Income: Acct'ing Sys., Canceled Debt, Windfalls, Annuity K, Illegal Income, Damages, Basis, Realization, & Recog.

Annual Acct'ing Sys.

  1. Charact's
    1. Income During Yr.
    2. Prob's b/c
      1. Prog. tax
      2. Simple sit's
  2. Doc's 2 Handle Annual Acct'ing Sys.
    1. Net Operating Loss Deduction § 172
      1. Take deduction 4 busi. loss 3 yrs. back / forward 15 yrs.
    2. Compl'ed K Method Soln
      1. For longterm K, can use trxn'al approch 4 income
      2. Subst'l restriction
    3. Claim of Rt Doc.
      1. T had control & take under claim of rt. then income that yr.
      2. 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
        1. Only 4 item incl'ed before b/c seemed T had unrestricted rt. /
        2. Can deduct if est'ed that T didn't have unrestricted rt. +
        3. Amt of deduction exceeds $3k
        4. Not cov. embezzlement / math error & knew the error
    4. Tax Benefit Rule
      1. Incl. aspect where if get tax benefit before but something incompatible w/taking it occurs later, then income in later yrs.
      2. Excl. aspect where excl. recov'ed item from income if didn't get tax benefit before

Windfalls

Cancellation of Indebtedness: § 61)a)12

  1. Income 4 Loans Not Paid Back
    1. Sit's When Not Pay Back
      1. S /L runs out
      2. Cancel debt
  2. Contested Liab. Doc.
    1. Agreed Amt as Debt
      1. If can't dec. amt of liab., then agmt btwn debtor & creditor is actual debt

Annuity K

  1. Types
    1. Annuity K's
      1. Set amt of $ paid 4 partic. per., gen'ly life
    2. Straight Life Annuity
      1. Co. pays ins. & ins. pays benefic. until death
    3. Jt. & Survivor Annuity
      1. Smaller amt until both H & W dies
      2. Could have larger amt in beginning & smaller when 1 dies
    4. Life Annuity w/Term Cert.
      1. Paid 4 specified pers. of X instead of life
    5. Cash Refund
      1. Refund features
  2. Taxing Annuity
    1. Methods Not Used by IRS
      1. Income 1st where tax annuity by int.
      2. Investment 1st where all payments R consid'ed as payment 2 investment & defers tax
    2. Excl. Ratio by § 72
      1. GI not incl. amt received by annuity which is same ratio as investment in K 2 expected return of K
      2. Multiple 4 expected return in Reg. 1.72-9
      3. So total investment / total expected return X return 4 the yr. = excl. amt
      4. Short cut if total investment / expected return multiple
    3. Excl. & Dif. in Length of X Lived
      1. 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
      2. If die early, amt of unrecov'ed investment deductible 4 last tax yr. by § 72)b)3

Illegal Income

  1. Possibility of Deduction
    1. If Pay Back $ 4 Busi. Expense / Trxn 4 Profit
  2. Embezzlement
    1. Not Income If Intended 2 Pay Back When Took $

Damages

  1. Incl. 4 Income
    1. Punitive Damages
      1. Incl'ing from pers'al phys'al inj. / sickenss except 4 Alabama
    2. Lost Income
    3. Nonphys'al Inj. / Sickness Damages

Basis, Realization, & Recog.

  1. Basis
    1. Investment in Asset / Prop. According 2 Tax Sys.
      1. Income on whatever exceeds basis
    2. Changing Basis
      1. Incr. 4 perm. improvement which incr. value but not 4 maintenance
      2. Decr. 4 depreciation deductions by § 1016
    3. Types of Basis
      1. Carry over basis 4 gift
        1. Donee's basis = donor's basis by § 1015
        2. If it's less than fair mkt value, basis is mkt value 2 det. loss but only when prop. decr. in value
      2. Step up basis 4 getting prop. from decedent
        1. Fair mkt value of prop. @ death by § 1014
      3. Cost basis
        1. Initial cost of investing in asset / prop.
    4. Allocation of Basis
      1. If sell only part of rt. (like mineral rt), det. basis of that rt. through prop. 2 fair mkt value & reduce approp. basis
      2. For part gift & sale trxn
        1. Seller recog. realized gain w/o apportioning basis
        2. Recipient's basis is higher of seller/donor's basis / recipient's cost basis
        3. For charitable contrib., apportion basis 4 gift & sale
    5. Det'ing Basis 4 Specif. Sit.
      1. Lessee's improvement in prop.
        1. Lessor's GI not incl. income 4 bldgs / improvements by lessee by § 109
        2. Basis not changed 4 lessee's improvements by § 1019
        3. If negotiated in lieu of rent, then income & basis incr'ed
      2. Basis in marital rts = fair mkt value
      3. Incl's nonrecourse loans
      4. Buying depreciation deduction when prop. value much less
        1. No basis in prop. by buyer b/c seller keeps risk of loss
  2. Realization
    1. Trxn 4 Tax Sys. 2 Notice
      1. Incl's sale, trade, exch's of dif. prop. but not if corp. div's stock
      2. Realized amt - basis = gain / loss
        1. Nonrecourse loan incl'ed in amt realized
    2. Can't Tax Unrealized Incr. in Pub. Trade Stock
  3. Recognition
    1. Gain v. Loss
      1. All realized gains recog'ed & reported unless code prov. non-recog.
      2. All realized loss only recog'ed if specif. code
        1. Pers'al loss not recog'ed as deductible

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December 8, 1997

Ms. Haeji Hong
 1