9/18
Chapters 9- Discharge of Indebtedness.
Is forgiven debt income?
$61 (a) (12) specifically includes in gross income, discharge of indebtedness.
Sometimes, discharge of indebtedness can be treated as a gift,
108(a) describes insolvency exclusion- not gross income if
a) in a Title 11 case
b) while taxpayer is insolvent
c) qualified farm indebtedness
d) in the case of a taxpayer other than a C corporation, the indebtedness discharged is qualified real property business indebtedness.
108 covers all discharge of indebtedness income.
108 (e) (5) is retroactive purchase price reduction
108 (e) (2) is exception for deductible items
108 9e) (4) is related party rules
Bowers, sup ct considered whether a taxpayer who borrowed $ repayable in marks received income when it repaid the loan with devalued marks. No, that was $ lost in a business venture, the mere diminution of loss is not gain, profit, or income.
Kirby, repayment of corporate debt at less than its face amount constitutes income.
There was a clear gain, increased net worth, how are these things distinguished?
There's a freeing of assets theory, taxpayer realises gain when a debt is discharged. Bowers- borrowed funds lost in unsuccessful enterprise. Loans aren't income because there's an obligation to repay, when the obligation isn't there anymore, then it's income.
A leases a building from B and can't pay b/c of insolvency. A agrees to pay some of what's in arrears and then B agrees to cancel balance and reduce future rent. Is this income if A remains insolvent?
Dallas Transfer, There was no income, 'cos discharge of debt did not result in payer having something of exchangeable value in addition to what he had before.
,
9/25, IRAs or fringe benefits.
He was saying that this is an interesting time for those of us who have invested all of our money in gold, well, I invested all my money in horrible old GM rwd cars.
Something about deductible, you have an exclusion for contribution amount to IRA.
Deductible: Above the line deduction,
Caps and income phase outs (there's a limit to deductions, and above a certain income line, you don't get to deduct anymore)
As you accumulate earnings across all three, they aren't taxable in the year in which they are realised. (not additions to capital)
Distributions, however, are taxable under the annuity rules
Mandatory withdrawal
Early distribution penalty.
Nondeductible IRAs
No immediate tax advantage
Deferral rule, built in increases not taxable until withdrawal
Distributions taxable under annuity rules
Mandatory withdrawal
Early distribution penalty. (when would you use this? When beyond cap or have exceeded income requirements)
Roth: Qualifying distributions are nondeductible. (on the others the distributions were always taxed) Qualifying distributions are excludable for gross income, essense of Roth IRA. There's an age requirement and also a 5 year holding requirement. Problem, see Chapter 8 p 157.
To solve this, start with 219 g 1. Ron does not get to use deductible IRA, he apparently makes too much money. Start with 219 b 5 a. In general, deductible amount is 5K for 2008 and thereafter. He's also attained age of 50 so has catch up provision of 1K, so he can contribute up to 6K and get an above the line deduction, an exclusion from income up to 6K. But Ron's going to be phased out 'cos of 219B5B , and then 219 g something and 219 3 g, something. He makes too much $ and is already covered by a pension plan. Mary won't bust the cap on income, 219G7 but she does have a reduction in the amount she could otherwise contribute. She gets about a 2K deduction. Her income exceeds cap by 5K so she gets half of that.
B for Problem 1, non deductible, Ron can contribute 6, Mary can contribute 5, she doesn't get catch up provision.
408 a and 408 c for Roth, Ron can contribute up to 3K and Mary up to 2500. Their roth contributions are cut by 50% because they exceed income cap. (wouldn't you want to fool with gross income to adjust it downwards? yes, that's a planning issue, you could defer a lot of different things) 408 d 2 defines something important.
A contribution that is tied to a qualifying distribution.
COD- discharge of indebtedness? We know this from some section of 61, we know this from Kirby lumber, freeing up of assets. Loan equals cash and then debt on the other side. 61 a 12, the discharge of indebtedness leads to freeing up of asset. There's also a tax benefit rule theory. We can't go back and amend to correct if in year three, the debt goes away.
Now he's talking about insolvency, that's a tax logic rule. Hmm, it's 7, we've had an hour of this, that means an hour and three quarters. Tax benefit rule is the better approach, but In year 1, you borrow 100$, then in year 3, you can't pay it back, you don't have any $, but when creditor files it as a bad loan, then you have to file it as income. It's as though you had undeniable accession to wealth, and it's not a gift.
Reduction or forgiveness of student loans is accession, Unless it's for public interest work, teaching and now law.
Discharge of indebtedness is income to debtor, $61 a 12,
Certain exceptsions $108 a 1, Gross income does NOT include any amount which would be includible in gross income by reason of the discharge of indebtedness of the taxpayer if a) the discharge occurs in a title 11 case, or b) the discharge occurs when taxpayer is insolvent (is this because of that whole debtor's prison thing?)
If Cancellation of Debt income is excluded from gross income, then- reduction in debtor's tax attributes- any remaining Cancellation of debt income, i.e. after exhausting all tax attributes) is not included in gross income, but instead disappears- (what are tax attributes? Deductions that end up getting zeroed out)
Exclusions: gift exception, I've "lent" $ to Julio, and cancel debt. Detached and disinterested generosity means that it's a gift and no income. Buyer seller, I sell Alex Moby Dick for $2000, and then have to adjust purchase price downward, as long as taxpayer is solvent, then basis changes and doesn't give rise to cancellation of indebtedness income.
student loans, as long as qualified student loans.
Lost deduction,
Chap ? 10? Compensation for Injury and Sickness. There's an undeniable accession to wealth in punitive damages. 5 rules in slides. Income is an undeniable accession to wealth per Glenshaw glass which was in fact a punitive damages case.
Rule 1: Damages awarded on account of lost profits are Gross Income (in lieu of taxable income, profit)
Rule 2: Recovery for property damage is measured against the basis of property to determine gain or lsos
Rule 3: Damages to recover portion of goodwill are a return of capital and are excluded from Gross Income
Rule 4: Conversion of property to cash, however, may result in the recognition of gain (We'll buy your home, buy income producing property, generally in commercial context, both pl and def have some sort of commercial relationship or the damage is directed at property.)
Rule 5: Damages received on account of personal physical injuries are excluded from gross income.
Rule of exclusion: sickness damages etc, not taxed, but an economist would
Rule 5: Damages received on account of personal physical injuries or sickness is excluded from Gross Income.
Raytheon : gives us the in lieu of test. That's what we use to deal with Prob 1 of chapter 10.
Rule 104 a 2, excludes from gross income any damages received, whether by suit or agreement, as a lump-sum or periodic payment, on account of personal physical injuries or sickness (that is, tort or tort type rights) Typical cases: Battery, Title 7, Typical exceptions to exclusion: Emotional distress, punitive damages.
GR: key is to show origin of claim lies in a physical injury and the claim is no otherwise grouped under emotional distress. Thus, law excludes all the damages intended to compensate a taxpayer for a physical injury and the consequences, including economic consequences, flowing from that injury.
Accident and health insurance, 104 (a)(3) not includable if it's not financed through/by taxpayer's employer.
methodology: Key: Allocation:
Payments for pain and suffering!
Is there a personal injury?
Are there damages?
See problem P 181, he gets 900K, 500K for pain and suffering, 100K in reimbursed medical expenses, 50K in future med expenses, 80K in lost income, 150K in punitive damages, and 20K in damages to truck. He paid 10K already and got a deduction for 6K of it, the remaining 90K was paid by HIS health ins co. Ah! And we see the tax consequences of the way a lawsuit is pled, what's excludable and what isn't.
some things are excludable under 104 a 2- then you go back to section 61, undeniable accession to wealth = gross income, now 104 a 2, and see, amount of damages other than punitive, so punitive will be gross income. Personal physical injury and sickness. So for pain and suffering, do we have a physical injury/sickness? Yes. Are there any damages? Start by looking at text of settlement. -1-c regs. Can you infer there are damages from future medical expenses? Yes, so this is excludable.
Even if it's IIED damages that manifest themselves in a physical way, still included in gross income.
Do I go there or does I goes home?
Now he's talking about structured settlement brokers, and annuities, and a bunch of them go under and if you are the plaintiff and win the $, and then you are SOL. You have signed release of liability.
Step 1- do you have physical injury, 2- damages 3- damages received on account of personal physical injury.
Under this analysis, the 500K entirely excluded. Reimbursed med expenses of 100K, generally excluded, but then there's qualification under 104, referring to 213. He can't get the 10K he's paid and deducted, this has to be taken into income. No, deduction of 94K, or wait, reduce by amount already deducted. Future med expenses are clearly excluded, lost income is excluded, not the source or category of award, but this is the result of personal physical injury. It's irrelevant that it replaces wages because it results from personal physical injury. Must meet three part test, physical personal injury, damages, and then damages result from physical/personal injury. The pickup truck does not meet requirements of damage to you.
Fringe Benefits. We're most concerned with disguised income. We don't want employers to move into the category of moving compensation and calling it fringe benefits. So there are three ways, one which is not valid, a fringe benefit is a gift, and we know no such thing. Other is they are includable in gross income 'cos undeniable accession to wealth, or they're excluded b/c of policy.
What's a fringe benefit: An economic benefit, other than a cash salary or wages, that is provided to (see slide)
Presumably accession to wealth.
Exceptions to general rule to include fringe benefits in Gross income:
Qualified fringe benefits: meals and lodging
no additional cost services (free Kaplan class for employee)
qualified employee discounts
working condition fringe
de minimis fringe (unlimited office supplies)
Qualified transportation fringe (public transit pass)
On premises athletic facilities
Qualified tuition reductions (6)
Qualified moving expense reimbursements (19)
119, exclusion for employee for meals and lodging provided on the employer's premises, does not include cash allowance, must be meals, can include employee, spouse, and dependents. Lodging must be furnished on the employer's business premises at the convenience of employer and as a condition of employment, housekeeper,etc.
Section 132 all the others, no additional cost service, qualified employee discount, working condition fringe, etc.
Elements of no additional cost, like - if you reserve something, then that's not a no additional cost services, once they've reserved the seat, it's compensation. There's an additional step. Delta and American can cut a deal to allow reciprocal agreements for employees all in the same industries. If it's not qualified, it's gross income. Lady in example works for holding company, so all the subs as well.
Whenever payer buys goods or services for less than FMV as form of compensation, then the difference is included in income unless the difference qualifies as a recognised employee discount.
If the difference btw the FMV of the property/services and that what the taxpayer paid is a qualified employee discount, then a taxpayer does not take the difference into income, basis in property = fmv.
Then there's a slide about qualified employee discount, and you can't sell it for less than what you paid for it.
10: Compensation for injury/Sickness
$62 (a) 20, e, 104 (a,c) 105 9-c, 106 a.
Sections 104/5 exclude from gross income certain amounts received on account of personal physical injury or sickness.
106 a excludes from income of employer provided coverage under health and accident plans.
Raytheon defines what is deductible and what is not. lost profit damages are taxable, property damage loss is measured against basis of property to determine taxpayer's realised gain or loss. Antitrust suit damages are taxable, because for ordinary income and loss of profits. If the suit is NOT for lost proftis but for injury to good will, then it's return of capital and not taxable.
(Certain kinds of loss events equate to realisation events)
104(a) (2) Except for (ya ya ya) gross income does not include 1) amounts received under worker's comp as compensation for personal injuries or sickness, damages, other than punitive, on account of personal physical injuries or sickness, or amounts received through accident or health insurance for personal injuries or sickness,
This distinguishes between personal physical injuries and all other injuries, including non-physical injuries and injuries to one's business or property.
If you allow someone to do something otherwise tortious, then you can't get damages, ex, if taxpayer gets paid for giving blood, she can't claim that payments constituted damages for personal injuries she incurred in giving blood.
Burke, see if it's a tort-type personal injury. Then these damages for tort are not damages received on account of personal injuries.
commissioner v. Schleier.
, 11: Fringe benefits
Chapters 12: Business and profit seeking expenses $162 is the primary business deduction in the code, and states: (a) In general, There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including
1) a reasonable allowance or other compensation for personal services actually rendered
2) traveling expenses including amounts for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business.
3) rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the tzxpayer has not taken or is not taking title or in which he has no equity.
b) no deduction allowed for gifts or charitable contributions which exceed restrictions,
c1) can't deduct bribes, or other illegal payments. Or medicare/medicaid bribes.
Can't deduct for lobbying expenses.
Business deductions provide that net, rather than gross income, should be taxed. "personal" expenses not deductible.
What's a business expense- generally anything incurred in producing income. Reg 1.61-3(a) says, gross income = total sales - cost of goods sold.
Review $162a, 1) cost must be an "expense", 2) expense must be "ordinary" 3) it must be "necessary" 4) it must be paid or incurred during the taxable year, and 5) it must be paid or incurred in "carrying on" a "trade or business"
"ordinary" Welch v. Helvering, customary or expected in the life of a business. (payments made by a taxpayer to creditors of bankrupt employer NOT deductible)
Jenkins v. Commissioner, Conway twitty allowed to deduct as business expense amounts he repaid to investors in his defunct fast food venture, Twitty Burger. Can one person, Conway Twitty, deduct the expenses of another person, Twitty burger? we must (1) ascertain the purpose or motive of the taxpayer in making the payments and (2) determine whether there is a sufficient connection between the expenditures and the taxpayer's trade or business.
Respondent said no, there wasn't any business purpose in his reimbursing these people and also he had no involvement. Twitty/Jenkins sez; I wanted to protect my rep as a country music singer. Just 'cos he didn't HAVE to make the payments doesn't mean that it isn't deductible.
"ordinary" to be distinguished from capital expenditures such as reputation (goodwill) or learning.
Anyway, you can't pay insurance on the president and expect to deduct it.
Gilliam, taxpayer has fit on airplane and then has to pay $$, wants to deduct legal costs etc. Commission says, you shouldna had a fit. Not ordinary.
Dancer, taxpayer wanted to deduct costs incurred in negligence action from car accident while traveling on business. Yah this didn't further business in any economic sense, but there's a direct relationship between the expenditure and the business.
Is it necessary? Palo Alto Town and Countr Village, Inc. v. Commissioner, maintaining airplane on standby basis was necessary cost. Although not used with sufficient frequency, saved a pile of $ on a couple of occasions, and it was appropriate and helpful to the business. But in Henry, ct decided that Yacht with "1040" pennant was not a good deduction.
I really want to tell (my friend) that her dress makes her chest look, ah, particularly imposing, but I do not think she will like this.
$162 a/m
Ordinary and necessary
Trade or business
$195
$212.
-13, 9/25
