Chapter 2
Does she have to report her salary of 150k/year? Take-home pay was only 100k, 30k to federal income taxes, 11k to social security, and 9k for state income.
She must report all 150k, even the parts taken out are ultimately benefitting her and going to what she will owe.
A $2,000 reward. Marcella found a purse and then turned the purse in. For her good deed, she was rewarded 2k.
Yes, report. because wealth duh
Mark owns a private garbage collection service. Mark sends bills to his customers on the first of every month. If Mark has not received payment within 20 days, he sends a second billing. By the time some customers receive the second billing, they have already paid for the first and mistakenly send more money.
When that occurs, Mark applies a credit balance to the account and then applies it when the next month comes around. A customer may instead to elect to get a refund for that amount. In Dec, Mark is holding 5k in overpayments. For which year should they apply?
Mark should report this income NEXT year when come to fruition, as customers still have complete control to get money back. CONTROL
Maggie purchased a summer home for 500k, 100k of her own funds and 400k from the bank .
(d) two years after remodeling the home. Maggie, who had never used the home as her PR, sold it. Purchaser paid 300k in cash and assumed the 400k mortgage balance.
How much gain has Maggie realized?
What basis will the purchaser take in the home?
Maggie: GAIN : “realized 700k - the adjusted basis of 575k: 125k”
the purchaser takes a 700k basis
At the request of her frail elderly father, Maria moved out of her apt to live with him to care for him. At the time of the request, her father indicated that he would devise his home to her for this. Maria said there was no need to do so, as she was the most available of her siblings. When her father died, he devised the home to Maria, in gratitude of her care, and gave the balance of his estate equally to maria and her siblings. What tax consequences?
IRS argument: will say compensation for services because Maria helped Lawrence last few years of his life, and because of that, Maria got the home. “In gratitude for her care.” and he told her that beforehand.
Maria argument: parent-child relationship, and she told him he didnt need to do that, lived nearby, and still left equal shares to her siblings.
Marcella receives a year-end bonus of 5k in recognition of her work. Report?
Yes, because undeniable accession to wealth/
dominion
Savings from her self-representation in legal fees. maybe 10k.
No, do not have to report self-help/ imputed income.
Kevin owns rentals. Kevin requires a security deposit equal to one month's rent. The rental agreement used by Kevin specifically provides that security deposits will be applied (a) to compensate Kevin for property damage or (b) to cover unpaid rent. If a tenant complies with his terms, Kevin will return the security deposit. (He does not keep a separate bank account for this). Kevin rarely actually returns these as most just apply it to their last months rent. How should he treat this deposits?
Wait to report,
Kevin does not control money, customer does. Deposit, not income. Customer can say whether it applies to last months rent or not. Tenant still has complete control
Claire, a collector of modern art, owes Liz $6,000 in legal fees. Liz purchases one of Claire's paintings for 6k. Claire uses the 6k to pay the legal fees to Liz. 5 years later, the painting has increased in value, and Liz sells the painting for 10k.
Tax consequences?
Alternatively, assume that Liz, instead of paying 6k for the painting, instead just accepted the painting as payment. Assume as before, she sells the painting for 10k.
Tax consequences?
part one: Liz buys the painting, has a 6k basis in painting, 10k-6k: 4k gain. Must pay the tax on her 4k.
She also must pay the tax on the +6k in cash for her services
Alternatively: Her basis in the painting stays the same, 6k basis in painting (given for her services), legal fee of 6k =painting value of 6k.
Once she sells, 10k-6k still=4k gain.
Years ago, Dan purchased for investment purposes, a tract of undeveloped land for 100k. This year, Dan deed the land to his son, Will , as a gift. The land had a FMV of 250k, and an adj basis of 100k for Dan.
(a) would either dan or will recognize income on the transfer? What basis will Will have in the land?
(b) How, if at all, would your answer change if to (a) if Dan was also Will's employee?
No, idky. Basis of 100k
102(c)/ reg 1.1021f2: “was not made in recognition of employer’s employment” “if can be contributed to familial relation” . nothing changes
Marcella purchased a walnut bookcase for $150 from the firm. FMV of $400. One of 15 bookcases sold at a similar price to other employees there.
No, don't have to report it. It was more of a bargain purchase, not a company benefit.
GAIN =
AMOUNT REALIZED - ADJUSTED BASIS
Maggie purchased a summer home for 500k, 100k of her own funds and 400k from the bank .
(a) what basis will Maggie have in the summer home?would your answer change if she paid 100k down and agreed to pay off the 400k in a payment plan?
Her basis is 500k, either way. Her basis is what it cost her.
Philadelphia Park Amusement Co. v. United States takeaway (contrary to $1020):
the cost basis of the property received in a taxable exchange is:
the fair market value of the property received in the exchange (not the value of whatever they had relinquished, NOT whatever you gave up for it).
Years ago, Dan purchased for investment purposes, a tract of undeveloped land for 100k. This year, Dan deed the land to his son, Will , as a gift. The land had a FMV of 250k, and an adj basis of 100k for Dan.
(c) How would your answer change if instead of giving the land as a gift,
Dan sold it for 50k?
What about 200k?
(1) part gift, part sale: he had basis of 100k and sold for 50k. Loss not recognized. Loss of 50k. Now, Will’s basis will be in hands of last purchaser: 100k.
(2) Dan had basis of 100k, sells for 200k. Gain of 100k. Basis for Will will be 200k. Then Dan will pay taxes on the 100k he gained from the sale.
Mandatory retreat to a popular ski resort, 3-day retreat, skiing in the morning, meetings in the afternoon. Firm paid for transportation, meals, and lodging. Approx 2,500
No, required by work, not a reward/compensation. The firm will already get to deduct the expenses
Mitch purchased stock in XYZ Corp in Jan of Year 1: 1k. At the end of Year 1, value was 1.5k, Year 2, offered 2k but declined. Year 3, value of 2.5k. Mitch borrowed 2k from bank and pledged stock as collateral. Year 4, he paid back the loan. Year 5, Mitch used his stock, now worth 3k to satisfy a debt to a creditor. Does Mitch have gross income, when?
INCOME: 3k realized total - basis paid (1k)= gain of 2k
A realization event occurred in Year 5
Maggie purchased a summer home for 500k, 100k of her own funds and 400k from the bank
(b) assume during the five years following the purchase of the home, Maggie made principal payments totaling 100k on the mortgage. The mortgage is now 300k. How does this payment affect her basis in the summer home?
It doesn't, basis is still 500k.
Elizabeth, solo law practice receives the following:
(a) 10k Rolex from a major corporate client with a note "happy holidays , we want you to have this as a small appreciation for commitment to the rule of law."
(b) $100 holiday gift basket of cheese and crackers and stuff from the CEO of a nonprofit that she volunteers for
(C) $50 gift certificate to an organic food store from a voter who liked her generosity
(a) $102, tax, falls under compensation, not a gift… there is clearly interest and attachment
(b) 132(a)(4), de minimus fringe benefit? IRS will lose according to something called dominimous fringe benefit
(c) total gift. Real detached generosity
Years ago, Dan purchased for investment purposes, a tract of undeveloped land for 100k. This year, Dan deed the land to his son, Will , as a gift. The land had a FMV of 250k, and an adj basis of 100k for Dan.
(d) how would your answer change if Dan's land was encumbered by a mortgage in the amount of 125k, and Will agreed to assume the mortgage?
If Will agrees to take over 125k mortgage. Then, yes, Dan will gain 25k from the sale. Will will pay the full 125k. So amount realized- adjusted basis. Then Will’s basis is 125k.
A small greenhouse worth $2,500 was constructed on Marcella's property by her brother, Bill. Bill insisted on making this greenhouse as a way of thanking her for the legal work that she performed for him for free.
No, the exchange of services can cancel each other out. Can say equal value, so nobody made income. OR possibly a gift. But James like #1.
Case which provided: "undeniable accessions to wealth, clearly realized, and over which taxpayers have complete dominion"
GLENSHAW GLASS
Maggie purchased a summer home for 500k, 100k of her own funds and 400k from the bank.
(C) after reducing the mortgage to 200k, Maggie refinanced and borrowed an additional 250k from the bank. 75k to remodel the summer home. 50k for a european trip, and 125k for a tract of land she is holding for an investment.
What is her basis in the summer home?
What is her basis in the land?
575k basis in home. 500k basis + 75k improvements.
125k in land. the cost of the land
Gift:
disinterested generosity
Years ago, Dan purchased for investment purposes, a tract of undeveloped land for 100k. This year, Dan deed the land to his son, Will , as a gift. The land had a FMV of 250k, and an adj basis of 100k for Dan.
(e) Assume that Dans land was worth only 90k when he made the transfer. What tax consequences to Will when he subsequently sells for 90k, 80k, 95k, 110k?
(f) Assume Dan devised the land to Will and the land had a FMV of 250k at the time of Dans death. Tax consequences of land? What basis does Will have?
(g) What about if the FMV was 75k at time of death?
(h) Assume, Dan gave the land to his father, George when it had a FMV of 250k. George died 2 months later, and devised the land to Will (still at 250k FMV). What basis will Will have?
3(e):when we have land that goes down in value .. Basis for loss and basis for gain.
B4L: FMV at time of gift B4G: price at hands of last purchaser.
(1) no gain, no loss. end of story (2) “10,000 loss”, but you dont recognize a loss. It disappears sorry. Something about this part wrong, mentioned in class next week. (3) no gain, no loss. (4) gain of 10,000.
3(f): take it at FMV of time of decedent's death, 250k, at death transfer. Code tell us that. No taxes because death is not a realization event like a sale.
3(g): 75k dollars, FMV at time of decedents death.
3(h): didnt go back to donor or donor’s spouse, so 1014(e) doesnt apply. 250k basis.