Income: Acct'ing Sys., Canceled Debt, Windfalls, Annuity
K, Illegal Income, Damages, Basis, Realization, & Recog.
Annual Acct'ing Sys.
- Income During Yr.
- Prob's b/c
- Prog. tax
- Simple sit's
- Doc's 2 Handle Annual Acct'ing Sys.
- Net Operating Loss Deduction § 172
- Take deduction 4 busi. loss 3 yrs. back / forward 15 yrs.
- Compl'ed K Method Soln
- For longterm K, can use trxn'al approch 4 income
- Subst'l restriction
- Claim of Rt Doc.
- T had control & take under claim of rt. then income that
- If T restores subst'l amt held under claim of rt., can choose
yr. it was claimed as income if favorable tax rate by § 1341
- Only 4 item incl'ed before b/c seemed T had unrestricted rt.
- Can deduct if est'ed that T didn't have unrestricted rt. +
- Amt of deduction exceeds $3k
- Not cov. embezzlement / math error & knew the error
- Tax Benefit Rule
- Incl. aspect where if get tax benefit before but something
incompatible w/taking it occurs later, then income in later yrs.
- Excl. aspect where excl. recov'ed item from income if didn't
get tax benefit before
Cancellation of Indebtedness: § 61)a)12
- Income 4 Loans Not Paid Back
- Sit's When Not Pay Back
- S /L runs out
- Cancel debt
- Contested Liab. Doc.
- Agreed Amt as Debt
- If can't dec. amt of liab., then agmt btwn debtor & creditor
is actual debt
- Annuity K's
- Set amt of $ paid 4 partic. per., gen'ly life
- Straight Life Annuity
- Co. pays ins. & ins. pays benefic. until death
- Jt. & Survivor Annuity
- Smaller amt until both H & W dies
- Could have larger amt in beginning & smaller when 1 dies
- Life Annuity w/Term Cert.
- Paid 4 specified pers. of X instead of life
- Cash Refund
- Refund features
- Taxing Annuity
- Methods Not Used by IRS
- Income 1st where tax annuity by int.
- Investment 1st where all payments R consid'ed as payment 2
investment & defers tax
- Excl. Ratio by § 72
- GI not incl. amt received by annuity which is same ratio as
investment in K 2 expected return of K
- Multiple 4 expected return in Reg. 1.72-9
- So total investment / total expected return X return 4 the
yr. = excl. amt
- Short cut if total investment / expected return multiple
- Excl. & Dif. in Length of X Lived
- If live longer, excl'ed annuity from GI can't exceed unrecov'ed
investment in K so pay tax 4 all if outlive by § 72)b)2
- If die early, amt of unrecov'ed investment deductible 4 last
tax yr. by § 72)b)3
- Possibility of Deduction
- If Pay Back $ 4 Busi. Expense / Trxn 4 Profit
- Not Income If Intended 2 Pay Back When Took $
- Incl. 4 Income
- Punitive Damages
- Incl'ing from pers'al phys'al inj. / sickenss except 4 Alabama
- Lost Income
- Nonphys'al Inj. / Sickness Damages
Basis, Realization, & Recog.
- Investment in Asset / Prop. According 2 Tax Sys.
- Income on whatever exceeds basis
- Changing Basis
- Incr. 4 perm. improvement which incr. value but not 4 maintenance
- Decr. 4 depreciation deductions by § 1016
- Types of Basis
- Carry over basis 4 gift
- Donee's basis = donor's basis by § 1015
- If it's less than fair mkt value, basis is mkt value 2 det.
loss but only when prop. decr. in value
- Step up basis 4 getting prop. from decedent
- Fair mkt value of prop. @ death by § 1014
- Cost basis
- Initial cost of investing in asset / prop.
- Allocation of Basis
- If sell only part of rt. (like mineral rt), det. basis of
that rt. through prop. 2 fair mkt value & reduce approp. basis
- For part gift & sale trxn
- Seller recog. realized gain w/o apportioning basis
- Recipient's basis is higher of seller/donor's basis / recipient's
- For charitable contrib., apportion basis 4 gift & sale
- Det'ing Basis 4 Specif. Sit.
- Lessee's improvement in prop.
- Lessor's GI not incl. income 4 bldgs / improvements by lessee
by § 109
- Basis not changed 4 lessee's improvements by § 1019
- If negotiated in lieu of rent, then income & basis incr'ed
- Basis in marital rts = fair mkt value
- Incl's nonrecourse loans
- Buying depreciation deduction when prop. value much less
- No basis in prop. by buyer b/c seller keeps risk of loss
- Trxn 4 Tax Sys. 2 Notice
- Incl's sale, trade, exch's of dif. prop. but not if corp.
- Realized amt - basis = gain / loss
- Nonrecourse loan incl'ed in amt realized
- Can't Tax Unrealized Incr. in Pub. Trade Stock
- Gain v. Loss
- All realized gains recog'ed & reported unless code prov.
- All realized loss only recog'ed if specif. code
- Pers'al loss not recog'ed as deductible
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Law School Notes
December 8, 1997
Ms. Haeji Hong