.
Would require filing of 4 tax returns. 1 for yr of sale & 3 for
Another option would be to reconcile it on return in 4th yr when
assumption is discovered to be false. Done by 1016 by adjusting the
Adjust it so that yr of sale basis is 3700 (v. 4,000) which takes
out for 300 in deductions allowed based on a false assumption.
Deductions represent a return of her capital.
Adjust basis by subtracting every depreciation deductio allowed from
the purchase price.
What if we assume that TP borrows 3,000 at time of purchase? We know we
want to tax the excess depreciation, b/c asset is not worn out false
assumption. 600 would have been taxed but for a false assumption. We
want gain on the sale & can get that result by:
1. ignore borrowing completely OR
2. include it as taxable income.
FMV is 4000, & when rec's it in cash, 3000 is offset by the loan.
If ignoring the loan, then TP's basis must have begun at 100. Capital
investment of 1000 must be reduced to 700.
Could regard as after tax return, loan proceeds, by systematically
including it. Use amt realized as 4000. Will include it in TP's after-
tax investment. His basis will start at 4,000 TP's cost, & adjusted by
3700 for loan proceeds & deductions accounted for in earlier periods.
Which scheme is preferable?
1. one favors the method set out in the code. Given stautory control.
If we chose to say the sale was for 1000 -- (700) = 300, then favor those
who are taxed as the richer v. poorer. Problem w/vertical inequity. By
yr 11, amt deducted will have reduced basis below what was actually
paid. Can't get recovery of after-tax investment that exceeds the
actual investment. When you're done recovering after-tax capital, then
you can't get any more, the gov't isn't giving a gift.
2. If Tp is considered to have paid 4000 for it, then in 11 yrs you
still haven't recovered all of after tax investment. In yr 11, the TP
who had to borrow, net income will be 100 & TP who doesn't borrow in yr
11 will earn 200 on the same asset.
Fact that 300 was borrowed doesn't affect net taxable income b/c
assumption that loan will be paid off. Assumption turns out to be
false, loan doesn't have to be repaid.
1. amend returns & claim 400 in taxable income (v. 100)
2. include amt of debt forgiven in yr that it is forgiven (T4)
Sec 61a12. Tax 300 as taxable income in yr 4.
***Depreciation deductions & forgiveness of indebtedness are treated
***People who can purchase w/o borrowing can depreciate the entire value
paid for the asset, while those who borrow can only depreciate the value
of the asset that wasn't borrowed.
Sections 61a3, 1001b, 1012.
Which model would someone who cared about the code prefer? Look at amt
Model B would be preferable (4000 -- 3700 = 300)
Sec 1012: fits model B better b/c it just says cost (4000) & start with
that & adjust downwards. B fits much better with the statute.
Assume same facts, but amt realized is characterized differently.
Purchaser in yr 4 pays 1000 cash & assumes liability of TP for 3000.
Does statutory language create a problem w/this scenario re: model
Same argument if we stipulate only 1000 is paid cash & other 3000 is
recognized as an assumption of debt.
Amt realized = $$ rec'd -- FMV prop.
TP argues amt realized is 1000 & can argue vertical inequity & Sec
***There is a net loss on the transfer.
Reg 1001-2: includes liabilities for amt discharged by sellor.
Could conclude amt realized is only 1,000, but w/regulation the amt
of liabilites discharged is included in gross income. Amt realized
includes amt of TP's indebtedness.
Case Law supports this position:
Diedrich. Income under 61a3, in form of gain from disposition of
property where someone is treated as if transferred FMV of 300,000 for
discharge of 60,000. Amt realized was 60,000.
If amt of tax for Diedrich is taxed under 61a12 as discharge of
indebtedness, then the amt must be 60,000, not amt of net basis.
1001 is only place you can recover after tax investment.
Reg 1.1001-2 reflects what Diedrich says. Says in extremely bad
language. (BAD LANGUAGE)
Model B, notwithstanding: sum of cash rec'd & amt realized is less than
or = 100,000 b/c assumed on sale of the asset.
Assume amt of indebtedness is non-recourse. 300,000 is non-recourse.
If borrower stops making payments, lender can take prop & dispose, but
can't go after the borrower, recourse is for property only.
If payments aren't paid on loan, recourse is in prop alone.
On sale of asset, non-recourse indebtedness is assumed.
Same problem w/vertical inequity only if we decide not to allow
people to borrow at all. Allowed to include it in basis. Can make
distinction b/t recourse & non-recourse.
When lending is non-recourse can we still use model B?
Look at amt realized 1001b & basis 1012. Which model fits w/statute
better? (Including Diedrich & regulation principal?)
No vertical inequity involved in this situation.
Is A or B a better reading given these new facts, based on the
statute (1001b or 1012)?
1012: says cost. The cost of the asset if loan is non-recourse is
When look at 1012, want to say TP's cost. (sometimes more than 1 TP buys
the asset). Difference w/non-recourse is B is no longer liable. Bank
becomes a co-investor. (Crane & Tusk cases support this argument) If
the risk of dep in value beneath 1000 is on the bank, then the bank is a
partner & bank is a purchaser/investor) When TP borrows recourse, then
all liability is on TP. Where non-recourse, risk of depreciation is no
affair of TP at all b/c no recourse, no liability. (Risk is on the bank)
1012 says TP's cost, TP's cost is 1000, & 3000 is in a co-
investor. Borrower can buy out or let risk fall on co- investor.
Any reason for prefering model B if loan is non-recourse.? Depreciation
dedcutions are for the purpose for allowing TP to recover after-tax
investment. What will happen in model A that won't happen in model B?
In model A, TP can recover 1000 in 10yrs, then allow rest of
deductions to the bank, but risk is on the bank.
Problem is TP only gets a 1000 basis, regardless how long the asset
is held. Deduction is either wasted or split b/t TP & bank (who can't
How can TP keep taking deductions beyond the 10yrs?
A can make payments on the loan & increase their basis, but it
requires constant recomputation of basis.
Both concerns are mentioned as part of rationale for Crane case on page
Counts against model A w/re: basis. Suggests w/1012 we want the
model B scenario. Don't want to recompute basis & don't want to waste
If C pays 1000 cash & depreciation is 3700, the net loss is 2700, but
the deductions can't be taken if loan is non-recourse or if takes a
loan. (B/C TP didn't actually pay that amt & bank can't take
1001-2A4i: sale or other disposition, discharges transferor from
liability. Assume non-recourse is treated as assumed recourse
indebtedness for purposes set forth in Diedrich.
Have a regulation, but they aren't the code & aren't Sup. Ct. decisions.
What is standard Commissioner is held to?
Maj in Tufts: argue regulation isn't the law in a tax case by
stating that they are unreasonable. If you want to argue that provision
of non-recourse indebtedness is assumed & is non-reasonable, then must
use Tufts. Regualtions must be reasonable based on statutes.
Regulations are discretionary & must be reasonable in light of the
Unreasonable to include amt realized in amt realized. Answered in
1. amt realized is 1000, not 4000.
a. b/c no eco benefit to have loan assuumed by TP in Crane
b. alternative is to abandon property. BUT bank isn't entitled to
any amt greater than amt borrowed.
If indebtedness is assumed, then TP doesn't have to hope bank gets more
than 3000. If bank takes your car & sells it for more than what you
owe, then you get difference. If bank sells it for exactly amt owed
w/no incentive & in bad faith to only get amt owed, then you sue them
b/c car is yours & you have an interest in it.
Look at 1012 or 1016, but 1016 doesn't work. Crane says commissioner's
interpretation of 1012 isn't unreasonable, so inclusion of amt in same
amt (indebtedness) in amt realized, follows. Sale is rigged to allow
recapture of depreciation thru deductions upon sale.
Must be enough in amt realized for that to work.
Best model: Tufts, even though the value of the property is less than
the amt of indebtedness, the non-recourse value (works but something
rtelly stupid about it) Can't buy propety for more than it's worth.
Tufts tells us that the amt realized on date of sale is 4000
Adjusted basis (Crane) is 4,000 by time of sale is 3700 thus 300 to be
included under 61a3
Gets out 600 in form of eco income/rent, 300 in dep ded reduces value to
300 represents excess depreciation deductions (assumption property was
wearing out to extent of 300, which isn't true according to TO who put
in 1000 & got out 1000, false assumption. Instead of having taxpayer
file amended return, have him adjust the basis in yr property is sold to
Tufts doesn't say that amt realized is 1000 b/c there is any benefit to
TP, but Crane suggests there was a benefit conferred upon the TP.
If basis is equal to the value of property on date of purchase & amt of
debt incurrred to purchase property then basis will increase in realtion
to the amt the debt increases.
Bank is a co-investor, but they don't get any portion of the rents, so
they (lender) can't get any depreciation deductions. (no incentive to
give dep ded's to lender).
We should included amt of non-recourse amt in basis. In spite of
statute, b/c non-recourse isn't a cost to TP. Commissoner wants to do
that & we let him. Only way to recapture non-recourse indebtedness is
to included it in adj. basis (CRANE).
Court: wants to allow TP to have basis of 4,000, though only 1000 was
paid in cash to avoid TP losing less than amt paid on date of purchase &
to avoid purchaser losing full value on date of sale.
J. O'Connor's Problem:
What she thinks should happen, a bifurcated analysis:
Indebtedness is treated as if it were real, recourse indebtedness, even
O'Connor wants to treat it as if non-recourse has greater amt realized
than the FMV rec'd on date of sale.
Purchaser will have an amt realized less than what was purchase
price. New purchaser's basis will be less than amt realized.
Justice cites David: (p263-64) Amt reallized shouldn't be greater than
new purchaser's basis. Spicas says this argument is arbitrary.
An asset defined as capital asset, gained by sale is taxed lower than
applicable income; a motivation break for capital gains, preference.
Tufts yields result that there is a 300 capital gain.
Generate a gain equal to depreciation deductions.
O'Connor fixes amt lost w/Tufts analysis due to tax on the 300 (ie $30
if tax is 10%)
????Ask Spica about Tufts & O'Connor Analysis???
Taxes TO in same manner as another who is in the same osotion
econonmically. Gets 300 on ordinary income side.
Have good reasons in Crane & Tufts for allowing TP to include non-
recourse indebt used to get prop, in basis. Otherwise prop subject to
dep for less than FMV on date of purchase.
Assumes wouldn't give dep ded's to lender, but it is a sound
assumption b/c to give them to lender separtates it from stream of
income & defeats purp for allowing dep ded's.
Include non-recourse in purchaser's basis, though doesn't represent
a cost to him. Sec 1012
Given that, what do we do when prop is sold is cash paid, then TP
would get a loss on the sale & it would be non-economic & won't allow
effect of adjusting basis to recapture excess depreciation deductions on
gain of sale.
Tufts & Crane says include amt of basis in amt realized.
TP has benefit for non-recourse to be assumed.
If prop is worth less than amt of indebt, then full amt of indebt
isn't to be included in amt realized. Footnote 37 in Crane.
Tufts majority says: 2nd reason in Crane is unnecc b/c 1st reason is
enough, b/c loss will be generated, reagardless & allows dep to be
recovered as a gain in the property.
O'Connor thinks whole system is wrong. Wan't to improve in code,
regardless of borrowing. She complains about code in general, recovers
dep deductions as a gain.
She uses a story that uses forgiveness of indebt to recapture excess
dep ded's. It works, but if really serious about recapturing excess
deductions, but problem is improvement on total scheme, but works only
if there is forgiveness of indebtedness.
eg. If buys for 4000 cash & in 3yrs produced 600 income (rent) & 300 tax
deductions for depreciation, leaving net taxable income of 300. Sells
prop 4th yr for 4000.
Put in 4000, gets out 4600, deducted 300 that we want to tax. 4000
- adj basis of 3700 = 300 recaptured deductions at time of sale.
Deductions taken as ordinary income w/no borrowing, at a
Tufts is right & O'Connor wrong b/c recapture of excess dep deductions
is more effective if borrowed $$$ than those who pay cash.
Tufts: & why the majority opinion is wrong.
If someone takes 300 in dep ded's, prop is purchased for 4000, w/a 1000
cash contribution & 3000 non-recourse indebt. Prop depreciates to 2700,
below non-recourse indebt. Property is sold, subject to indebtedness,
purchaser pays 1000 cash of 2700 sale price.
Amt realized is cash + amt indebt 1000 + 3000 = 4000 (CRANE)
4000 -- 3700 = 300 (dep deductions)
Taxable gain of 300.
Good answer b/c put in 1000, then took 300 dep ded's assuming to offset
income, & got out 1000. Total got out was 1300. Put in 1000, got 600
cash & taxed on 300 (600 -- 300 dep ded).
Ct is saying must include indebt amt in amt realized b/c it wants to
include in it basis, based on CRANE.
Non-recourse has been included in basis.
Simply ignoring non-recourse in basis & amt realized will get same
result if included it in both. Must include in amt realized if it is
included in basis, though value of prop on date of disposition is less
than amt realized.
Bais would go up each time a mortgage payment was made, thereby
allowing more dep ded's.
Ct says: If don't included non-recourse in basis, then no eco benefit
for treating non-recourse indebt as real. If someone relieves you, no
benefit to you b/c you don't care if they pay it or not.
Recourse indebt is included in basis b/c it is real & we know how to
compute it. If someone relieves you of recourse indebt, then you are
benefitted & have a gain.
Say amt realized is 1000-(3700) = (2700)
Doesn't make sense b/c indebt is included in basis, but person
definately doesn't have a loss of 2700.
Ct wants basis figure to be (3700). So include indebt in amt realized
(1000 + 3000) = 4000. Amt realized 4000 -- 3700 basis = 300 net
(represents amt of dep ded's taken on false assumption, recovery of dep
Ct also wants non-recourse to be included in basis b/c if we didn't,
then problem of vertical inequity arises. People who borrow would be
treated differently than those who don't. Also diff if non-recourse or
Co investment (non-recourse) is economically different than recourse
Ct wants amt depreciated not to be less than amt paid on date of
Tufts says b/c good reason to include amt non-recourse in basis, then we
must include it in amt realized b/c want prop to be depreciated to
extent that it is actually losing value. Otherwise if buys for 4000,
but only pays 1000 cash, they can't get deductions past the 1000 paid.
Under Tufts & Crane:
TP will be forced to pay back dep ded's in every case in which TP
gets his real investment out.
If TP buys for 4000, pays no cash & takes non-recoure indebt:
(w/rent of 600 & 300 in dep ded's):
4000 -- (3700) = 300 taxable income from dep ded recovery.
Then purchaser pays 2700, w/non-recourse loan of 4000 & pays no cash:
Under Tufts dep ded's always must be paid back, unless TP gets back
less than what he really put in.
Under Tufts, TP who gets less than what she put in can keep dep ded's,
but if get what you put in, then always have to pay back the dep ded's.
CT doesn't give dep ded's that would be wasted or given to lender, they
loan them to her. If actually depreciates, but TP gets her investment,
then no reason to allow her to keep the dep ded's b/c she didn't
lose/her interest in prop didn't depreciate.
You get the time value of the tax on the income even if you have to pay
back the amt of the dep ded's. (if you get out what you put in & if you
put in 0, then you always have to pay back dep ded's).
Shelter an amt of income = to amt of dep ded's.
eg. 100 ded/yr at 10% tax rate earns you $10 first yr.
They created tax shelters at the time the case was decided.
Difference b/t how we tax capital gains & ordinary income?
Dep deductions are taxed as capital gains (less tax) than ordinary
When Tufts was decided, diff b/t capital gain tax & ordinary income
Paid tax on dep ded's at a lower rate.
eg. capital gain 10% & ordinary income taxed at 20%
Gets 300 in deductions.
Income from wages are taxed at 20% & dep deductions are taxed at 10%
if you have to pay them back.
Always want to pay tax later rather than soooner.
*****Nominal amt saved is 60, tax bill is 30. Get time value of
deduction & pay less tax nominally.
Motivation for borrowing all & paying 0 cash, not only get to keep
time value of deductions, but also pay less tax nominally.
Motivation for tax shelters:
Now you have to wait to take deductions until you actually get
income from the investment.
Tufts, when pay ded's back pay it at a capital gains rate.
Reg1-1002A4i: for purposes of this section (exchange of prop, amt of
your indebt is discharged, then that amt is included in your amt
Sale or other dispositon w/non-recourse liability, discharges TP
from the debt, then under gen rule it is included in amt realized.
O'Connor w/no cash paid:
Tufts says amt realized is 4000, when amt paid is 2700.
Macomber: idea that something more is needed than mere fact of
appreciation of value of property to make appreciation currently
Depreciated property, not of nature that is expected to wear out,
something more than depreciation is required to make it taxable.
If asset isn't expected to wear out & isn't deducted from income, need
something more than a loss in value. p299
Sec: 1031 & 1034
Confluence of 2 features:
realization req't & existence of non-recognition
main combination/combining: appreciation in value of property is not
taxed & depreciation w/re assets not expected to wear out during their
productive lives isn't deductible until:
1. property is sold or exchanged. (realization req't)
2. in such a way as to take TP's after-tax investment in prop out of 1
mkt & put it into another. (non-recognition)
***Both 1 & 2 are required*** (for Macomber & Bruun)
1001c: all gains from sales/exchanges shall be recognized unless
1031 & 1034: no movement of prop, no sale/exchange
Take after tax investment & move/trade to another mkt, it isn't a
In addition to sale/exchange, must be such a nature it takes after
tax investment from one mkt to another.
p320 Rev. Rul. 82-166
Silver is an industrial commodity, & gold is watched by people for
Not like-kind exchange; different markets
JORDAN MARSH: gov't argues sale/exchange fell under 1031. TP won. In
addition to depreciation, must also be a completed transaction for
taxation. (1031 is non-recognition provision)
p 323 Gov't said sale/exchange was w/in 1031.
Macomber/Bruun v. 1031&1034:
Can always try to argue no sale/exchange, & then there is never tax.
Could analogize to stock dividends. Argue it is a non- recognition
2. A & B have 100 shares. Basis is 30,000, value is 100,000.
70,000 would be gain. But A & B don't sell, they divide the shares. No
sale/exchange & if that fails, then they argue it is a non-recognition
No sale, no cash, & no exchange b/c no new prop, only interests
changed. Analogize to stock dividend or improvement of real estate (sec
Authority: Rev Rul 56-437: joint tenancy, no determinate things are
Severance of joint tenancy.
Non-recognition treatment assumes a realized gain from sale/exchange.
Basis of shares held by each after severance of the tenancy.
What is the effect of 1031?
Computable gain, w/exchange of like property, so 1031 does & should
apply so that gain will only be recognized to extent of cash & non-like
prop rec'd for which 1031 doesn't apply.
E has no moot gain, so 1031a & b don't apply, only a 1/2 int in X is
received, previously owned by F. For no gain to be recognized &
allocable to E (if sold out of tenancy), is found in the value of
property rec'd. E's basis in X, such that if sold at FMV on date of
exchange, E would realize a gain of 1,375.
Since F got something other than the building, worth 500 (prom note),
then on the exchange, F will realize a gain of 500. Applies rule
1031b gain is recognized to extent that the lesser of gain realized
over FMV of prop received.
F must recognize a 500 gain on the exchange b/c it is more than the
FMV of prop exchanged, not only a like-kind exchange.
F's basis in Y, if sold at FMV on date of exchange, he would recognize
875 of gain. (+500 = 1375)
F gives up 1/2 interest in X. It is an exchange based on analogy of Reg
79-44, so there is a gain under 1001c (gross income, 61a3). To apply
1001, must compute amt realized. Sum of cash rec'd in exchange + FMV of
prop rec'd in transaction.
A note (500) isn't prop, so it is cash.
Possible challenge that this isn't a like-kind exchange.
In substance it isn't a like-kind exchange, and the 990 is never
recognized, so TP is benefitting from 1031. If form of transaction is
misleading, then what is substance?
Govt: B bought FM1 from F for cash, which F used to buy FM2 from L.
(Substance Argument by Govt)
If B had paid cash to F for FM2, & then L could have bought FM2 from
B & F could have bought FM1 from B. Would have yielded the same result.
If govt argues form over substance, then govt argues alternative method
exists which would have yielded same result & only reason for using
method is tax consequences.
This is no reason for granting govt remedy, sim ply b/c another
method existed. Can't tax situation based on what would yield most tax
for them, simply b/c 2 methods exist & 1 yields more/less tax for govt.
***Congress intended to change TP's transaction based on statutes,
that's why they're enacted (partially). Provisions in tax code will
effect TP's behavior, but is that intended by govt? Must analyze form
Was an alternative method, alternative reduced taxes, & what TP is
seeking is provided for by alternative method.
If you can argue result is out of rationale for the section, then you
have an argument that Congress didn't intende TP's claim.
How do you argue that three-party trans shouldn't be respected & should
be treated in form that would yield greater tax?
Must be argument that falls outside 1031. (Jordan-Marsh
uses/presents rationale for using 1031).
According to Jordan-Marsh, when enacting 1031 Congress intended (see)
which is to move after-tax investment from one mkt to another, or one
prop to another. (paper gains).
F doesn't fit this scenario. F asked not to receive the cash & did
everything to avoid touching the money.
In general, like-kind exchanges aren't taxable, but non-like exchanges
Congress intended (Jordan-Marsh) to make 1031 treatment avail only
to those w/paper gains, which is diff from gains when you receive cash.
Form of argument: to tax on form not substance. Form TP is seeking is
outside Congress' rationale for taxing transactions in form congress
adopted in way that they are taxed. In making non-recognition treatment
avail for like-kind exchanges, Congress intended to do something for
TP's that F is unlike/different from those TP's. Form is rationale for
treatment is outside substance. If Congress intended F to be taxed the
way he wants to be taxed, then TP-F is entitled to those tax benefits.
Argument: no rationale to let form govern, so should let F get tax
treatment that he is seeking.
Spica says no coherent rationale for 1031, so F should get benefit
of 1031 so long as form is employed.
In form, F rec'd no cash. In substance, F rec'd cash b/c B wanted to
pay F cash & F worked it out so that he didn't have to touch the money.
Spica says you must say that b/c F avoided cash, then he is outside
class congress intended to benefit w/1031.
Recognition of Losses:
Capitalized Cost: Sec 1016 reason indebtedness you acquire when you
acquire an asset can't be deducted, but rather is treated as the basis.
(&1012) after tax investments which aren't currently deductible.
If you by prop for 100 & 2 yrs later, w/o appreciating prop, you
build a barn, basis in yr of improvement will go from 100-120 to reflect
a non-deductible cost in the prop.
When 1st Air acquired route, they couldn't deduct as bus expense, but
rather an after tax investment (capitalized cost) of 100. From time it
acquired route authority until new regulation, profitable, but after
they lost flights b/c of increased competition. They want a deduction
in yr it is clear that competition will get worse, not better.
What amt is the airline out? If it cost nothing today to get that
value, then what has been lost is amt spent to get route authority when
it cost something to get. The 100 is a loss b/c you can get it today
for 0 or close to nothing.
Need to fix amt of the loss. Is the loss to be deducted? Need a
165: loss shall be allowed in yr for which it is incurred & is not
covered by insurance or otherwise.
Have same concerns here as in Macomber & Bruun. Expense of route
authority (basis) wasn't deductible when paid, but rather capitalized,
so TP can recover it later. Losses from sale/disposition of property
(Macomber/Bruun) separation/derivation of capital, is the completion
of a transaction or close of a transaction.
What will Govt argue?
B/C route is still being used & still has value, the loss in its
value isn't deductible. Mere diminuition doesn't constitute elimination
or abandonment of a com pletely worthless asset, not a deductible loss.
Rev Rule 70-63.
Losses aren't deductible until there is a sale or they are realized in
mkt or other realized transaction or until the asset becomes completely
Need realization event to deduct the loss.
If realization event occurs Jordan-Marsh but exchange of like-kind
occurs, then no deductions will be allowed/recognized.
Value of goodwill is 0, so there is a 200,000 loss. Is it deductible?
No, she must sell the store. Rev Rule 84-145.
165 will be avoided/abandoned otherwise, if she only sells fixtures
& not the store.
A deduction is the recognition of a loss. What are recogniton
requirements for gain?
Macomber & Bruun
Rev Rul 84-145
Must be a realization of gain (16th A), & must be a fund from which
the tax may be paid. (Macomber)
(Bruun) After deregulation, costs nothing to get a route authority,
TP wants to claim a loss of 1million. Autority was worth 1mil b/f
deregualtion. Route authority may have some residual value.
Is this a realization, or do we have to wait for route authority to
be abandoned? Quest of whether a good analogy from TP's getting route
authority (& lessor selling underlying property.)
In Bruun, prop was not sold, but ct said there WAS a realized gain.
TP is told to wait until last moment to take the loss as unrecovered
basis on sale or 165 loss in case where prop is abandoned.
There must be a new trans to yield realization event if Bruun is to
be analoagous to REV RUL. Bruun doesn't require this.
Everything is final in Bruun when TP abandoned property. (sell or
re lease it) Deregulation has same finality as lease. Route goes from
1mil to 0, same finality.
Analagize deregulation to abandonment of lease in Bruun, then argue Rev
Rul is more strict than lease ruling in Bruun & it should be
symmetrical Rev Rule should be same as gain ruling.
Yes, if Bruun is good law, then the Rev. Rul doesn't interpret gain rule
symmetrically (w/realization ruling).
It is very hard to draw the line so as to minimize disputes about
valuation of property. Realization req't is strict in respect to
losses. Improvement isn't income to lessor unless it increases value
Rev Rule is consistent w/109, but it is inconsistent w/Bruun.
109, says you realize losses at the last possible moment.
You can have a realized loss that isn't recognized, meaning basis
transfers from one asset to another.
OID RULES Original Issue Discounts & Related Rules:
Recognition of interest is at stake.
Congress enacts 1272 to 1275:
Focus on w/RE to OID Rules, effect recognition & character of
income. OID Rules must be differenciated from 78-72.
Creditor pays 386 yr 1 & O in yrs 2-10
Debtor pays 0 yrs 1-9 & 386 in yr 10
How much int would be earned in yr 1? 38.60. Then treat C as
transferring that amt to D. The D transfers that amt to c as interest.
C has income under 61a4 in amt of 38.60 & D has deduction in same
amt under sec 163.
Need to know motivations, gift, etc.
Idea that it is interest income is a fiction. 7872 creates interest
that it causes to be realized & recognized. Timing gives creditor the
benefit of tax refferal. Forces interest not otherwise recognized as
income to be recognized & taxed.
1275 makes it recognized later, rather than sooner.
7872 (after assumptions of interest rate) taxes TP on interest
earned, even thought TP is not entitled to receive it.
386 today is same as 1000 10 yrs from today.
Does taxation bring a preference here?
If cash method: doesn't count income until rec'd, so prefer #2 b/c
receives no cash until yr 10.
If accrual method: counts income when earned, so prefer #1 b/c interest
is earned in yr 10.
To avoid 61a4, TP should pick #2 instead of method #1
1. Indebtednes. When will interest be recognized 7872.
2. When will 385 gain be taxed?
Timing of recognition of gain. Installment payments, 1st installment is
less than TP's basis. (Installments in more than 1 taxable period.)
When will 200 be taxed? upfront, very end, or partially all the way
through installments? 61a3 question.
Upfront problem: taxing TP on gain that may not be accompanied by
income from which to pay the tax.
Can hook up gain w/payments which eradicates concern w/upfront taxing
ie. 50 gain for each 100 payment. (200 will be recognized over 4
This method is ok, if we know total # of payments/what the amt of
the payments will be, otherwise pro-rato tax method won't work. p364 &
366. If don't know FMV of the note is, then don't know FMV of prop
transferred for purposes of computing amt realized.
If no max price or max time period, then 15yrs will be used.
Look at Logan case.
Recovery of basis 1st method. Allow TP to get 1st two payments free
of tax. Normally installments totalling basis are tax free, & then they
are taxed on the gain beyond that.
If value of note is uncertain b/c of contingencies upon which sale is
based, then code allows assumptions (basic) from which to use the pro-
Regulations provide TP can recover basis over 15yr period. Some
income will be recognized from each payment/installment.
Does Logan have meaning after Sec 453?
Yes, b/c 453 is elective (TP can elect out of it). 453d allows TP
to elect out of installment sales. Regulations assure TP if elects out
of 453, then taxed in yr of sale on diff b/t basis & amt rec'd from
purchaser. (get what govt is arguing for in Logan.)
In Logan, govt was trying to value an item/asset that couldn't properly
Don't allow completely arbitrary assumptions.
In Logan, govt used TP's numbers to come up w/a value/assignment of
a value. TP wasn't in position to say # govt used was completely
arbitrary b/c # came from TP. Estate tax return provided that the item
be valued. What controls estate tax returns isn't controling for indiv
Ct in Logan says: estate tax requires a valuation date. Not under that
pressure w/respect to income tax. For purposes of meeting valuation of
estate tax, it was not arbitrary. It is arbitrary to use same methods
for income tax purposes for indiv/TP.
Absent compelling time constraints, use of valuation method becomes
Logan teaches that in any situation where amt & period of payment are
unknown, though not impossible for income tax purposes, the wait & see
approach should be available if no time constraints.
See Regulation 15a.453-1d23(also)
***must be able to confirm obligation of buyer to seller in order to
Recognition of gain w/installment sales, all 3 possiblilities are
available in certain circumstances. Reg 453.
Treating trans as open is the rare thing b/c what is at issue is a
question of when gain should be realized for tax purposes & when it
should be recognized. In Bruun, a closed & completed transaction.
COMPARE TO AMEND CASE:
(Constructive receipt and related doctrines)
Situation where farmer, not intelligent, who used someone elses bank
acct as a form of savings. He didn't like to have money around/didn't
understand time value of money.
Sells wheat today for fixed price to be paid a yr from date of sale.
Logan & regualtion come to same result when only 1 payment is made.
To have installment sale, only need 1(min) payment in diff taxable
period from date of sale.
If pro-ration means allocating tax proportionaltely, then if only 1
payment, all 100% of tax must be recognized w/1 payment/installment.
Waiting for payment to be actually rec'd, govt would have to argue
that the TP rec'd, on date of sale, the value of the sale price, BUT
THAT ISN'T TRUE.
TP was cash method. Govt tries to argue that he's constructively
rec'd amt itself. Should be analogy b/t what farmer does in savings &
what we do when we leave int in bank accs that earn the int.
What did govt have in mind? Want to tax cash method TP on whole amt.
Farmer had rt to be paid on date of sale, so govt wants to tax him as if
he were paid b/c he allowed deferrment for his own reasons.
Govt says since TP could have had present rt to 'X', same as person
who has 'X' in bank acct & can w/draw it whenever they want it.
Ct says that TP doesn't have that rt b/c it was in the K that he
couldn't touch money until following yr.
In substance, a cash payment & some arrangement to allow TP to engage
Not enough to say it could have been done differently in way to
produce more tax.
Govt says if had been differently to yield more tax, so lets tax it as
if it were done that way.
Must argue falls outside way/what TP is trying to do/achieve.
Ct says it isn't enough to say you could get more tax if done
differently when TP has a choice & code allows it.
Amend: Ct refuses to do what legislature did in OID Rules.
OID Rules people are like TP in Amend (avoiding income). TP in OID
Rules prevents himself from having current rt to receive interest.
Different than bank acct, like TP who has current rt to reduce rt to
income in taxable period that he's entitled to. (bond, w/no int income
OID Rules say if you make deal & put int out of your control, still
taxable to you like income from bank acct taxed when earned.
Amend situation is diff b/c doctrine of constructive receipt says given
deal from you & bank, up to you when you get interest, so you get int
when decided. Necc to enact OID Rules to tax 0 tax bonds as if pay int
If Govt had succeeded in Amend, then OID Rules would be completely
Sec 1272-1275 & Amend testify to limitation on constructive receipt.
Quest of whether TP can get it today, not whether TP could have arranged
to get it today. (Doctrine of constructive receipt).
Suppose govt had lost b/c failed to have amt of tickets included in
TP's income for 1969. Also suppose in 1976 govt hadn't requested
Lose in 1969, want to argue includable in 1975, how?
(at least includible in 1975) Use Amend, say constructive receipt,
like a bank acct. p. 378. If absolut rt to request payment, up to
guardian if amt is applied for.
Could govt argue constructive receipt itself, for 1969?
Depends on whether up to guardian in 1969 if amt is received. If
only application for funds was needed to rec'v payment, then
constructive receipt would apply/would seem to be avail for argument for
conclusion in 1969 & 1975.
Govt argued, not for constructive receipt, but got same result by
arguing (in 1969) economic benefit. The govt argued TP was entitled to
prize money, didn't take it & it was earning interest.
Similar to bond situtation where int isn't paid until 10th yr. PV
of rt to rec'v amt whenever you want is that amt itself. Don't need to
compute PV if no period of time must elapse in order for you to receive
Constructive receipt never involves prob of taxing something on
assumption there will be income from other sources from which to pay
tax. Amend says constructive receipt exists whenever it is up to you
when you receive payment.
When you can't argue constructive receipt b/c not just will of TP on
when to receive it, then eco benefit applies.
See Pulsifer case.
Eco benefit applies when they request it, but can't get it, although amt
in question is earning mkt int. PV of rt to get amt in future plus mkt
int = 'X'. To tax, assumes income from other sources to pay tax. Don't
like to assume that, so eco benefit has more problems than constructive
In case where tax someone on eco benefit when can't get constructive
possession, relies on fact that TP has int/income from which to pay it.
Winnings were not assignable in Pulsifer, so couldn't sell rt to receive
Assume case where it is necc for govt to argue eco benefit Case
where TP couldn't get the money/it was unavil for some reason, then
quest is do we pay in yr prize is one. Becomes relevant if prize money
Ct in Pulsifer says doesn't matter if income is assignable or not. Ct
cites (p.379, Brodie).
We could have cited (non cash assignability doesn't matter)
Drescher. [payment of premium on anniuity].
Brodie case is like Drescher b/c involves deferred annuity, purchased
for employee by employer.
How do you distinguish cases for TP, to argue that concern for absence
of fund from which tax can be paid is greater concern in Pulsifer case
than it is in Brodie & Drescher?
With annuities from employer, part of comp, so ususally other income
from which to pay it. Anyone can apply for winnings, but not always
income from which to pay it.
Even if annuuity is non-assignable & it is pd in relationship where
payor wants to please payee, won't make it difficult for employee to pay
tax. Usually paid in form so employee can pay the taxes.
Less reason accomodation w/prize payor & payee to allow for payment
If don't tax on current eco benefits for non-kind benefits, ripe for
abuse w/payment in kind w/employees & employor's.
Threat for which Brodie & Drescher was decided, but
doesn't apply in Pulsifer situation.
Difference w/constructive receipt & arguing income from eco benefit is:
w/eco you assume other income from which to pay the tax.
Don't want to assume something can be selled in order to pay the
Nothing to sell in Pulsifer.
Cts argument: don't like to assume other income, but will to avoid
abuses of system. If you can distinguish from your case, then you must
Ask if quest is diff, diff threats, amt of fund, risk of abuse, etc.
Use Rule's rationale & dinstinguish cases. Good tax attny would have
argued non-assignability b/c of assumption of other income. Threat of
abuse greater w/emp K's
Greater chance of adjustments w/emp K's/annuities.
Divorce case. Husband transfers prop to wife. Gov't wants to tax a
gain. They were not co-owners of the prop. Diff b/t appreciated value
of prop & FMV at time of transfer = gain.
Govt: (61a3) Must say that there was an amt realized, diff b/t A/R &
husband's basis. There is a release of an obligation in this case.
Application of Sec 1001. (sale/exchange)
Idea is that this is a sale/exchange. Exchange of prop of husband
and release of marital rts. [share she's entitled to equally]
Husband owes obligations to wife by way of prop. In exchange for
release from those obligations he transferred appreciated property.
(Similar to exchange of asset & legal services discussed earlier in
Gov't argues taxable gain on property.
Husband: no gain to be recognized on exchange.
1031 allows recognition of gain if characterize as like-kind exchange,
admitting a realization event. (1031 is no good here, not admitting a
Prop must be exchanged as a like-kind exchange. Test is whether an
after tax investment in one mkt is removed from that mkt on acct of that
Husband: Shares of stock were traded in Davis. (if both owned all
shares, then it could be a like-kind exchange if exchanged halves of
stock, but that isn't the case here. 1031 doesn't apply to shares of
TP in Davis didn't reside in a community prop state, so not a like-
kind exchange. (see above)
Look at Sec 1041, the solution to Davis. (fixes problem Davis
poses, but didn't exist at time Davis was decided.)
Rev Rul 56-437: Authority for TP's argument. Involves situtations
where tenancy rts were changed. Analysis under the ruling, which states
that no gain is recognized, in cases to which it applies directly, is
that it is not a taxable gain b/c prop appreciated, but it provides that
there is no realized gain.
Point of Rev Rul 56-437: To tax the gain under 61a3, must find the
condition expressed in 1001 in sale/exchange, has been satisfied. You
find a realiazed gain, then once there is a realized gain, now must
determine if it is recognized. Compute gain under 1001(amt realized -
basis = gain). If 1031 applies, gain isn't recognized, if 1001 applies,
no recognized gain & if 1034 applies, no gain is recognized.
TP Davis: no gain is recognized. Situation isn't ripe for taxing the
appreciation. Only tax appreciation in prop only where there is an arms
length trans which takes TP's after tax investment out of one mkt &
places it in another.
TP isn't arguing recognition, only that there is no realized gain.
Must be like the Rev Rul/analogous to Rev Rul. Must analogize division
of marital prop to division of
Co-Tenants take there prop & go separate ways, thus dividing the
tenancy. When the tenants divide their interests, then the event is a
non-realization event provided there is no exchange.
Govt: division of marital prop is like tenants in common. That's
reason for 1001.
Ct: finds TP is taxable on prop exchanged in divorce. Looks at local
law & says wife's int in prop & marriage doesn't arise to the level of
co-ownership. (inchoate rts). Not like co-tenants in a joint tenancy
exchanging rts to dispense w/survivorship beneifts of surviving joint-
tenant b/c wife has no int which reaches level of co-ownership having
Ct disposes of TP's argument that there was no realization of gain.
TP could cite authority that even if it is a realization event, the gain
shouldn't be taxable. (p. 412) Could be a realization event b/c it is
an exchange. Now we are in arena of Sec 1001.
How do we argue that although in arena, game shouldn't be played?
We don't know what the A/R was (value of marital rts given up) so
Bottom. Treats pty's to exchange as though they're rational. (Ct's
approach, saying that rts exchanged are equal in value, otherwise a very
bad deal, & wife wouldn't do that.)
People will make bad settlements if they are sick of dealing
w/bullshit. Similar to ZARIN case.
Sup ct assumes values exchange were equivalent. Ct is saying if it
is a realization event, let Congress say in is non-recognition if they
don't want it to be a taxable event.
Not looking for a realization event, do doubt there is one b/c she
sold stock. We're questioning the amt realized.
Govt: argues amt realized is greater than she claims it is. She sells
stock she got from man who at time of transfer was her fiancee. (They
were about to get married at time of transfer)
Sec 1001 applies b/c there is a gain.
Dispute over amt of gain. Govt & TP don't argue about amt realized, but
they disagree over amt of basis.
TP: argues under 1001, that the fmv of prop was worth 800 when she
3/20 = 80,000/1
A/B = 12 on date of gift. She sells for 19 per share.
TP argues basis is 800, govt argues it is 1200.
Must argue 800 by arguing that she gave up marital rts to get the
She paid/lost 800 to get prop to get married.
Govt: argues it was a gift, which is the donor's basis.
Ct buys the TP's argument. They say it isn't a gift. It isn't a
gift/transfer isn't a gift b/c she surrendered all other prop rts for
the marriage. Whenever there is consideration, then no motivation
involved, like in Duberstein. See
Fed Estate & gift tax consequences are irrelevent to indiv income tax
provisions/taxes to indivs.
Transfer is a gift for Fed income tax purposes, but it is irrelevant
for income tax purposes to indiv.
Counts as a purchase of 800 worth of stock. Her inchoate int exceeded
amt of stock transferred to her.
She has gain based on FMV of stock she gets & the FMV on date of
transfer. When he transferred it to her he had a gain of 788.
Important to see that if transfer to fiancee was a taxable event, then
he would have had a gain.
1. If 1041 had been enacted, is there a non-recognition provision?
No same result b/c of when transfer happened & how it happened.
1041 doesn't apply to significant others.
Result would be the same.
2: IF her basis is 800 b/c she bought stock worth 800 at time she
bought it in exchange for inchoate marital rts. It is not like-kind &
no recognition provision.
What was her basis in inchoate marital rts? 0
He would be taxed on 788 & she would be taxed on 800.
We don't give basis on marital rts. No basis for eligibility for
No better way to treat this is as a gift from him. Otherwise, result
will be that when prop is transferred under these cirumstances, then the
value of prop will be taxed twice & the only recovery will be the after-
tax investment of the donor.
Must arrange so prop rec'd by future spouse is the spouse when it is
Alimony, Child Support, & Prop Settlements:
Favors payments in terms of Alimony v. Prop settlements when both
Possible to elect to have, but for election would be treated as
alimony, as a prop settlement. p. 421. Deductible to payor & includible
in GI of payee.
Secs 71 & 215.
71: includible in GI of payee
215: deductible to payor.
Doesn't mean you can have non-alimony treated as alimony. Can treat
alimony as non-alimony.
When it can be arranged so that it qualifies as alimony, then you
have a choice to treat it as alimony or not.
Strong incentive to arrange it as alimony if you have a choice to treat
it as alimony under the statute.
Usually if alimony is paid, starts as a high rate & reduces over
Divorce attny must know what is at stake in secs 71 & 215. If attny
knows the diff, then he can advise the grounds on which they can both
agree, b/c both have incentive to treat it as alimony b/c they both
Diff b/t cost to including pty & the deduction to payor.
Accrual method TP incurrs income as the money is generated, not when
they're entitled to it, otherwise above example would be the result.
This Accrual method shows exactly how the Company is doing, best for
Sec 446A: Tax Income computed on basis way reg TP computes for
Prevents TP's from having to keep 2 books of financial records.
(Cash & Accrual, one for tax purposes & one for investors.)
Sec 446B: If method used doesn't clearly reflect income, then must be
made in way of opinion of Secretary so that it does clearly reflect
TP AAA: Commissioner doesn't have discretion properly construed to
deprive him of the Accrual method for pre-paid membership fees.
TP distinguishes Michigan by stating that the accounting method used
in Michigan wasn't very scientific, in that they didn't have a way to
compute the probable costs that will be incurred in the future to
compute the gain fromthe membership fees.
Gov't: Practical & Legal Arguments:
Legal Argument: Michigan: method of treatment of pre-paid
memberships dues employed for Fed income tax purposes are purely
artificial. Allowed Commissioner to insist, under Sec 446B, to require
them to use the cash method.
Ct: Decided in favor of the govt. Difference in proof.
Dissent: agrees w/TP on meaning of Michigan.
Result: Accrual method TP is a cash method TP w/respect to membership
fees b/c accrual method of financial accounting involves mere estimates.
(Estimates aren't allowed based on MICHIGAN).
Accrual method involves estimates w/substantial financial activity.
To say that a method that involves estimates in allocating receipts for
income, is to rule out the accrual method.
Ct interprets the statute to have this meaning. (Sec 446B)
Accrual method always relies on mere estimates to allocate income.
Repeal of statute is an expression of legislative disapproval.
Not true, b/c only those who switched methods would have found this
TP's method is completely consistent. They take income into their
taxable income when they incurr the expenses, when they do the work b/f
pay. If they are paid b/f they do the work, then they include the amt
of income when they preform the services.
Ct: tried to distinguish AAA. Said in Boise, the services were in no
way dependent on request of client. (Irrelevent under Artnell.)
Further, it just isn't true. Bad Argument, irrelevant & untrue.
BOTTOM LINE: Accrual method is avail to TP's unless Commissioner
complains about it.
Only applies to auto clubs, to fix AAA case (fix the bad result),
but no section exists to fix the rest of the situations, ie. someone who
gives dance lessons.
Sec 446B must be consistent w/446A, & AAA is not the solution.
Indianapolis Power & Light Co:
Under AAA, fees are included in GI when they're rec'd.
Dispute: Whether payments can be characterized as pre-payments for
Ct: payments are pre-payments for services. Ct says the difference is
that in Indianapolis, they aren't in control of the money to do what
they want b/c the customers could request the money back if they met
certain conditions, distinguishable from the non-refundable payments
made by the customers in AAA.
GENERAL DYNAMICS CORP:
Accrual method TP. Whether medical expenses should be deducted at a
particular time, 'X'.
At end of yr Co. can predict how many claims will be made the
following yr based on medical attention rec'd by clients in prior yrs.
Must be estimated b/c don't definately know how many claims will be
The "all events test: all the events have occurred & w/reasonable
accuracy, essentially a factual issue."
Govt: not all events fixing liability have occurred, so haven't reas.
estimated the deductions.
Legal quest of liability of med expenses:
No obligation to pay expenses until employee has filed a claim.
Ct: Hughes Properties, Anderson, etc.
Hughes Properties involved payment of a jackpot. May never be
claimed, but Casino was allowed to deduct the loss.
Anderson: can deduct Federal Munitions tax b/f they were actually
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