Basic Tax For Lawyers

The legislatrue enacts the tax code via the powers given to it in the constitution.

The executive Branch enforces the code via the IRS.
--the IRS dies theis via regulations, revenue rulings, and private letter rulings

The judicial branch: three seperate courts that interpret the code

a) Three separate trial courts interpret the code:
(1) Local Federal District Courts
(a) Appeal to Court of Appeals
(2) United States Tax Court
(3) United States Court of Federal Claims
(a) Appeal to Court of Appeals for Federal Circuit (12th Circuit)

The Financial Accounting Standards Board (FASB) establishes and impoves standards of financial accounting and reporting for the guidance and education of the public.

They do this through Generally Accepted Accounting Principles (GAAP) and Generally Accepted Auditing Standards (GAAS). Federal statements not filed in accordance with GAAP will be considered misleading or inaccurate despite footnotes.

a) A statement of an entity’s current financial position, disclosing the value of the entity’s assets, liabilities, and owners’ equity.

(1) Assets
(a) Current Assets – can quickly & easily turn it into cash
(i) Cash and cash equivalents
(ii) Marketable securities (stocks)
(iii) Accounts receivables (people owe you money that you
will receive within the year)
(iv) Inventory
(v) Prepaid Expenses (EX: paying year’s rent in advance…then reduce each month by that month’s expense until at end of year it is zero)

(b) Non-current Assets
(i) Long-term investments
(ii) Property, Plant and Equipment
(iii) Intangible Assets
(a) Goodwill
(b) Patents, Copyrights, Trademarks

You can balance the asset side without needing to balance the liabilities (EX: when you buy inventory, cash goes down but inventory goes up…total doesn’t change, so no need to change liabilities). BUT if you change the asset side, you must adjust the liabilities side to balance.

(a) Current Liabilities
(i) Debt payments due within one year (i.e. a loan)
(ii) Account payables (i.e. a payment you own every month, etc.; or a ‘tab’ between business that you owe EX: I make cars, you make wheels, you just gave me 10K wheels and I own you)
(b) Long-term
(i) Long term debts
(ii) Pension and post-retirement obligations (company putting defined contributions in EE’s plans)
(iii) Commitments
(iv) Contingencies- if future event is probable & amount can be reasonably estimated
(a) But… until there is some type of certainty that potential lawsuits may arise, we don’t have to put this here so there is a lot of wiggle room in valuating companies

(3) Equity – the “net value” (Assets – Liabilities)
(a) Depends on type of entity:
(b) Corporation:
(i) Stockholders’ or Shareholders’ Equity
(a) Contribution Accounts:
(i) Capital Stock/Stated Capital (Using Par Value)
(ii) Additional Paid in Capital (Surplus)
(b) Earnings Accounts:
(i) Retained Earnings (Net Income)
(ii) Accumulated Other Comprehensive Income and Gains (Misc.)
(c) Partnership:
(i) Individual Partners Capital Accounts
(d) Sole Proprietor:
(i) List contributions separately from earnings or combine

a) A statement of all the revenues, expenses, gains, and losses that a business incurred during a given period.
b) Statement of operation results for a period
(1) Show profit or loss for the period
(2) Profit or loss is the change in net worth of the entity as a result of operations
c) Components of Income Statement
(1) Operating Income
(a) Receipts from sale of inventory &/or from providing services
(i) i.e. gross profit (gross sales –COGS)
(b) Less operating expenses
(2) Other income/loss
(a) Investment activities
(b) Sale of assets

a) Statement of all changes in cash in a defined period of time
(1) Creditors like these…shows how much cash you have on hand
b) Shows Change in cash as a result of
(1) Operating Activities
(2) Investment Activities
(3) Financing Activities
c) Statement is essentially just a tracking of the checking account

a) Show increase or decrease in earnings retained during the period
b) Show changes in capital (or owner contribution) accounts

3. Income Statement (Profit/Loss Statement)
a) A statement of all the revenues, expenses, gains, and losses that a business incurred during a given period.
b) Statement of operation results for a period
(1) Show profit or loss for the period
(2) Profit or loss is the change in net worth of the entity as a result of operations

(1) Operating Income
(a) Receipts from sale of inventory &/or from providing services
(i) i.e. gross profit (gross sales –COGS)
(b) Less operating expenses
(2) Other income/loss
(a) Investment activities
(b) Sale of assets

a) Statement of all changes in cash in a defined period of time
(1) Creditors like these…shows how much cash you have on hand
b) Shows Change in cash as a result of
(1) Operating Activities
(2) Investment Activities
(3) Financing Activities
c) Statement is essentially just a tracking of the checking account

a) Show increase or decrease in earnings retained during the period
b) Show changes in capital (or owner contribution) accounts

1. Not a guarantee
a) Management prepares the statements
2. Auditors search for improper procedures and material misstatements.
a) Test procedures and assertions used in preparing statements
b) Try to provide reasonable assurance as to fair presentation of information
c) If they find something, must include in an opinion…or fire the client

a) REMEMBER: These numbers mean nothing standing alone!
b) You must compare these ratios to the industry as a whole and/or specific competitors, etc.

an INCOME STATEMENT CALCULATION

gross profit/net sales (calculate using numbers from an income statement)

OR sales-COGS/ sales

(a) Gross Profit: gross sales – cost of goods sold (will probably be on the income statement)
(b) Net sales/gross sales/net revenue: first number on income statement

(2) Generally speaking, you want this number to be high!
(3) (And again compare to the industry!!)

A BALANCE SHEET calculation

(1) Current Ratio: current assets/current liabilities (calculate using numbers from a balance sheet)

(a) Generally you want this number to be high also

: total debt/total equity or current liabilities/current equity (calculate using numbers from a balance sheet.

(a) Generally speaking you want this number to be a fraction below 1 (better than a 1:1 ratio, but it depends on the industry!!...some industries (financial institution) a 10 or 20:1 would be ok b/c they have to borrow to operate)

Interest Rate X Yrs. = 72

ex. at an interest rate of 18% it would take 4 years for my money to double

ex. If i wanted my money to double in 6 years, i would need an interest rate of 12%

Tax Liaility =

Gross Income - Above the Line Deductions - Personal Exemptions - (The Greater of Itemized Dedeuctions or Standard Deductions) X Tax Liability + (Net Capital Gain X Capital Gain Rate) - Credits

3. Adjusted Gross Income = Gross Income – Authorized Deductions
a) Once you know AGI, then you consider below the line deductions.
b) If any qualify, then you take the portion that qualifies and compare it to Standard Deduction—deduct the greater of the two from AGI
c) Then deduct Personal exemptions from new AGI (3,500K for each person)
d) Now you have the total that will be taxed according to your particular tax rate (see 2008 rates)

1. Gross Income Defined
a) (§61) All income from whatever source derived
b) § 1.61-1(a) – (a regulation) GI means all income from whatever source derived, unless excluded by law. GI includes income realized in any form, whether in money, property or services.
(1) i.e. any benefit received, unless excluded by law

(1) Elements of Gross Income:
(a) Undeniable accession to wealth;
(i) Any transaction that results in an increase in net worth.
(b) Clearly realized; and
(c) Taxpayer has complete control.

a) Treasure Trove is taxable income to the extent of its value in US currency for the taxable year in which it is reduced to undisputed possession. – Cesarini v. US
(1) Ex: Finding money in a piano

b) Payment by Employer of the income taxes assessable against the employee is taxable income – Old Colony Trust Co v. Comm.
(1) Payment of the tax by the employers was in consideration of the services rendered by the employee and was a gain derived by the employee for his labor
(2) Payment for services, even though entirely voluntary, is nevertheless compensation w/in the statute.

e) Unlawful as well as lawful gains are comprehended w/in the term “gross income”

c) Punitive Damage Awards are taxable gross income. – Comm. V. Glenshaw Glass

f) Bartering IS included in gross income.
(1) If services are paid for other than in $, FMV of property or services taken in payment must be included in income
(a) If services were rendered at a stipulated price, such price will be presumed to be FMV of the compensation received in the absence of contrary evidence.

d) Frequent Flier Miles = GENERALLY NOT Gross Income
(1) Frequent flier miles generally - outside of this kitty situation in Charley. IRS treats this as a reduction in purchase price, not as income; even if use for personal use when your company purchases original ticket. (or just it is a benefit, but too much trouble to track…)
(2) Charley v. Comm. – Income derived from funny business of travel expenses billed to client for 1st class, but booked coach, & used frequent fliers to upgrade is Gross Income
(a) Here π was essentially overcharging client & Trading/selling his frequent flyer miles for cash to his company.


(1) Borrowing Money
(a) Get loan, put it in your account – This is not GI b/c the money in your account is balanced with the new liabilities
(2) Buying Asset (ex: stock)
(a) No income → We are just changing categories in the asset section; now a different type of asset
(b) What if stock increases in value
(i) At this point, net worth hasn’t gone up b/c haven’t sold the stock and realized it. Not income until we take it out and sell it.

2. § 102 - Gifts and inheritances.
a) General Rule – Gross Income does not include the value of property acquired by gift, devise, or inheritance (tip: Look for a lack of consideration)

Exceptions to gift and inheritance exceptions ARE gros income. They are:

1. Income from a gift or inheritance is GI = rent or selling of property

2. Employee gifts are always Gross Income except certain retirement gifts and achievement awards

(2) Objective inquiry – reasonableness
(a) Consider all facts
(b) Must not appear to be inducement or compensation
(3) Case: Comm. v. Duberstein: Can the referral fee of a car (Cadillac) be considered a gift? No
(a) Rules: Whether the property is regarded as a gift or not is a question of fact, looking basically at the transferor’s “intention.”
(b) A gift proceeds from a “detached and disinterested generosity,” “out of affection, respect, admiration, charity or like impulses”
(c) Use a Reasonableness Standard

Ex. cadillac for referral not a gift because he did something for it.

(a) Rule: The true test is whether in actuality the gift is a bona fide gift or simply a method for paying compensation.

Ex. Bequest of money to lawyer that helped old lady with her taxes is not an inheritance. IT WAS DEFFERRED compensation

No. They are an exception to gross income However there are exceptions.

3. § 101: Life Insurance Policies
a) General rule – gross income does not include amount received under life insurance contract paid by reason of death
(1) Beneficiary receives proceeds tax free


b) Exceptions -
(1) Owner takesCASH SURRENDER value while alive, amount in excess of basis (amount paid) is taxable gain
(2) TRANSFER FOR VALUABLE CONSIDERATION
(a) Seller and buyer both have taxable gain for excess of amount realized over basis
(b) Ex: Investment to buy life insurance policy on sick dude w/ AIDs - taxable
(c) Exception:
(i) § 101(a)(2) Transfer to spouse or child or controlled business for valuable consideration or as gift, then general rule applies - no tax consequences to either party

accellerated death benefits are not gross income when they are accelerated for the terminally ill or the chronically ill.

a) When any type of benefit is given from the employer to the employee, we start with the presumption that it is taxable, unless we find an exclusion.

(1) Gross Income shall not include any fringe benefit which qualifies as a:
(a) 1. No additional cost service
(b) 2. Qualified Employee Discounts
(c) 3. Working Condition Fringe
(d) 4. De minimis Fringe
(e) 5. Qualified Transportation Fringe
(f) 6. Qualified Moving Expense Reimbursement; or
(g) 7. Qualified Retirement Planning Services

can't only give them to upper managment

(b) Service offered for sale to customers in ordinary course of Same line of business; and
(c) No substantial additional cost (Ex: flying standby)

(a) Maximum qualified employee discount allowed tax free is the gross profit percentage for the line of business.
(b) Gross profit percentage: Gross Profit
Gross sales

See refrigeratory example

(a) Ordinary and Necessary to perform job
(b) NEED MORE – essentially whether it would qualify as a business expense

(f) Examples of common working-condition fringe benefits include—
(i) employer-paid subscriptions to business periodicals for employees;
(ii) employer expenditures for on-the-job training or business travel for employees;
(iii) use of employer-provided vehicles for business purposes; and
(iv) educational assistance that is not provided under a qualified educational assistance program (and thus not excludable under IRC section 127).

(a) Any property or service that has a value so small as to make accounting unreasonable or administratively impractical
(b) Employer Operated Eating Facility shall be treated as de minimis fringe if:
(i) Located on or near business, and
(ii) Operates at break even or profit

(a) Any of the following provided by the E’er to the E’ee:
(i) Transportation in a commuter highway vehicle if such transportation is in connection w/ travel btwn the employee’s residence and place of employment (limit $105 per/month)
(ii) Any transit pass (limit $105 per/month)
(iii) Qualified Parking (limit $205 per/month)

(a) Any amount received from E’er for payment or reimbursement

(7) Qualified Retirement Planning Services

– furnished to E’ee, his spouse, & dependents pursuant to employment, on behalf of oro for the convenience of E’er are excluded from GI, but only if
(a) Meals furnished on business premises, or
(a) Ex: Doctors and Nurses eat free at hospital to incourage them staying there on call
(b) There is usually a provision that it needs to be immediately before during or after shift
(b) Lodging, E’ee is required to accept lodging on premises of his E’er as a condition to employment

(a) § 132(j) Auto salesman- can drive demo cars w/o being taxed
(b) § 132(j) On-premises athletic facilities- if there is a gym on the premises
(i) doesn’t even have to be ON the premises. Can be connected through the tunnel system. As long as its operated by your firm. (Can even be operated by your firm and someone else)
(c) § 79 Group term life insurance
(d) § 120 Group legal services
(e) § 129 Dependent Care Assistance
(f) § 137 Qualified adoption expenses
(g) § 112 and 134 Special Military compensation
(h) § 125 Cafeteria plans
(i) § 107 Parsonage Allowance
(j) § 119 Meals and Lodging

A. Business Income
1. 1.61-3: Gross Income (business) = total sales – cost of goods sold + any income from investments and from incidental or outside operations or sources
1. Gains Derived from dealings in property: unless excluded by law.
a) Includes tangible items (ex: building) and intangible items (goodwill)
b) Generally, the gain is the excess of the amount realized over the unrecovered cost or other basis for the property sold or exchanged
3. Interest: GR: interest received by or credited to the taxpayer constitutes gross income and is fully taxable.
4. Rents and Royalties:
a) Advanced Rentals; Cancelation Payments: GI includes advance rentals, which must be included in income for the year of receipt regardless of the period covered or the method of accounting employed by the taxpayer
b) Expenditure by Lessee:
5. 1.61-9 Dividends:

162- ordinary -and necessary -expenses -incurred during the tax year- in carrying on - a trade or busines.

6 parts to the sentence; we will now break them down

(1) Ordinary= considered reasonably common & accepted in business the community
(i) “ordinary” does not mean that the payment must be habitual or normal (in the sense that the same taxpayer will make the payment often)
(ii) Examples – What is ordinary? – Paying for legal services IS an ordinary expense. Even if you only have to hire a lawyer once in your entire time being in business, this is something that can be reasonably expected.
(iii) Examples of what is NOT ordinary – paying off your old creditor’s debts (welch case)

“Appropriate and helpful” to business

(3) Expense – taxpayer can deduct current expenses BUT NOT capital expenditures
(a) Capital Expenditures → §263(a) no deduction shall be allowed for any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of property. Cap. Exp. are capitalized and depreciated through the asset’s life.
(b) As a general rule, cost incurred will either be (1) deducted immediately (“expensed”), (2) Capitalized & written off over period of time by way of depreciation or amitorization deductions, or (3) taken into account on a realization of gain or loss from property

(a) Capital Expenditure if:
(i) More than insignificant increase in value of asset;
(ii) Appreciable prolonging of life of asset; or
(iii) Adapt asset for new or different use
(b) Current expense if doesn’t do the above
(i) Repair: Costs that merely the property in its ordinary efficient operating condition. It neither materially increases the value of the property nor life beyond original expectation
(ii) Plan of Rehabilitation: making improvements to put in efficient operating condition is a capital expenditure. To keep efficient, repair (current expense)
(iii) Look at change in value and prolonging of life

(c) Examples:
(i) Replacing the engine in a car that the engine burned out – this is a major component of the asset → this is a capital expenditure
(ii) Replacing the roof on an office building you own → major improvement → capital expenditure
(iii) Patching up the roof on office building → just a repair → current expense

timing and recognition issues

(Must currently be in the business)
(a) Ordinary and necessary expenses incurred prior to actual start or entry into the trade or business are NOT §162 business expenses
(i) Case: Morton Frank: The expenses of investigating and looking for a new business and trips preparatory to entering a business are not deductible under §162.
(b) Expanding an existing business → deductible
(c) New Business → generally not deductible, b/c incurred when taxpayer is not carrying on business
(d) Investigating a New Business → not currently deductible but may give rise to a loss deduction under § 165(c)(2)

(a) Profit motive- to be a business you must have a “profit motive”
(i) There are 3 big categories of activities: 1) business, 2) investment, 3) personal
(ii) Make sure it fits in the business category (business and investment are both for a “profit motive” but factor “b”  is what distinguishes these two)
(b) Continuous, regular activity required to produce income
(i) This is how we distinguish between business and investment
(a) Ex: If you have 1 rent house and a good solid renter, you don’t spend much time thinking about it –This is an investment
(b) But say you have 40 rent houses and spend time managing them this would be more of a business category
(c) Not an investment (transaction entered into for profit)
(d) Not a personal living expense or a hobby

1. Reasonable and Necessary
2. Away from home
3. in pursuit of trade or business

(a) Wherever your employer’s place of business is, that is where your tax home is.
(b) If “away from home”, then transportation and meals and lodging are deductible
(c) OVERNIGHT RULE - A taxpayer is considered to be staying overnight if he is away from his tax home long enough to require him to stop for substantial sleep or rest no matter what distance he travels or mode of transportation used

Transportation expenses are always deductible when you are away.

Meals (without being entertainement) and lodging are only deductible if you are away overnight.

(d) If No Home: Can never be away from home
(e) Tax home = principal place of business.
(i) CIR v. Flowers – Exec’s residence was Mississippi but traveled to his permanent office in Mobile. - Ct found home (for tax purposes) was Mobile b/c there was no business reason to stay in Jackson
(ii) If more than 1 place of business- Tax home will be principal place of business. Factors:
• Amount of income earned in each location
• Nature and extent of business at each location, and
• amount of time spent at each location
(f) Temporary Assignment
(i) If reasonably expected to last less than 1 year, then deductible. If in fact it lasts more than 1 year then no deductions for any expenses § 162(a)
(ii) If expected to last longer than one year, then you as a taxpayer to move to the location of your employer’s principal place of business or pay for commuting as a personal expense.

(iii) Pursuit of Trade or Business
(a) Discussion in notes of this.
(b) Whether or not you are in the business.
(c) Some provisions for start-up costs in separate sections of code.

(i) Transportation- Expenses incurred to get to and from your tax home to the place of your destination including airline, car travel and taxi
(ii) Meals and Lodging
(a) Expense deductions for all meals must be taken at 50% of cost § 274(n)(1)
(b) Unless traveling away from home, expense for meals will be treated as an entertainment expense and must be directly related to associated with business to be deductible
(iii) Incidental Travel Expenses - Includes telephone calls, tips, baggage charges, laundry, etc. These may be either transportation or meals and lodging

(c) Travel for Business and Personal Reasons
(i) Traveling expenses incurred to and from the location are deductible only if the primary purpose of the trip is business (Must be greater than 50% in total days) § 1.162-2

(ii) If the transportation expenses are not deductible because the primary purpose of the trip is not business, the T/P may nevertheless deduct meals and lodging incurred on the trip that are attributable to business purposes Id.
(iii) Travel as form of education (§274(m)(2)) – No deduction
(iv) Luxury Water Travel – Deductions Limited

sure, but if we want to take her deductions, then we have to put her ass to work.

(d) Spouses
(i) Expenses related to spouse on travel are deductible only if:
(a) The spouse, dependent, or other individual employee is an employee of the T/P; - so if you must bring your spouse you need to make them a temporary employee
(b) The travel of the spouse, dependent, or other individual is for a bona fide business purpose, and
(c) Such expenses would be otherwise deductible.

(a) Transportation expenses
(i) Local travel
(a) Deductable:
(i) Travel from one business location to another is deductible
• Any travel from office to client’s business or courthouse
• The rule was taken literally at first and you would have to go to the office and stop and then go to the client’s office. – The rule is no longer interpreted this literally.
• Lunch - BUT if you travel from office to lunch and back – this is NOT deductible unless this is a business lunch.
(ii) Can deduct travel from home to temporary work place
(iii) If home is principal place of business, daily transportation to another work location is deductible
(b) Not Deductible – “Commute Travel” (home to office, office to home)
(ii) Travel outside local area
(a) Transportation from home to temporary work location is deductible
(i) Temporary work location: employment realistically expected to last (and does in fact last) for 1 year or less
(b) Hypo: What if the travel situation becomes more permanent and the office now wants you to spend all your time in that different place.
(i) You can continue to deduct until it becomes permanent and definite. When it becomes permanent & definite? → 1 year

Domestic meals are only 50% deductible and must be treated as entertainment. (away from home meals, you don't have to entertain).

(1) §274(c) Foreign Travel for business
(a) Transportation cost
(i) Deduct 100% if:
(a) Travel does not exceed 1 week, or
(b) Non-business time is less than 25% of total travel time
(ii) Deduct only business portion of transport, if:
(a) Travel time exceeds 1 week, & non-business time is 25% or more of total time

(a) Held outside North American area
(i) No deduction unless:
(a) meeting is directly related to active conduct of business, and
(b) it is reasonable to be held there considering –
(i) purpose of meeting
(ii) purpose and activities of sponsor
(iii) residence of active members of sponsor
(iv) other relevant factors
(b) Convention on cruise ship
(i) No deduction unless:
(a) meeting is directly related to active conduct of business,
(b) cruise ship in vessel registered in U.S., and
(c) all ports are located in U.S. or possessions
(ii) Allowed deduction limited to $2,000
(iii) Reporting requirement in §274(h)(5)
(3) Luxury Water transportation limited §274(m)(1)
(4) Travel as form of education → No deduction §274(m)(2)
(5) Travel Expenses of spouse, dependent, or others → No deduction, unless:
(a) An employee of Taxpayer
(b) Travel is for bona fide business purpose; AND
(c) Expense is otherwise deductible

yes. But beware of the rental vs. hidden purchase situation.

(a) Held outside North American area
(i) No deduction unless:
(a) meeting is directly related to active conduct of business, and
(b) it is reasonable to be held there considering –
(i) purpose of meeting
(ii) purpose and activities of sponsor
(iii) residence of active members of sponsor
(iv) other relevant factors
(b) Convention on cruise ship
(i) No deduction unless:
(a) meeting is directly related to active conduct of business,
(b) cruise ship in vessel registered in U.S., and
(c) all ports are located in U.S. or possessions
(ii) Allowed deduction limited to $2,000
(iii) Reporting requirement in §274(h)(5)
(3) Luxury Water transportation limited §274(m)(1)
(4) Travel as form of education → No deduction §274(m)(2)
(5) Travel Expenses of spouse, dependent, or others → No deduction, unless:
(a) An employee of Taxpayer
(b) Travel is for bona fide business purpose; AND
(c) Expense is otherwise deductible

F. Education Expense
1. General Rule - Deductible business expense if:
a) Maintains or improves skills required by the individual for business, or
b) Meets express requirements of employer, law or regulation, imposed as a condition to the retention of established employment relationship, status or rate of pay.
(a) Ex: CLE programs – Deductible: Tuition
2. Exception - Not deductible if:
a) Education is required as minimum educational requirement to qualify for the position, or
b) Education will lead to qualifying for a new trade or business.
3. Examples:
a) If you go to med school to be a better med-mal lawyer, and just go to med school for the knowledge, don’t do residency and get the license. Going to med school still can’t be deductable.
b) BUT it is okay if after you enter the profession and then decide to go get an MBA or an LLM, this can be deducted. → Go to get an LLM at NYU – 50% of all meals, living expenses, and travel

a) Entertainment, Amusement or Recreation
(1) Activity- General Rule: No deduction
(a) Two Exceptions: Direclty related to or associated with business
(i) Directly Related: §1.274-2(c)
a. GENERAL TEST
i. More than a general expectation of income/benefit
ii. Actively engaged in some type of business activity
iii. Principal character of activity was business
iv. Only covers expense for Taxpayer and person engaged in business activity
b. Alternative Test → CLEAR BUSINESS SETTING -Reasonably known that there is no significant motive other than business
i. Taxpayer must be present
ii. Distractions must not be substantial

(ii) ASSOCIATED WITH: §1.274-2(d)
a. Associated with the active conduct of business, and
b. Directly precedes or follows a substantial and bona fide business meeting, discussion, etc.
- “directly preceding or following”- the evening before, morning after is okay
- “associated with” – can include spouses here

(2) Facility
(a) No deduction related to acquisition or ownership
(i) i.e. Can’t deduct the price of a house boat you are going to have a business party on. (can’t deduct the cost of purchasing or maintaining the boat.) BUT can deduct the drinks and beverages for the party. (but only 50%)
(b) No deduction for club dues

(4) §274(n): Only 50% of meals & entertainment deductible
(a) Some exceptions in §274(n)(2)
(5) §274(k): Business Meals
(a) Cannot be lavish or extravagant under circumstances
(b) Taxpayer or employee must be present
(c) Some exceptions in §274(k)(2)

(6) §274(d): Entertainment expenses must be substantiated by adequate records:
(a) Amount of expense,
(b) Time and place,
(c) Business purpose, and
(d) Business relationship of parties
(e) Regulations provide for per diems which do not have to be substantiated

Yeah, but only at face value

(7) 274(l)(1) : Entertainment Tickets – Only get to deduct the face value of the ticket (and then only get 50% of this amount. This applies when you aren’t going to anything involved w/ charity. There is a different rule for charitable events.

an accountable plan is a plan that employers set up for employees. Amounts treated as paid under an accountable plan are excluded from gross incomg and not reported as wages or other incomt.

without an accountable plan, the employee must rreport the amount of reimbursement as gross income and then take deductions

a reasonable salary for services actually rendered is deductible.

the question will be: was the compensation reasonable at the time paid?

EVEN if it is not, the compensation is still deductible if:
1. the contract was freely bargained for; and
2. if the compensation was reasonable when the contract was entered into.

1. §212- Individual: Deduction for Production of income
a) In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or included during the taxable year –
(1) (1) for the production or collection of income;
(a) more in notes and slides
(2) (2) for the management, conseration, or maintenance of property held for the production of income; or
(3) (3) in connection w/ the determination, collection, or refund of any tax.

a) §162 Trade or Business expenses
(1) §62: Deduct from gross income (“Above the line”)
b) §212 Held for the production of income by individuals
(1) §62: If property held for the production of rent or royalty income, deduct from gross income.
(2) If property NOT held for the production of rent or royalty income, deduct from ADJUSTED gross income as a miscellaneous itemized deduction.
(a) §67: Misc. ID must be reduced by 2% of AGI

Passive (activities in which the taxpayer does not materially participate) or Hobby Losses.

1. Profit motive
2. Amount of activity
3. Production of income

Examples:
carrying on in tradeor business - your job or your sole proprietership

investement expeses (but not the expenses incurred in the production of rent) = insurance biz on the side, cleaning service, security service) = misc gross income

Personal expenses - real estate taxes mortgage interest, mortgage insurance.

Gross Income - above the line deductions(=AGI) - personal exemptions- GREATER of standard deductions OR Itemized deductions x tax rate + Net cap gain - cap gain rate - credits.

1st step:
Amount Realized § 1001(b)
- Adjusted Basis § 1011
=Gain/Loss Realized § 1001(a)

2nd step: Character of Gain/Loss

3rd step: Recognition of Gain /Loss

A. Amount Realized §1001(b) = Total net value of consideration received for asset being transferred away, including:
1. Cash – value of cash received
2. Property - Fair market value of property received
a) Ex: Bonus of new car–amount realized is FMV. But remember FMV of a new car IS NOT sticker price!
3. Services- Fair market value of services received
a) Ex: What if you trade car for dental services → FMV of dental service
4. Discharge of Indebtedness
a) Ex: Selling car that still has debt on it. You get a little bit of money and get rid of your indebtedness. The value is the amount you received + the amount of indebtedness

Original Basis(depends on the method of acquisition - cost/gift/inheritance)
+/- Adjustments Authorized in § 1016
=Adjusted Basis at time of disposition

1. Adjustments in §1016
a) Major expenditures
b) Losses
c) Depreciation

(1) §167 Deduction against gross income allowed for
(a) reasonable exhaustion or wear and tear
(b) of tangible asset
(c) with determinable useful life
(d) for property used in a trade or business, and
(e) property held for the production of income
(2) Through depreciation, deduct the cost of the asset over its useful life.
(3) §1016 Original Basis of a depreciable asset must be reduced by amount allowed as depreciation deduction

Purchased: Original Basis of asset acquired in taxable exchange of property is the FMV of that asset – The asset received in the exchange
b) Also includes incidental costs involved (ex: if you purchase a delivery van, the cost includes tax, title, & license & any costs in improvements to make the vehicle functional for your specific use)

GIft: a) General Rule: Basis to donee is the basis of donor/transferor at the time of the gift
BUT exception

PROP INCREASES IN VALUE: If donee sells prop for more than the FMV at the time of the gift, = then the donee's basis is the donor's basis at the time of the gift.

PROP DECREASES IN VALUE: if the donee sells the property for less than the FMV at the time of the gift, then the donee's basis is the FMV at the time of the gift.

General Rule: Beneficiary receives property with basis = FMV at date of death or 6 months after death, whichever date is use for the estate tax return

o “Taxable Estate” is what you are going to give to family and friends (after exclusions - the gifts to spouse, charity, AND after $12,000 (not taxed))
o Exclusions –
• Spouses: Can give as much property as you want to your spouse w/o tax consequences
• Charities: or charities w/o tax consequences.
• Personal → $12,000 Planned Giving - Annual amount, Per donor, per donee
• Lifetime/Death → 2 million

• Income tax consequences? No, this is not “gross income” because it fits w/in the gift exception
• Estate/ Gift Tax consequences? grandmother needs to file an estate and gift tax return and make a decision to either pay the gift tax now or use it as part of her $2 Million
• If you say the gift is from gpa too, then you can exclude $24k
• What is the basis on the car?
• What if she received the car as inheritiance?
o Not Income
o Basis = FMV on date of death

is an allowed current expense (current deduction) that represents the exhaustion and wear and tear (including obsolescence) of property with an identifiable useful life.
a) Through depreciation, deduct the cost of the asset over its useful life.

b) § 167 Can depreciate:
(1) Property used in a trade or business, and
(2) Property held for the production of income
c) How it effects your basis→ reduces basis yearly over useful life
(1) A deduction is taken yearly from the basis of the asset over the useful life
(a) Ex: Computer purchased for $1k, Useful life is 5 years → you get a reduction in basis of the computer of $200 per year. After 5 years, adjusted basis is $0.

d) Caveats: Real Estate
(1) No deduction on land
(2) BUT you can depreciate what is on the property

A. Incurring or Acquiring Debt
B. Payment of Debt

C. Interest Income to Creditor - included in gross income

D. Interest Expenses to Debtor – Deductible? Depends on what it was used for
1. §163
a) (a) GR: Deduct all Interest
b) (h) Except: Noncorporate taxpayers cannot deduct “personal interest”
(1) Personal Interest – not in trade or business or in income producing activity

E. Income from Discharge of Indebtedness –
1. GR: Any forgiveness of indebtedness or reduction of liabilities w/o payment of liabilities is taxable
2. §108(d): Discharge of Indebtedness (taxable)
a) Any indebtedness for which
(1) Taxpayer is liable, or
(2) Taxpayer holds property subject to

3. Nontaxable Discharge of Indebtedness
a) §108(a) excluded from current income if
(1) Discharged by Bankruptcy Court
(2) Taxpayer is insolvent
(a) Excluded from current income if taxpayer is insolvent before and after discharge
(3) Qualified farm indebtedness
(4) Qualified real property business indebt
4. Other 108 Nontaxable discharge if:
a) Purchase money debt reduction as price reduction
b) Discharge of student loans in exchange for work in certain professions in certain areas (ex: teachers in urban schools, doctor in rural areas)

A. Steps
1. AR – AB = Gain/Loss Realized
a) §1001(b) Amount Realized
(1) Total net value of consideration received for asset being transferred away
2. Character of Gain/Loss (3 types)
a) Ordinary Income & Gain/ Deductions & Losses
(1) Income is taxed at ordinary rates – max is 35%
(2) Losses allowed are fully deductible against all income
b) §1231 Gain from sale or exchange of depreciable & real property used in a trade or business held longer than 1 year.
c) §1221 Capital Gains/Losses: 1st net cap gains against cap losses.
3. Recognition

a) we don’t have to recognize all gains
(1) Ex: Sale of Principal Residence – You buy your home for $100k and then end up selling it for $250k
b) § 121 – Exclusion of gain from sale of principal residence: gross income shall not include gain from sale or exchange of property if, during the 5 yr period home has been lived in for 2 yrs.
(1) Must have lived in this “principal residence” for 2 years
(2) Limitation: amount excluded shall not exceed $250k
(a) Filing Jointly - $500k
(3) Note: Here we aren’t talking about “realized” – we still have to realize

c) Other Recognition Provisions
(1) §165(c) – Individual Taxpayer’s losses are limited to
(a) “Business” - losses incurred in a trade or business
(b) “Investment” - losses incurred in any transaction entered into for profit{investment}, though not connected with a trade or business
d)
e) Current
f) Deferred
g) Excluded

4. Reporting

2 different kinds of capital gains or losses:

1231 CAPITAL GAIN ORDINARY LOSS - if there is a gain due to the sale or exchange of depreciable and real property used in a trade or business hled longer thatn one year =

GAIN = LTCG = lower tax rate
Loss = ordinary loss = fullly deductiblle

1221 Captial Gain/Capital loss = the gain or loss from the sale of property held by the taxpayer but not (1231) depreciable or real property or other categories listed in 1221.

So if you gain from the sale of real or depriciable property used in a trade or business that is held for more thatn one year = LONG TERM CAPITAL GAIN

If you lose money on the sale of depreciable or real property used in a trade or business held longer than one year, that is an ordinary loss.

If you gain from a capital asset that is not depreciable, not real estate, not inventory (or any other thing listed in 1221) then that IS A SHORT TERM CAPITAL GAIN

If you have a loss from the sale of property that is not depreciable, not real property, and not held for more thatn a year, (and all the other shit in 1221) then that is a SHORT TERM CAPITAL LOSS

you must net the capital gains against the capital losses.

if you have a net LTCG the max rate is 15% (or 28 or 5%)
If you have net STCG it is taxed as an ordinary gain

In you have a net LTCL or STCL then the limited to $3,000 deduction?? chek these rates.

I

OK 1st step is to net all of the ST gans and losses and all of the LT gains and losses.

Then, if one is a gain and one is a loss, then you net them and they take the character of the gain. The net gains will be taxed according to character of the gain(up to 28% for LTCG and Ordinary rate for STCG)

The losses (either STCG or LTCG) will be limited to 3000.

If both LTCG and STCG then both will be taxed at their individual rate.

If both LTCL and STCL, STCL deducted first from 3K, then LTCL limited to what is left of 3k limit. any losses left over carryover to the next year.

28% for collectibles
15% for others

taxed from 5-28%

Current
Deferred
Excluded (ex. gain from sale of principle residence up to 250K or 500k )

We don't always have to recognize gains or losses:

121 - gain up to 250k (or 500k) on sale of house if used as taxpayer's principal residence for at least two of the last five years.

Also lossees for individuals are llimited to losses incurred in a trade r business and losses incurred in any transaction entered into for profit though not connected with a trade or business

Know liabilites see chart.

In general*, Gross Income does not include:
(1) Amounts received under worker’s compensation for personal injuries or sickness
- Deals with injury or death related to work
- If company carries worker’s compensation insurance they are protected from liability unless there is gross negligence

(2) Amount of any damages (except punitive) received for personal physical injuries or physical sickness
• received by suit or agreement
• whether in lump sum or periodic payments
• received for PERSONAL PHYSICAL INJURIES OR PHYSICAL SICKNESS

• What is included?
• Reimbursement of medical expenses → generally NOT taxable, unless already deducted medical exp.
• Pain & suffering → NOT taxable
• Compensation for lost wages → NOT taxable

• What is not included?
• Punitive damages → TAXABLE
• Pre-judgment and post-jdgmt interest → TAXABLE

• Punitive damages → TAXABLE
• Pre-judgment and post-jdgmt interest → TAXABLE
AND

• Damages that are for NON-PHYSICAL injury → ALL TAXABLE
o Mental anguish and emotional distress
• UNLESS result of physical injury
• MUST have physical injury first
o Stress without physical injury
• UNLESS stress manifests in physical way so to need counseling or medical treatment
• Amount recovered for medical expenses → EXCLUDED
• Excess recovery over actual expenses → TAXABLE

mental anguish as a result of physical injury (must have a physical injury first)

Stress without a physical injury that manifests itself in a physical way so to need counseling or medical treatment.

• Amount recovered for medical expenses → EXCLUDED
• Excess recovery over actual expenses → TAXABLE

NOT INCLUDED in gross income
• All amounts received, even in excess of premiums paid are EXCLUDED

(4) – Amounts received as pension or annuity for personal injury or sickness resulting from active service in armed forces.

(5) – Amounts received as disability income attributable to injuries from terroristic or military action.

a) Taxable to recipient - § 71
b) Deductible by payor - § 215

a) No current income to recipient
b) No current deduction for payer
c) Carryover or transferred basis of the property

a) No current income to recipient
b) No deduction for payer

4. Personal Exemption
a) Divorced parents can agree on who claims exemption for dependents