1. Legislative Branch

a. writes internal revenue code (IRC)

b. legislative history- committee reports will show what congress was trying to do

2. Executive Branch (treasury dept)

a. IRS is a bureau of the treasury dept.

b. treasury regulations- interpret the IRC, inferior to code

c. revenue rulings address a specific set of facts and issue a conclusion, they are intended to be relied upon

d. revenue procedures

e. private letter rulings are issued only to a specific TP and only they can rely on it

3. Judicial

a. Tax ct.- you don’t have to pay first to seek relief here, considered to have a higher expertise, no min. amnt., bench trials only

b. U.S. Dist. ct.- must pay first, hears other cases, you can have a jury trial

c. U.S. Claims ct.-must pay first, hears other cases, bench trials only.

d. you should look at precedent in all of the cts before you choose one

B. The Big Picture

1. What tax rate applies?

2. What is the taxable income? § 63, GI minus itemized deductions= taxable income

1. §61- Gross Income (GI) defined

2. 31- Credit shall be allowed for taxes withheld

1. 1.61-1- GI is all income, from whatever source, unless excluded by law. GI includes income realized in any form- money, property or services. GI is not limited to the items enumerated.

2. 1.61-2(a)(1)- wages, salary, commission paid, tips and bonuses, severance pay, jury fees are all included in GI.

3. 1.61-2(i)- except as otherwise provided, property transferred to employee or independent contractor, as compensation for services, is gross income.

4. 1.61-8(a)- rents and royalties are included in GI

5. 1.61-9(a)- dividends are included in GI.

6. 1.61-14(a)- miscellaneous items- punitive damages, treble damages, another person’s payment of a TP’s taxes, illegal gains, treasure trove.

1. Glenshaw Glass- are punitive damages included in GI? based on Eisner, no. But, Eisner was not intended to limit the definition of GI. GI is defined as accessions to wealth, clearly realized, and over which the TP has complete dominion.

3. Old Colony- (Co. was paying taxes for employees) The discharge by a 3rd person of an obligation to repay is GI to the obligor.

3. Access to Wealth- wealth is not taxed until it is realized

4. Imputed Income- not taxed, but no specific exclusion, it is unrealized potential value of a piece of property.

5. Eisner v. McComber- stock dividends were distributed in the form of more stock, the Supreme Ct held that this was not taxable income because it had not been realized. Income is gain derived from capital, labor, selling a capital asset.

6. Marginal- the highest rate that applies to a particular income

7. Duberstein- leading case on gifts, must have disinterested generosity.

8. Cessarini- treasure trove is included in GI in the year it becomes reduced to your possession.

9. RR 91-36- reduction in price not included in GI, the fact that it is in the form of a rebate or credit is irrelevant.

10. McCann- the cost of spouse’s trip was GI to the employee.

11. Pellar- No taxable income results from the purchase of property assuming that the transaction is at arm’s length. In this case, the builder has a business relationship with the buyer and sold it over cost but substantially less than FMV. No taxable income resulted because there is nothing to indicate that the sale was compensatory.

12. RR 79-24- in a barter exchange, the GI is the FMV of the services.

1. §61(a)(1)- GI defined, if compensation is a service, add te value of the service.

2. 1341(a)(1)- Claim of Right- if an item was included as gross income for a prior taxable year because it appeared that the TP had an unrestricted right to such item,

3. 1341(a)(2)- a deduction shall be allowed if it was est. that the TP did not have such a right,

4. 1341(a)(3)- and the amount of the deduction exceeds $3000

1. 1.61-8(b)- Advance rental payments, cancellation payments- are included in GI the year that they are received.

2. 1.61-8(c)- Expenditures by lessee are additional rental income to the lessor, if expenditures constitute in whole or part, a substitute for rent.

5. 1.61-9- Dividends

6. 1.61-10- Alimony and annuity payments constitute GI unless excluded by law.

8. 1.61-12- Income from discharge of indebtedness may result in the realization of income.

10. 1.61-14(a)- Miscellaneous items of GI include income from illegal activity, punitive damages, another person paying a TP’s taxes.

1. North American Consolidated Oil- Claim of right doctrine- we do not await the resolution of a contingency to decide whether or not the receipt of money was income. In this case, the money was taxable in the year they first had a claim of right to the money with no restriction as to its disposition, even though they may have to return it later.

2. James v. U.S. and Putkin v U.S.- embezzled funds and extorted funds are GI. No obligation to give back unless they are caught.

3. Indianapolis Power- The issue turns upon the nature of the rights and obligations of IP Co. The deposits were supposed to be returned and IP Co., did not have complete dominion. They were not placed in escrow but that is not dispositive. They were not necessarily and advance payment and the little in interest that IP Co. was receiving was irrelevant. As long as records are kept when funds are intermingled it is okay.

1. §61(a)(3)- Gains derived from dealings in property

2. 1001(a)- Computation of gain or loss- the excess of the amount realized over the adjusted basis.

3. 1001(b)- Amount realized is the sum of any money received plus the FMV of any property received.

4. 1001(c)- The entire amount of gain or loss shall be recognized- except as otherwise provided.

5. 1011(a)- The adjusted basis for determining gain or loss shall be the basis, as adjusted by 1016.

6. 1012- The basis is the cost, except as otherwise provided and shall not include property taxes.

7. 1016- Adjustments to the basis shall be made for expenditures, receipts, losses or other items properly charged to capital acct., for exhaustion, wear, and tear, amoritization, and depletion.

1. 1.61-6(a)- Property includes tangible and intangible, the gains is the excess of AR over AB. The sale of part is treated as separate transaction and gain or loss is computed separately.

2. 1.1001-1(a)- The basis may be different depending on whether gain or loss is being computed, see 1015(a).

3. 1.1001-2(a)(1)- The AR includes the amount of liabilities from which the transferor is discharged as a result of sale or disposition.

4. 1.1001-2(a)(3)- Liability incurred on acquisition- this section does not apply to the extent that such liability was not taken into acct in determining transferor’s basis.

1. Recovery of Capital- the principle of income being the excess over investment.

2. Non-recourse debt- when there is no personal liability associated with debt.

3. Recourse debt, Tufts- included in TP’s cost

4. Crane- Non-recourse is treated the same as recourse debt.

5. Philadelphia Park- the cost basis of property received in a taxable exchange is the FMV of the property received (in arm’s length transactions).

1. 102- As a general rule, GI does not include the value of property acquired by gift, bequest, devise or inheritance.

2. 274(b)(1)- No deduction shall be allowed under 162 or 212 for any expense for gifts made directly or indirectly to any individual to the extent that such expense, when added to prior expenses of the TP for gifts made to such individual exceeds $25.

3. 1014(a)- The basis of property acquired from decedant is the FMV of the property at the date of the decedant’s death.

4. 1014(b)(1)- Property acquired from decedant- property passed by bequest, devise or inheritance,

(6)- Property which represents the surviving spouse’s 1/2 share of community property held by the decedant and the surviving spouse under the community property laws.

6. 1014(e)- Appreciated property acquired by the decedant by gift within 1 year of death, and acquired from decedant by donor (or spouse of donor), the basis shall be the AB of the property in the hands of the decedant, immediately before death.

7. 1015(a)(1)- Basis of property acquired by gifts and transfers in trust shall be the same as it would be in the hands of the donor or the last proceeding owner by whom it was not acquired by gift, except if such basis is greater than FMV of the property at the time of the gift, them for the purpose of determining loss the basis shall be FMV.

8. 1015(d)(1)(A)- Increased basis for gift tax paid- the basis shall be increased (but not above the FMV at the time of the gift) by the amount of the gift tax paid.

9. 1015(d)(6)(A)- the increase for gift tax shall be an amount (not in excess of the amount of tax paid) which bears the same ratio to the amount of tax paid as-

i) the net appreciation in value of the gift, bears to the

ii) amount of the gift.

10. 1015(d)(6)(B)- net appreciation in the value of any gift is the amount by which the FMV of the gift exceeds the donor’s AB immediately before the gift.

2. 1.102-1(b)- The 102 exclusion does not apply to where the property received by gift, bequest, devise or inheritance is income from property, even if it is paid at intervals.

4. 1.1001-1(e)- Part sale/Part gift- the transferor has gain to the extent the AR exceeds his AB. However, no loss is sustained on such a transfer if the AR is less than the AB.

5. 1.1014-2(a)(5)- The surviving spouse’s 1/2 interest in community property is considered to have been acquired from decedant.

6. 1.1015-1(a)- For the purpose of determining gain from the disposition of property acquired by gift, the basis is the same as it is in the hands of the donor. For loss, the same rule applies unless the basis is greater than FMV at the time the gift is made, then the basis is FMV.

7. 1.1015-4- Part gift/Part Sale- the unadjusted basis in the hands of the transferee is the sum of whichever is greater- the amount pd by the transferee or the transferor’s AB. For determining loss, the AB should not be greater than the FMV.

8. PR1.102-1(f)- employer/employee transfers- extraordinary transfers will not be considered for the benefit of an employee if the employee can show the transfer was not made in recognition of the employee’s employment (102 would not apply to related parties).

1. Dubberstein- deference is given to fact findings but not matters of law. In this case, one TP gave another a car for helping him. The recipient thought the car was a gift. The donor took a business deduction. The ct said a gift is a voluntary transfer, detached and disinterested generosity must be the reason for the transfer. Mere absence of a legal or moral duty is not dispositive

2. Practice Tip- If something is appreciating, keep it and devise it in a will. If it is depreciating, sell it off and take advantage of the loss.

(a) General Rule- GI shall not include gain from sale of a principal residence, if during the 5 year period ending on date of sale, such property has been owned and used by TP as a principal residence for periods aggregating 2 years or more.

(b) Limits- (1) Amount of gain shall not exceed $250,000

(2) Joint returns- $500,000 if

i) either spouse meets ownership and use requirements;

ii) both meet use requirements; and

iii) neither is ineligible

(3) Only 1 sale every 2 years to which this applies (Pre-May 1997 sales are not taken into acct).

(c) Exclusions- exclusions for TP’s not meeting certain ownership and use requirements do not apply but the dollar limit shall be equal to

(1)(A) the amount which bears the same ratio as

(B) the shorter of- the aggregate periods during the 5 years such property has been owned and used by TP as PR; or the period after the date of the most recent sale by TP to which this applied and before the sate of such sale or exchange bears to 2 years.

(d) Special Rules-

(1) joint returns- (a)&(c) shall not apply if either spouse meets the ownership and use requirements

(2) property of the deceased spouse- the period of ownership and use includes the period such deceased spouse owned and used.

(f) This section does not apply if the TP elects not to have it apply.

4. 72(c)(1)- Investment in the K as of the annuity start date is- the aggregate amount of premiums or other consideration paid for the K minus- the aggregate amount received under the k before such date to the extent such amount was excludable from GI.

72(c)(3)- Expected return shall be determined as follows-

(A) Life Expectancy- if the expected return depends in whole or part on life expectancy of one or more individuals, the expected return should be computed with actuarial tables.

(B) Installment Payments- the expected return is the aggregates of the amounts receivable under the K as an annuity.

5. 72(e)(4)(A)- Amounts not received as annuities- this subsection applies to any amount which is received under an annuity, endowment, or life ins. K and is not received as an annuity, if no other provision of this subtitle applies.

1. 1.101-1(b)(1)- Transfers of Life Ins. Policies- the amount of the proceeds attributable to such policy which is excludable from GI is generally limited to the sum of i) actual value of the consideration for transfer and

ii) the premiums and other amounts subsequently paid by the transferee.

This limit does not apply where the basis of the policy or interest transferred (for the purpose of determining gain or loss) is determinable in whole or in part to the basis in the hands of the transferor; or where the transfer is to the insured; or to the partner of the insured; or a corp. in which the insured is a shareholder.

3. 1.72-1(a)- Section 72 prescribes rules relating to the inclusion of GI of amounts received under life ins. Ks, endowments, or annuity K, unless such amounts are specifically excluded in other provisions.

1. Risk Shifting- Life insurance shifts risk to the insurance co., and the insurance co. spreads the risk to all policy holders.

2. Risk Distributing- Spreads the risk of all deaths over all insureds with it’s premium.

3. 2 Forms of Life Ins.- term and cash value. Term is for a specific number of years. The premium goes up when you get older. Cash value is a larger premium because you are prepaying for future charges.

1. 61(a)(12)- Income from discharge of indebtedness is included in GI.

2. 102(a)- GI does not include the value of property acquired by gift, bequest, devise or inheritance.

3. 108(a)- Exclusion- GI does not include any amount which would be includable in GI by reason of discharge of indebtedness if-

(1)(A) discharge occurs in a title 11 case; or

(B) TP is insolvent

(C) indebtedness discharge is qualified farm indebtedness; or

(D) in the case of a TP other than a C corporation, the indebtedness discharge is qualified real property business indebtedness.

4. 108(d)(1)- Indebtedness of TP includes any indebtedness for which TP is personally liable or subject to which the TP holds property

5. 108(e)(2)- Income is not realized to the extent of lost deductions- no income shall be realized to the extent that payment of the liability would have given rise to a deduction.

6. 108(e)(4)- Acquisition of indebtedness by the person related to debtor- is treated as acquisition by debtor. Members of the debtor’s family include- spouse, children, grandparents, parents and their spouses. Entities under common control are treated as related.

1. U.S. v. Kirby Lumber- Repayment of a corporate debt at less than its face value constitutes income.

2. Zarin v. Commissioner- The casino settled their dispute with the TP for less than the amount that they originally sought. There was no GI to the TP because the debt was unenforceable as a matter of law and this was contested liability. Contested liability is an unclear doctrine. See Presslar in supp., and Road, p160.

3. Dallas v. Commissioner- if the TP was insolvent before and after discharge of debt, no GI is realized.

4. RR 84-176- Cancellation of indebtedness under some circumstances may represent a form of compensation or some other form of payment and should not be under 61(a)(12). If the amount owed by a TP is forgiven by the seller in return for a release of K counter claim, income from

5. Merkel- TP claiming insolvency must prove that any obligation claimed to be a liability as of the calculation date it is more probable than not the TP will be called upon to pay the obligation in the amount claimed and that the total amount of hie liabilities are greater than the FMV of his assets.

1. 104(a)- Except in the case of amounts attributable to deductions allowed under 213 (relating to medical expenses), for any prior taxable year, GI does not include-

(1) w/c paid for physical injury or sickness

(2) amount of damages (other than punitive) by suit or agreement on account of PI or sickness

(3) accident or health insurance for PI or sickness (other than amounts received by an employee to the extent such amounts are attributable to contributions by employer which were not included in GI).

(4) pension/annuity for PI or sickness resulting from active service

(5) disability income for terrorist attacks

**Emotional distress shall not be treated as a physical injury or physical sickness. The preceding sentence shall not apply to an amount of damages not in excess of amount paid for medical care attributable to emotional distress.

except as otherwise provided GI of an employee does not include employer provided coverage under an accident or health plan.

1. 1.104-1(a)- Exclusion from GI amounts attributable to compensation for injuries and sickness.

2. 1.105-2- Reimbursement for medical expenses by an employer is excludable from GI.

1. Raytheon- Ask "in lieu of what are the damages being paid?"

2. RR 75-232- Future medical expenses are excludible now but he shouldn’t be able to deduct them later. (?)

3. Robinson & Bagley- Tax Ct will scrutinize TP’s allocaiton.

4. RR 75-230- Lump sum settlement- allocate medical costs first.

5. RR 69-154-

1. 61(a)(1)- GI includes compensation for services, including fees, commissions, fringe benefits and similar items.

2. 119(a)-Meals and Lodging furnished to employee, his spouse, and his dependents pursuant to employment is excludable from GI if provided for the convenience of the employer and if-

(1) in the case of meals, the meals are furnished on the business premises; and

(2) in the case of lodging, the employee is required to accept such lodging as a condition of his employment.

3. 119(b)- Special Rules-

(1) Provisions of employment K of state statute is not determinative of whether it is provided for the convenience of the employer.

(2) Certain factors are not taken into account with respect to meals- the fact that a charge is made for such meals and the fact that an employee may decline such meals.

(3) Certain fixed charges for meals- is the amount excludible

(4) Meals furnished to employees on business premises where meals of most employees are otherwise excludable- if more than 1/2 of the employees to whom meals are furnished on the premises for the convenience of the employer, all meals furnished are treated as furnished for the convenience of the employer.

(2)- qualified employee discount,

(3)- working condition fringe,

(4)- de minimis fringe,

(5)- qualified transportation fringe,

(6)- qualified moving expense reimbursement.

6. 132(b)- No additional Cost Service means any service provided by an employer to an employee for use by such employee if-

(1) such service is offered for sale to customers in the ordinary course of business of the employer in which the employee is performing services; and

(2) the employer incurs no substantial additional cost (including forgone revenues)

7. 132(c)(1)- Qualified employee discount means any employee discount with respect to property or services to the extent that such discount does not exceed-

(A) in the case of property- the gross profit percentage at which the property is being offered to customers;

(B) in the case of services- 20% at which the services are being offered to the customers.

(2)-Gross Profit Percentage means the percent which the excess of aggregate sales price of property sold over the aggregate cost of such property, is of the aggregate sale price of such property.

8. 132(e)(1)- De minimis fringe means any property or service the value of which (after taking into account frequency) is so small as to make accounting for it unreasonable or administratively impracticable.

(2)- The operation by an employer of any eating facility for employees shall be treated as a de minimis fringe if-

(A) such facility is located on or near premises; and

(B) revenue from the facility normally equals or exceeds the direct operating costs.

9. 132(h)(2)(A)- In general, any use by the spouse or a dependent child of the employee shall be treated as use by the employee.

10. 132(j)(1)- Special Rules- Exclusions under (a)(1) and (2) apply to highly compensated employees only if such fringe benefits are also available on substantially the same terms to each member of a group of employees.

11. 132(j)(4)-On-premises gym and other athletic facilities- GI shall not include the value of any on-premises athletic facility if it is substantially used by employees.

1. 1.61-21(a)(1)-4(i) Examples of fringe benefits, GI of fringe benefits is included in the GI of the TP performing services in connection with the fringe benefit.

2. 1.61-21(b)(1)- The TP must include the amount by which the FMV of the fringe exceeds the sum of the amount paid for the fringe by or on behalf of the recipient and the amount, if any, specifically excluded from GI by some other section of subtitle A.

3. 1.61-21(b)(2)- FMV is determined based on all the facts and circumstances. Specifically, the amount that the TP would have paid for it in an arm’s length transaction. (Not the TP’s subjective value).

4. 1.119-2(b)- If work restricts a meal break to be 30-45 minutes and an employer furnishes meals, they will be regarded as furnished for a substantial non-compensatory business reason of the employer.

6. 1.132-2(a)(1)- A service will not be considered to be offered for sale by the employer to its customers if that service is primarily provided to employees and not to customers.

7. 1.132-2(a)(2)- Excess capacity services are eligible for treatment as no additional cost services- transportation by aircraft, train, bus, subway, cruise, telephone services. Not eligible are services such as-facilitation by stock brokerage firm.

8. 1.132-2(a)(5)- No substantial additional cost-labor intensive services must include the cost of labor incurred in providing these services to employees.

9. 1.132-2(c)-Example- an airline that allows employees to reserve seats on flights forgoes potential revenue, and as such are not eligible for the no additional cost exclusion.

11. 1.132-3(e)- Excess discounts are includable in GI.

11. 1.132-4(a)(1)(iv)(A)- An employee who performs substantial services that directly benefit more than one line of businesses of an employer is treated as performing substantial services in all such lines of business. Ex.) An accountant for all 3 of an employer’s businesses.

12. 1.132-5(a)(1)(iii),(v),(vi)- An amount that would be deductible, other than under 162, 167 (such as 212), is not a working condition fringe. A physical examination provided by the employer is not excludable as a working condition fringe. A cash payment to an employee is not a working condition fringe unless the employer requires the employee to use it for expenses in connection with an activity for which a deduction is allowed under 162 or 167 and it is verified and any unused portion goes back to the employer.

13. 1.132-6(b)-Frequency with respect to de minimis fringe benefits is determined in reference to each employee, not the workforce as a whole. Ex) everyday a worker gets a free meal, everyday it is someone new- it is not de minimus with respect to a worker who gets one meal a year.

14. 1.132-6(c)- applicability of substantiation requirements.

15. 1.132-6(d)(2)- Meals, meal money or local transportation fare provided to an employee is excluded as a de minimis, if the benefit is reasonable and is provided on an occasional basis, because of overtime, and the meal is provided to enable the employee to work overtime.

16. 1.132-6(d)(4)- Benefits exceeding value and frequency limits, no amount of the benefit is to b considered a de minimis.

17. 1.132-6(e)- (1) Benefits excludable- typing personal letters by company secretary, personal use of copy machine (with restrictions), occasional cocktail parties, group meals, birthday, holiday gifts (low FMV), doughnuts, coffee, occasional tickets to sporting events, soft drinks, local phone calls, flowers (illness).

(2) Benefits not excludable- group term life insurance on the life of spouse or child, employer owned or leased facilities (house for the weekend).

19. 1.132-8(f)(1)- Highly compensated employee- government and non-government- 5% owner, +$75,000, +$50,000 and was in the top paid group of employees for the year, was at any time an officer and received 150% of compensation in 415(c).

1. Kowalski- Meal allowance, in advance, bi-weekly, included in salary and no allowance for time not on patrol, no records are required and the amount varies with rank- GI.

2. Benaglia- Manager of hotel is given lodging and food. But, he could not perform services without living at the hotel. No GI.

3. Gotcher- Cost of trip to Germany to tour the facilities was not GI to him but his wife’s trip was GI.

4. Charley- Frequent flyer miles that are being converted into cash are GI, otherwise not GI.

1. 162(a)- In general, there should be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the year in carrying on any trade or business including- reasonable allowance for salaries or other compensation; traveling expenses (including meals and lodging) while away from home in the pursuit of business; rentals or other payments required for T/B for property which the TP has no title or equity.

* For the purpose of temporarily being away from home, the period cannot exceed one year.

2. 262-Personal living and family expenses, except as otherwise provided, shall not be deductible.

3. 195(a)-Capitalization of expenditures- no deduction shall be allowed for start up expenditures.

195(b)- Election to amoritize- start up expenditures may be treated as deferred expenses, allowed as a deduction for not longer than a period of 60 months, prorated equally. If property is disposed of prior to close of amoritzation period, any remainder may be deducted to the extent allowed under 165.

195(c)- Start up expenditures are those amounts paid in connection with investigating the creation or acquisition of an active T/B, or creating a T/B, or activity engaged in for-profit before the day active T/B begins.

4. 212-Expenses for the production or collection of income, for the management, conservation, or maintenance of property held for income, or in connection with the determination, collection, or refund of any tax shall be deductible for an individual.

5. 265(a)(1)-No deduction shall be allowed for expenses and interest relating to tax-exempt income.

1. 1.162-1(a)- Business expenses are deductible.

2. 1.162-2(a)-Traveling expenses that are reasonable and necessary in conduct of the TP’s T/B may be deducted.

3. 1.162-6-Professional expenses may be deducted- cost of supplies, automobile costs to make professional calls, professional journals, office costs, books and equipment.

4. 1.162-7- Compensation for personal services may be deducted if ordinary and necessary and are in fact payment purely for services.

5. 1.162-8- In the absence of evidence to justify otherwise, excessive payments for salaries for personal service will be included in GI of the recipient.

6. 1.162-9- Bonuses to employees will constitute allowable deductions from GI when such payments are made in good faith as additional compensation for services rendered, provided that, when added to regular salaries, they do not exceed reasonable compensation.

7. 1.212-1(b)- Ordinary and necessary expenses incurred in the maintenance or management of a building devoted to rental purposes are deductible and may be deductible even if the building is not currently productive or there is no evidence that it will ever produce income.

8. 1.212-1(e)- A deduction in 212 is subject to the restrictions in part IX (section 261 and following), relating to items not deductible.

9. 1.212-1(f)- Among expenditures not deductible under 212 ae the following: computer expenses; expenses for improving personal appearance; cost of rental of safe deposit box for storing personal effects; expenses connected to seeking employment, bar admission fees.

10. 1.212-1(g)- Fees for services of investment counsel, clerical help, office rent paid or incurred in connection with investments held by a TP are deductible only if they are paid for the production of income, or for the management or maintenance of investments and they are ordinary and necessary under all circumstances, having regard to they type of investment and relation to the TP.

11. 1.212-1(l)- Those expenses incurred by TP in preparation of taxes or in contesting tax liability are deductible.

12. 1.212-1(o)- The provisions of 212 are not intended in any way to disallow expenses which would otherwise be deductible under 162.

1. Welch v. Helvering- Requires cost to be customary or expected in the life of a business to be ordinary. Ordinary doesn’t have to occur all the time as long at it is not unusual for it to occur in this business. Necessary means that it is appropriate and helpful. Ordinary is distinguished from capital expenditures.

2. Groetzinger- Must be continual, and regular, the primary purpose for income. TP made money betting on the dogs. This case is not overruling Higgins.

4. RR 75-120- Amounts paid by employee seeking new employment if in the same T/B is deductible but not if a new T/B. Must not have a substantial lack of continuity.

5. Higgins- Investing for yourself is not a T/B no matter how often you do it, even if you have an office and employees.

6. Below the line- and subject to the 2% floor (business and employee deductions).

7. Elliot- Factors when looking at reasonableness of salary- position, hours and duties, similar positions, size and complexity, potential relationship.

1. 161-In computing TI under 63, there shall be allowed as deductions the items specified in this part, subject to the exceptions provided in part IX (section 261 +).

2. 162(a)- There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on T/B including- a reasonable allowance for salaries, traveling expenses, rental payments.

3. 263(a)-No deduction shall be allowed for any amount paid for new buildings or permanent improvements made to increase value of any property. This shall not apply to the expenditures for dev. of mines, research and experimental expenses under 174, soil and water conservation, ect…

4. 263A(a)- Non-deductibility of certain direct and indirect costs- in the case of property which is inventory in the hands of the TP, shall be included in inventory costs, and in the case of other property shall be capitalized.

5. 263A(b)- General exceptions are personal use property, research and experimental expenditures, oil and gas wells, property produced by a long term k, timber.

6. 263A(g)- Produce means to construct, build, install, manufacture, develop or improve. The TP shall be treated as producing any property which was produced for the TP under a K.

2. 1.162-3- Cost of materials should only be included to the extent that they are actually used during the taxable year. If a TP carries incidental materials for which no record of consumption is kept it will be permissible for the TP to include expenses and to deduct from GI the total cost of such supplies as were purchased.

3. 1.162-4- Repairs that are incidental, which do not materially add to the value of the property nor appreciably prolong its life, may be deducted.

4. 1.162-6- Professional expenses, such as journals, books, furniture and professional instruments, office rent, light, water and telephone costs, may be deducted.

6. 1.263(a)-1- Except as otherwise provided, no deduction shall be allowed for any amount paid for new buildings or permanent improvements, -2 or any amount paid in restoring property or in making good the exhaustion thereof for which an allowance is or had been made in the form of depreciation, or amoritization.

1. Boylston Market Assoc’n- 3 year fire insurance is an asset.

2. Woodward- Costs incurred in perfecting title or defending title are capital expenditures. 1.263(1)(a)-2(c), 1.212-1(k). And it becomes part of the basis of the land. **Capital expenditure costs will be added to the basis.

3. Idaho Power- Cost of trucks used to build new building and facility was to be matched with life span of new facility. To the extent that the trucks were used in their ordinary business it is currently deductible. Think of how the cost would be allocated if they contracted out to have the facility built.

4. Mt. Morris Drive In Theater- Cost of constructing theater was also the cost of correcting the drainage problems that existed when it was bought because it was foreseeable.

5. Midland Empire Packing Co. – The condition that led to the cost of the wall having to be built was not foreseeable

6. Wehrli- One year rule of thumb is suggested as a guide post. Suggests that painting a whole building would be a repair.

7. RR 94-12- some repairs will produce income over a period of time, but their classification is not changed by INDOPCO..

8. Lincoln Savings & Loan- Insurance premiums are required by FSCIC and part of the premiums may be refundable in some circumstances- not deductible b/c a separate and distinct asset was created.

9. RR 96-62- costs of training new employees is still deductible.

10. INDOPCO- Spent various amounts on legal fees because it was the subject of a takeover. Board had to decide is this was a good idea. Separate and distinct is not the only test. Ask whether the costs will produce a significant future benefit.

11. RR 92-80- Advertising costs are deductible.

1. 167(a)- General Rule- There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear of property used in TP’s T/B or property held for the production of income.

2. 167(b)- For determining depreciation deduction see §168.

3. 167(c)- The basis for depreciation shall be the AB provided in §1011, for the purpose of determining gain or sale. If the property is subject to lease no portion of the AB shall be allocated to the leasehold interest, and the entire AB shall be taken into account in determining depreciation.

4. 167(e)- No depreciation deduction shall be allowed under this section to the TP for any term interest in property for any period during which the remainder interest of such property is held by a related person.

5. 167(f)(1)- Computer software shall be allowed to be depreciated using the straight-line method for a useful life of 36 months.

6. 168(a)- Determine depreciation deduction by using the applicable depreciation method, recovery period and convention.

7. 168(b)-(1) Applicable depreciation method is the 200% declining balance method, switching to straight-line method for the 1st taxable year which it will yield a larger allowance.

(2)- 150 % declining balance method is to be used in cases of 15 or 20 year property; property used in farming; if TP elects to (other than to property in (3)).

(3)- Straight line method applies to nonresidential real property; residential real property; RR grading; ect…

(4)- Salvage value shall be treated as zero

8. 168(c)- Applicable recovery period for residential rental property is 27.5 years, nonresidential real property is 39 years.

9. 168(d)-(1) Applicable convention is the 1/2 year convention (Treats as though placed in service at the mid-point of the year).

(2)- Mid month for nonresidential real property, residential rental property, and RR grading (Treats as though placed in service at the mid-point of such month).

(3)- Special rules if the property is placed in service in the last 3 months of the year-

(A)- the aggregate basis of property to which this section applies placed in service during the last 3 months, exceed 40% of the aggregate bases of property to which this section applies placed in service during the taxable year, the applicable convention shall be the mid-quarter convention for all property (Treats as though placed in service at the midpoint of the quarter during which it was placed in service).

(B)- For the purposed of (A), do not take into account any nonresidential real property and residential rental property or any other property placed in service and disposed of during the same taxable year.

10. 168(e)- Classification of property-

(2)- Residential rental property must have 80% of the GI from such building coming from rental income. It does not include a motel.

truck, any computer based telephone, any qualified technological equipment, ect….

11. 168(f)(1)- This does not apply to property which the TP does not elect to have it apply and the property is properly depreciated under the unit of production method.

12. 168(i)(1)- Class life for qualified technological equipment.