Federal Income Tax Professor Lon Sobel Southwestern Law School Study Guide Fall 2010 Copyright © 2010 by Lionel S. Sobel SCALE – Federal Income Tax SCALE – Federal Income Tax Southwestern Law School FEDERAL INCOME TAX Syllabus, Course Requirements, and Grading Research Topics – Criteria Professor Lon Sobel SCALE II- Period 4 Fall 2010 PHONE: 213-738-6756 EMAIL: [email protected] edu OFFICE: BW325 ___________________________ I. COURSE MATERIALS A. Required Text or Course Materials The assigned readings are in a “Study Guide” written by Professor Sobel and in PRINCIPLES OF FEDERAL INCOME TAXATION, 7TH EDITION, by Daniel Q.
Posin and Donald T. Tobin (Thomson/West 2005). The “Study Guide” contains excerpts from the Internal Revenue Code and Regulations, as well as multiple choice questions about the assigned topics. B. Recommended Text None. (But if you are doing the assigned readings and attending class, and you’re still having trouble, see me during office hours and I will show you what additional books are available. ) II. COURSE REQUIREMENTS A. Class Preparation Students are expected to have read the assigned materials.
Class discussion will commence with the assumption that everyone is thoroughly familiar with the assigned materials. In addition to reading the assigned materials, answer the questions in the Study Guide, and make notes to yourself about why you answered the questions the way you did. We will discuss the questions in class, because they will help you understand tax law; but the questions will help you, only if you have considered them carefully before class, and come to class prepared to participate in discussions about them. B. Attendance Regular and punctual attendance is required.
A student may be administratively withdrawn from this course if he or she is absent from more than 20% of the regularly scheduled class sessions. Each student is responsible for keeping track of his or her absences. Attendance will be taken at the start of class through distribution of an attendance sheet. If you are not in your seat at the beginning of class and do not personally initial the sign-in sheet at that time, you are considered absent. The Student Honor Code remains in effect. Students may initial only their own names, not those of other students.
Lack of preparation, early departure, or inappropriate behavior may result in a student being marked absent. C. Grading Research Topics – Criteria and Evaluation Your grade in this course will be based entirely on your performance on a take-home exam. The exam will be distributed on the last day of class, Thursday, December 2nd, and it will be due Monday, December 6th, not later than 9:30 am. SCALE – Federal Income Tax SCALE – Federal Income Tax Grades for this course will be awarded based upon an alphabetical system and will strictly follow Southwestern’s grading policies.
After a grade is awarded for the course, I am happy to discuss ways to improve a student’s performance. In accordance with law school policy, however, assigned grades will not, and cannot, be changed except for mathematical/clerical errors. D. Special Rules Regarding Electronic Devices Recording of class meetings is permitted only if the professor is first asked and gives permission. Recording a class without permission is prohibited. If a student is granted permission, recording is condition upon the student’s agreement to share any recording with any classmate who makes a reasonable equest. E. Statement of Reasonable Accommodations Students who need accommodations due to disabilities should contact the Counselor/Disability Specialist in the Diversity Affairs Office. The office is located in BW 361 and can be reached at (213) 738-6888 or [email protected] edu. It is the policy and practice of Southwestern Law School to comply with the Americans with Disabilities Act of 1990 as amended by the ADA Amendments Act of 2008, Section 504 of the Rehabilitation Act, and state and local requirements regarding students and applicants with disabilities.
Southwestern will make every effort to provide reasonable accommodations for students with medical, attentional, psychological, learning, or temporary disabilities. Accommodations are not provided to give a student an unfair advantage over other students, but simply to allow a student with disabilities to have an equal opportunity to be successful. A student has the responsibility to meet with the Counselor/Disability Specialist as early as possible to discuss his or her request for special accommodations. Students who do not seek accommodations need not make their disabilities known.
Further information regarding procedures, policies and documentation required is available in the Student Handbook. F. Office Hours/Instructor Availability Office: BW 325 Office Hours: Mondays and Wednesdays, 12:15 pm – 2:15 pm, Thursdays, 12:15 pm – 1:15 pm, and at your convenience (just let me know what day and time is good for you). I also will be on campus on other days and at other times. Please feel free to drop into my office, unannounced, whenever you see me there. III. ASSIGNMENTS: The reading assignments and topics covered in this class are set forth below. Assignments are subject to change or supplementation.
SCALE – Federal Income Tax SCALE – Federal Income Tax Day/Date Topics Study Guide Read in Posin & Tobin v Principles of Federal Income Tax Overview of Course and Federal Tax Income Introduction Income in General 1 1- 8 51 – 59 Tuesday August 10 Fringe Benefits Prizes 2 59 – 65 117 – 118 Interest Dividends Rents Royalties 3 79 – 83 86 – 89 89 – 89 89 – 92 Wednesday August 18 Life Insurance Proceeds Gifts and Inheritances 4 92 – 96 101 – 111 Discharge of Debt Damages Assignment of Income 5 121 – 122 136 – 143 329 – 336 Thursday August 26 Deductions Structural Issues 6 354 – 362 Ordinary and Necessary Business Expenses
Rental Expenses Bribes and Penalties Lobbying and Political Expenses Moving Expenses 7 362 – 364 – 472 – 475 475 – 476 406 – 407 Thursday September 2 Capital Expenditures vs. Business Expenses Depreciation 8 457 – 464 422 – 435 Itemized Deductions in General Tax Advice and Attorney’s Fees Taxes Interest 9 487 – 489 489 – 490 498 – 500 490 – 498 Tuesday September 7 Casualty Losses Charitable Contributions Floor on Miscellaneous Itemized Deductions Standard Deduction 10 500 – 506 519 – 527 527 – 528 529 – 530 Income & Deductions, Combined: Sales and Exchanges of Property Overview of Sales and Exchanges
The Requirement of Realization 11 148 – 152 152 – 166 Thursday September 16 Computation of Gain or Loss Realized 12 171 – 184 Thursday September 23 Carryover Basis of Gifts Basis of Property Received from Decedents 13 198 – 203 205 – 209 Thursday September 30 Recognition of Gain or Loss: In General Exchanges of “Like-Kind” Property 14 217 – 220 220 – 228 Thursday October 7 Recognition of Gain or Loss: Involuntary Conversions “Wash Sales” of Stock 15 237 – 239 242 – 246 SCALE – Federal Income Tax SCALE – Federal Income Tax Day/Date Topics Study Guide Read in Posin & Tobin v Tax Rates Ordinary Income vs.
Capital Gains Capital Assets Capital Losses 16 251 – 252 282 – 289 301 – 306 266 – 268 Thursday October 14 Section 1231 Property Calculation of Capital Gains Tax Capital Gains Policy 17 – – 319 – 322 Tax Alternative Minimum Tax Social Security and Medicare Taxes 18 532 – 539 – Thursday October 21 Credits: Earned Income and Certain Others 19 633 – 634 637 – 638 639 – 640 Selected Applications Family The Marriage Tax Personal and Dependents Exemptions Dependents Exemptions after Divorce 20 448 – 451 530 – 532 Thursday November 4 Alimony and Child Support 21 443 – 447 Property Division in Divorce
Child and Dependent Care Credit Child Tax Credit 22 166 – 171 634 – 637 640 – 642 Thursday November 11 Health Care Medical Expenses 23 514 – 519 Home Ownership Home Mortgage Interest Property Taxes First-Time Homebuyers Credit 24 490 – 498 – – Thursday November 18 Home Office Expenses Vacation Homes 25 412 – 417 417 – 422 Monday November 22 Gains (and Losses) on Sales of Homes 26 210 – 217 SCALE – Federal Income Tax SCALE – Federal Income Tax Tuesday November 30 For this class session, we will cover whichever one of the following topics the class selects Education Scholarships Education Expenses
Student Loan Interest Hope Scholarship/Lifetime Learning Credits Travel Business Travel Expenses Business vs. Pleasure Travel Expenses Entertainment, Amusement, and Recreation Expenses Entertainment, Amusement, and Recreation Expenses Limits on Deductibility of Business Meals and Entertainment Expenses Hobby Expenses 27 28 29 118 – 121 384 – 388 – 642 – 646 370 – 380 394 – 396 396 – 403 403 – 404 407 – 412 Review and Exam Thursday December 2 Review and Distribution of Final Exam Questions Monday December 6 Final Exam Answers Due by 9:30 am Survey of Federal Income Tax Survey of Federal Income Tax
Southwestern Law School SURVEY OF FEDERAL INCOME TAX Syllabus, Course Requirements, and Grading Research Topics – Criteria Professor Lon Sobel Fall 2010 PHONE: 213-738-6756 EMAIL: [email protected] edu OFFICE: BW325 ___________________________ I. COURSE MATERIALS A. Required Text or Course Materials The assigned readings are in a “Study Guide” written by Professor Sobel and in PRINCIPLES OF FEDERAL INCOME TAXATION, 7TH EDITION, by Daniel Q. Posin and Donald T. Tobin (Thomson/West 2005). The “Study Guide” contains excerpts from the Internal Revenue Code and Regulations, as well as multiple choice questions about the assigned topics.
B. Recommended Text None. (But if you are doing the assigned readings and attending class, and you’re still having trouble, see me during office hours and I will show you what additional books are available. ) II. COURSE REQUIREMENTS A. Class Preparation Students are expected to have read the assigned materials. Class discussion will commence with the assumption that everyone is thoroughly familiar with the assigned materials. In addition to reading the assigned materials, answer the questions in the Study Guide, and make notes to yourself about why you answered the questions the way you did.
We will discuss the questions in class, because they will help you understand tax law; but the questions will help you, only if you have considered them carefully before class, and come to class prepared to participate in discussions about them. B. Attendance Regular and punctual attendance is required. A student may be administratively withdrawn from this course if he or she is absent from more than 20% of the regularly scheduled class sessions. Each student is responsible for keeping track of his or her absences. Attendance will be taken at the start of class through distribution of an attendance sheet.
If you are not in your seat at the beginning of class and do not personally initial the sign-in sheet at that time, you are considered absent. The Student Honor Code remains in effect. Students may initial only their own names, not those of other students. Lack of preparation, early departure, or inappropriate behavior may result in a student being marked absent. C. Grading Research Topics – Criteria and Evaluation Your grade in this course will be based entirely on your performance on a take-home exam. The exam will be distributed on the last day of class, Thursday, December 2nd, and it will be due Monday, December 6th.
Please take this exam schedule (especially the December 6th due date) into account in allocating your study time for this and your other courses. Grades for this course will be awarded based upon an alphabetical system and will strictly follow Southwestern’s grading policies. After a grade is awarded for the course, I am happy to discuss ways to improve a student’s performance. In accordance with law school policy, however, assigned grades will not, and cannot, be changed except for mathematical/clerical errors. Survey of Federal Income Tax Survey of Federal Income Tax D. Special Rules Regarding Electronic Devices
Recording of class meetings is permitted only if the professor is first asked and gives permission. Recording a class without permission is prohibited. If a student is granted permission, recording is condition upon the student’s agreement to share any recording with any classmate who makes a reasonable request. E. Statement of Reasonable Accommodations Students who need accommodations due to disabilities should contact the Counselor/Disability Specialist in the Diversity Affairs Office. The office is located in BW 361 and can be reached at (213) 738-6888 or [email protected] edu.
It is the policy and practice of Southwestern Law School to comply with the Americans with Disabilities Act of 1990 as amended by the ADA Amendments Act of 2008, Section 504 of the Rehabilitation Act, and state and local requirements regarding students and applicants with disabilities. Southwestern will make every effort to provide reasonable accommodations for students with medical, attentional, psychological, learning, or temporary disabilities. Accommodations are not provided to give a student an unfair advantage over other students, but simply to allow a student with disabilities to have an equal opportunity to be successful.
A student has the responsibility to meet with the Counselor/Disability Specialist as early as possible to discuss his or her request for special accommodations. Students who do not seek accommodations need not make their disabilities known. Further information regarding procedures, policies and documentation required is available in the Student Handbook. F. Office Hours/Instructor Availability Office: BW 325 Office Hours: Mondays and Wednesdays, 12:15 pm – 2:15 pm, Thursdays, 12:15 pm – 1:15 pm, and at your convenience (just let me know what day and time is good for you).
I also will be on campus on other days and at other times. Please feel free to drop into my office, unannounced, whenever you see me there. III. ASSIGNMENTS: The reading assignments and topics covered in this class are set forth below. Assignments are subject to change or supplementation. Survey of Federal Income Tax Survey of Federal Income Tax Day Date Topics Study Guide Read in Posin & Tobin v Mon Aug 23 Overview of Course and Federal Tax No reading Principles of Federal Income Tax Wed Aug 25 Income Introduction Income in General 1 1- 8 51 – 59 Thur Aug 26 Fringe Benefits Prizes 2 59 – 65 17 – 118 Mon Aug 30 Interest Dividends Rents Royalties 3 79 – 83 86 – 89 89 – 89 89 – 92 Wed Sept 1 Life Insurance Proceeds Gifts and Inheritances 4 92 – 96 101 – 111 Thur Sep 2 Discharge of Debt Damages Assignment of Income 5 121 – 122 136 – 143 329 – 336 Mon Sept 6 No class. Labor Day. Wed Sept 8 Deductions Structural Issues 6 354 – 362 Thurs Sept 9 No class. Rosh Hashanah. Mon Sept 13 Ordinary and Necessary Business Expenses Rental Expenses Bribes and Penalties Lobbying and Political Expenses Moving Expenses 7 362 – 364 – 472 – 475 475 – 476 406 – 407 Wed Sept 15 Capital Expenditures vs.
Business Expenses Depreciation 8 457 – 464 422 – 435 Thurs Sept 16 Itemized Deductions in General Tax Advice and Attorney’s Fees Taxes Interest 9 487 – 489 489 – 490 498 – 500 490 – 498 Mon Sept 20 Casualty Losses Charitable Contributions Floor on Miscellaneous Itemized Deductions Standard Deduction 10 500 – 506 519 – 527 527 – 528 529 – 530 Wed Sept 22 Income & Deductions, Combined: Sales and Exchanges of Property Overview of Sales and Exchanges The Requirement of Realization 11 148 – 152 152 – 166 Thurs Sept 23 Computation of Gain or Loss Realized 12 171 – 184 Mon Sept 27 Carryover Basis of Gifts
Basis of Property Received from Decedents 13 198 – 203 205 – 209 Wed Sept 29 Recognition of Gain or Loss: In General Exchanges of “Like-Kind” Property 14 217 – 220 220 – 228 Survey of Federal Income Tax Survey of Federal Income Tax Day Date Topics Study Guide Read in Posin & Tobin v Thur Sept 30 Recognition of Gain or Loss: Involuntary Conversions “Wash Sales” of Stock 15 237 – 239 242 – 246 Mon Oct 4 Tax Rates Ordinary Income vs. Capital Gains Capital Assets Capital Losses 16 251 – 252 282 – 289 301 – 306 266 – 268 Wed Oct 6 Section 1231 Property Calculation of Capital Gains Tax
Capital Gains Policy 17 – – 319 – 322 Thur Oct 7 Tax Alternative Minimum Tax Social Security and Medicare Taxes 18 532 – 539 – Mon Oct 11 Credits: Earned Income and Certain Others 19 633 – 634 637 – 638 639 – 640 Selected Applications Wed Oct 13 Family The Marriage Tax Personal and Dependents Exemptions Dependents Exemptions after Divorce 20 448 – 451 530 – 532 Thur Oct 14 Alimony and Child Support 21 443 – 447 Mon Oct 18 Property Division in Divorce Child and Dependent Care Credit Child Tax Credit 22 166 – 171 634 – 637 640 – 642 Wed Oct 20 Health Care Medical Expenses 23 514 – 519
Thur Oct 21 Home Ownership Home Mortgage Interest Property Taxes First-Time Homebuyers Credit 24 490 – 498 – – Mon Oct 25 Home Office Expenses Vacation Homes 25 412 – 417 417 – 422 Wed Oct 27 Gains (and Losses) on Sales of Homes 26 210 – 217 Thur Oct 28 Education Scholarships Education Expenses Student Loan Interest Hope Scholarship/Lifetime Learning Credits 27 118 – 121 384 – 388 – 642 – 646 Survey of Federal Income Tax Survey of Federal Income Tax Day Date Topics Study Guide Read in Posin & Tobin v Mon Nov 1 Travel Business Travel Expenses Business vs. Pleasure Travel Expenses 28 70 – 380 394 – 396 Wed Nov 3 Entertainment, Amusement, and Recreation Expenses Entertainment, Amusement, and Recreation Expenses Limits on Deductibility of Business Meals and Entertainment Expenses Hobby Expenses 29 396 – 403 403 – 404 407 – 412 Thur Nov 4 Mon Nov 8 Wed Nov 10 Thur Nov 11 Mon Nov 15 Wed Nov 17 Thur Nov 18 Mon Nov 22 The topics for these class meetings will be selected later in the semester. In choosing topics, we will take into account what is then new and newsworthy and what you and your classmates are interested in covering. I currently have in mind these possible opics: Tax treatment of: – Retirement – Deferred compensation – Taxation of personal income earned abroad Wed Nov 24 No class. Thanksgiving. Thur Nov 25 No class. Thanksgiving. Mon Nov 29 Tue Nov 30 Wed Dec 1 Selected topics (continued) Thur Dec 2 Review and Distribution of Final Exam Questions Mon Dec 6 Final Exam Answers Due (at Time To Be Announced) Study Guide 1 Page 1. 1 PART 1: PRINCIPLES OF FEDERAL INCOME TAXATION INCOME Introduction Read (in Posin & Tobin) Pages 1-8 Questions We begin with a high-level overview of federal income tax – “the view from 40,000 feet,” so to speak.
We’ll get down to ground level (and below) in classes to follow. But before we do that, you’ll need to know some tax terminology. The following questions will enable you to test yourself on whether you picked up the meanings of critical terms as you read the pages assigned for this lesson. 1. Federal income tax is “progressive. ” Why is it called “progressive”? a. Because the tax system is designed to finance progress. b. Because the tax system was designed by the Progressive Party (a political party formed in 1912 by Theodore Roosevelt when he lost the Republican Party nomination for President to William Howard Taft). . Because federal income tax rates increase as a taxpayer’s income increases. d. Because federal income tax rates decrease as a taxpayer’s income increases. 2. Tammy Taxpayer will have taxable income of $100,000 in 2008 and will be in the 28% tax bracket. This means that for 2008, she will pay federal income tax of: a. $28,000 (i. e. , 28% of $100,000). b. less than $28,000, because she will pay 28% in taxes only on the last several thousand dollars that she earns; the first several thousand dollars that she earns will be taxed at lower rates. c. ore than $28,000, because she will pay 28% in taxes on the first several thousand dollars that she earns; the last several thousand dollars that she earns will be taxed at higher rates. d. None of the above. 3. In order to get a “progressive” tax system, the Internal Revenue Code uses something called “marginal tax rates. ” What are “marginal tax rates”? a. They are tax rates that are printed in the margins of the pages of the Code, like footnotes. b. They are rates that are applied on last dollar a taxpayer earns. c. They are rates that are applied on the first dollar a taxpayer earns. d. None of the above.
Study Guide 1 Page 1. 2 4. Because federal income tax is “progressive,” it isn’t “regressive. ” What is a “regressive tax”? a. A type of tax system advocated by the Regressive Party – a ultraconservative political party that seeks to return America to the kind of society it enjoyed during the 19th century. b. A tax system whose rates increase as a taxpayer’s income increases, thereby reducing the taxpayer’s incentive to work and causing society to regress. c. A tax system that requires those who earn high incomes to pay a greater percentage of their total income in tax than those who earn low incomes. . A tax system that requires those who earn low incomes to pay a greater percentage of their total income in tax than those who earn high incomes. 5. The Social Security tax is 12. 4% of a taxpayer’s wages up to $102,000 per year (for 2008). Half of that – 6. 2% – is paid by the taxpayer’s employer and the other half is paid by the employee him or herself. This means that a taxpayer who earns $102,000 in 2008 will pay $6,324 in Social Security tax (6. 2% x $102,000). It also means that a taxpayer who earns $1 million in 2008 will pay the same $6,324 in Social Security tax.
As a percentage of his or her total income, the taxpayer who earns $102,000 will pay 6. 2%, while the taxpayer who earns $1 million will pay just 0. 6324%. The Social Security tax is: a. Progressive. b. Regressive. c. Neither progressive nor regressive, but is instead an example of a “flat tax. ” d. None of the above. 6. What is a taxpayer’s “effective tax rate” (sometimes called the “average tax rate”)? a. The rate determined by the taxpayer’s tax bracket. b. The average of the taxpayer’s tax bracket rate and Social Security rate. c. The percentage of the taxpayer’s taxable income actually paid in federal income taxes. . The percentage of the taxpayer’s taxable income actually paid in federal income and Social Security taxes. 7. “Gross income” is: a. All income, from every source, including income that does not have to be reported to the IRS. b. Income from sources that are too disgusting to be discussed. c. Income from all sources that the law requires to be reported to the IRS, which means income from absolutely all sources. d. Income from all sources that the law requires to be reported to the IRS, which means that some income – including income that is received, enjoyed and even spent – is not included in “gross income. Study Guide 1 Page 1. 3 8. What is a taxpayer’s “adjusted gross income”? a. The amount the taxpayer is required to include in “gross income” after being audited by the IRS. b. The amount of the taxpayer’s income after taxes are paid. c. The amount of the taxpayer’s income after “above-the-line” deductions are taken. d. The amount of the taxpayer’s income after the employer’s share of Social Security tax is added to the taxpayer’s gross income. 9. “Above-the-line deductions” are: a. The same as “above the table” deductions, i. e. , deductions that are legitimate and honest. b.
Deductions that may be taken by all taxpayers (who actually incurred the relevant expenses), including taxpayers who do not itemize their deductions. c. Neither of the above. d. Both of the above. 10. A “standard deduction” is: a. A deduction for an expense that is so common that virtually all taxpayers incur such expenses and take deductions for it. b. A deduction that every taxpayer is entitled to take, including those taxpayers who itemize their deductions. c. A deduction that every taxpayer is entitled to take, but actually is taken only by those whose itemized deductions would amount to less than the amount of the standard deduction. . None of the above. 11. What are “itemized deductions”? a. Deductions for specific expenses permitted by the Internal Revenue Code. b. Deductions that are listed on tax returns, expense by expense (or at least by category). c. Both of the above. d. Neither of the above. 12. Will a taxpayer’s itemized deductions always will be greater than his or her standard deduction? a. Yes. b. No. 13. Do all types of itemized deductions reduce a taxpayer’s taxes by the same amount? a. Yes. b. No. Study Guide 1 Page 1. 4 14. “Personal and dependency exemptions” are: a. Circumstances that exempt some taxpayers from the obligation to file tax returns. . Amounts that all taxpayers may deduct, for themselves and their dependents, from their Gross Incomes in calculating their Taxable Incomes. c. Amounts that taxpayers who itemize their deductions may deduct for themselves and their dependents. d. Amounts that taxpayers who do not itemize their deductions may deduct for themselves and their dependents. 15. What is a “tax credit”? a. A deduction for federal taxes paid the prior year. b. A deduction for state and local taxes paid for the current year. c. A credit against the following year’s taxes given by the IRS to taxpayers who overpay their taxes for the current year. . A credit against taxes that would otherwise be payable for the current year. 16. Which saves taxpayers more in taxes? a. A $1,000 standard deduction. b. A $1,000 itemized deduction. c. A $1,000 credit. d. All three save taxpayers the same amount in taxes. 17. A taxpayer bought property for $100,000 and later sold it for $200,000. What was the taxpayer’s “basis” in the property? a. $100,000 b. $200,000 c. $300,000 d. None of the above. 18. In question 17, how much did the taxpayer “realize”? a. $100,000 b. $200,000 c. $300,000 d. None of the above. 19. In question 17, what was the taxpayer’s “gain”? a. 100,000 b. $200,000 c. $300,000 d. None of the above. Study Guide 1 Page 1. 5 20. Is a tax deduction this year a benefit to you, even if you have to pay tax on the amount deducted at some point in the future? a. Yes b. No 21. During George Bush’s first term as President, Congress passed four bills that cut the taxes of some Americans. However, those tax cuts – which were referred to during the last Presidential campaign as the “Bush Tax Cuts” – will automatically expire in 2010, at which time they will disappear and taxes will return to their pre-2001 levels, unless new legislation prevents that from happening.
Why did Congress insert expiration dates into the very laws that cut taxes in the first place, and why did Congress choose 2010 as the expiration date for the cuts? a. To put pressure on Americans to elect a Republican as President in 2008, because a Republican would have been more likely than a Democrat to extend the tax cuts beyond 2010. b. To give Congress an opportunity to see whether the tax cuts had a positive or negative impact on the U. S. economy, and to make adjustments if necessary. c. To reach a compromise between Republicans who wanted to cut axes permanently and Democrats who didn’t want to cut taxes at all. d. To comply with an already existing rule that required Congress to offset tax cuts with spending reductions, so as not to increase the deficit; but spending reductions weren’t necessary until 2010 (Congress calculated) because of budget surpluses that were earned while Bill Clinton was President. Income in General This begins our study of what is included in “gross income,” and in particular, what kinds of compensation for services are “gross income. ” But before we zero in on “compensation,” you’ll want to know how “income” is defined generally.
As a result, our study will start with some types of income that aren’t actually “compensation for services. ” Then we’ll segue into compensation for services by looking at Fringe Benefits. Read (in Posin & Tobin) re Income in General Pages 51-59 Study Guide 1 Page 1. 6 Internal Revenue Code re Income in General § 61. Gross income defined (a) General definition. —Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items: (1) Compensation for services, including fees, commissions, fringe benefits, and similar items; 2) Gross income derived from business; (3) Gains derived from dealings in property; (4) Interest; (5) Rents; (6) Royalties; (7) Dividends; (8) Alimony and separate maintenance payments; (9) Annuities; (10) Income from life insurance and endowment contracts; (11) Pensions; (12) Income from discharge of indebtedness; (13) Distributive share of partnership gross income; (14) Income in respect of a decedent; and (15) Income from an interest in an estate or trust. Questions re Income in General 22. Teresa Taxpayer bought a used guitar on eBay for $5.
Ten years later, Teresa’s son accidentally knocked the guitar off a table, and the guitar broke open like an egg. Teresa then discovered that an envelope had been taped to the inside of the guitar, and inside the envelope she found five $1,000 bills. The $5,000: a. is not income to Teresa, and never will be. b. is not income to Teresa unless and until she spends the money, at which time it will be income to her. c. was income to Teresa in the year in which she bought the guitar. d. became income to Teresa in the year in which she found the money. Study Guide 1 Page 1. 7 23. Tex Taxpayer is a successful football coach.
In addition to paying Tex a salary and bonuses, his team leases a Cadillac for his wife and a Corvette for his son. The team does this, because when Tex’s agent negotiated Tex’s employment contract, the agent demanded that the team do so. Tex’s employment contract requires the team to lease both cars and to make the lease payments directly to the auto leasing company. The auto lease money does not go to Tex (or his wife or son). The lease payments: a. are not income to Tex, because he doesn’t receive that money. b. are not income to Tex, because he doesn’t drive the cars. c. re income to Tex, because his agent demanded that the team lease the cars; if the team had volunteered to lease the cars for Tex’s wife and son, and Tex’s contract said nothing about the leases, the payments would not have been income to Tex. d. are income to Tex, because they are part of his compensation for coaching the team. 24. Tuffie Taxpayer sued her former investment advisor for investing her money in a what turned out to be a Ponzi scheme run by the advisor himself. In addition to recovering all of the money Tuffie lost on the investment, Tuffie also obtained a judgment for, and actually collected, punitive damages.
The punitive damages: a. are income to Tuffie, because they were an “accession to wealth” which she “realized” and over which she had “complete dominion. ” b. are income to Tuffie, even if she had been unable to collect them, because she got a judgment for them. c. are not income to Tuffie, because they were a windfall. d. are not income to Tuffie, because although they were a “gain” to her, that gain was not derived from labor or capital. Study Guide 1 Page 1. 8 25. [True story:] In August 2007, Barry Bonds, then of the San Francisco Giants, hit his 756th career home run – a new Major League Baseball record.
The home run ball was caught by a baseball fan named Matt Murphy. The ball was estimated (by whom, I’m not clear) to have a value of $500,000, and Murphy was told (again, by whom, I’m not sure) that he would have to pay income tax on the ball’s value, when he filed his tax 2007 return, even if he kept the ball and didn’t sell it. The tax could have amounted to as much as $175,000. So Murphy arranged to sell the ball by auction. The winning bidder – fashion designer Marc Ecko – reportedly paid $752,467. 20. [Questions:] Which of the following is true? a. Murphy got bad advice.
He wouldn’t have had to pay tax on the ball, unless and until he sold it. b. Murphy got good advice. He would have had to pay tax on the ball, even if he didn’t sell it. c. As things turned out, Murphy got bad advice, because if he had kept the ball, he would have had to pay tax on its $500,000 estimated value, but since he sold the ball for more than that, he had to pay tax on the full amount he received when he sold it. d. Murphy got inaccurate advice, but only he can say whether it was “good” or “bad,” because he wouldn’t have had to pay tax the ball if he kept it, and e didn’t have to pay tax on the money he received when he sold it. So the question – for Murphy – is simply whether he would have preferred to hang on the ball or whether he prefers the money. Note: If you find this question to be particularly interesting, or you are a serious baseball fan (in which case you should find this question to be interesting! ), take a look at Ball Busters: How the IRS Should Tax Record-Setting Baseballs and Other Found Property under the Treasure Trove Regulation, by Andrew D. Appleby, 33 Vermont Law Review 43 (2008), available at SSRN: http://ssrn. om/abstract=1310846. Study Guide 2 Page 2. 1 Fringe Benefits Read (in Posin & Tobin) re Fringe Benefits Pages 59-65 Internal Revenue Code re Fringe Benefits § 132. Certain fringe benefits (a) Exclusion from gross income. —Gross income shall not include any fringe benefit which qualifies as a— (1) no-additional-cost service, (2) qualified employee discount, (3) working condition fringe, (4) de minimis fringe, (5) qualified transportation fringe, (6) qualified moving expense reimbursement, (7) qualified retirement planning services, or (8) qualified military base realignment and closure fringe. b) No-additional-cost service defined. —For purposes of this section, the term “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 the line of business of the employer in which the employee is performing services, and (2) the employer incurs no substantial additional cost (including forgone revenue) in providing such service to the employee (determined without regard to any amount paid by the employee for such service). c) Qualified employee discount defined. —For purposes of this section— (1) Qualified employee discount. —The term “qualified employee discount” means any employee discount with respect to qualified property or services to the extent such discount does not exceed— (A) in the case of property, the gross profit percentage of the price at which the property is being offered by the employer to customers, or (B) in the case of services, 20 percent of the price at which the services are being offered by the employer to customers. (2) Gross profit percentage. — (A) In general. The term “gross profit percentage” means the percent which— (i) the excess of the aggregate sales price of property sold by the employer to customers over the aggregate cost of such property to the employer, is of (ii) the aggregate sale price of such property. (B) Determination of gross profit percentage. —Gross profit percentage shall be determined on the basis of— (i) all property offered to customers in the ordinary course of the line of business of the employer in which the employee is performing services (or a reasonable classification of property selected by the employer), and ii) the employer’s experience during a representative period. Study Guide 2 Page 2. 2 (3) Employee discount defined. —The term “employee discount” means the amount by which— (A) the price at which the property or services are provided by the employer to an employee for use by such employee, is less than— (B) the price at which such property or services are being offered by the employer to customers. (4) Qualified property or services. The term “qualified property or services” means any property (other than real property and other than personal property of a kind held for investment) or services which are offered for sale to customers in the ordinary course of the line of business of the employer in which the employee is performing services. (d) Working condition fringe defined. —For purposes of this section, the term “working condition fringe” means any property or services provided to an employee of the employer to the extent that, if the employee paid for such property or services, such payment would be allowable as a deduction under section 162 or 167. e) De minimis fringe defined. —For purposes of this section— (1) In general. —The term “de minimis fringe” means any property or service the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer’s employees) so small as to make accounting for it unreasonable or administratively impracticable. (2) Treatment of certain eating facilities. – 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 the business premises of the employer, and (B) revenue derived from such facility normally equals or exceeds the direct operating costs of such facility. The preceding sentence shall apply with respect to any highly compensated employee only if access to the facility is available on substantially the same terms to each member of a group of employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of highly compensated employees.
For purposes of subparagraph (B), an employee entitled under section 119 to exclude the value of a meal provided at such facility shall be treated as having paid an amount for such meal equal to the direct operating costs of the facility attributable to such meal. (f) Qualified transportation fringe. — (1) In general. —For purposes of this section, the term “qualified transportation fringe” means any of the following provided by an employer to an employee: (A) Transportation in a commuter highway vehicle if such transportation is in connection with travel between the employee’s residence and place of employment. (B) Any transit pass. C) Qualified parking. Study Guide 2 Page 2. 3 (2) Limitation on exclusion. —The amount of the fringe benefits which are provided by an employer to any employee and which may be excluded from gross income under subsection (a)(5) shall not exceed— (A) $100 per month in the case of the aggregate of the benefits described in subparagraphs (A) and (B) of paragraph (1), and (B) $175 per month in the case of qualified parking. (3) Cash reimbursements. —For purposes of this subsection, the term “qualified transportation fringe” includes a cash reimbursement by an employer to an employee for a benefit described in paragraph (1).
The preceding sentence shall apply to a cash reimbursement for any transit pass only if a voucher or similar item which may be exchanged only for a transit pass is not readily available for direct distribution by the employer to the employee. (4) No constructive receipt. —No amount shall be included in the gross income of an employee solely because the employee may choose between any qualified transportation fringe and compensation which would otherwise be includible in gross income of such employee. . . . (i) Reciprocal agreements. For purposes of paragraph (1) of subsection (a), any service provided by an employer to an employee of another employer shall be treated as provided by the employer of such employee if— (1) such service is provided pursuant to a written agreement between such employers, and (2) neither of such employers incurs any substantial additional costs (including foregone revenue) in providing such service or pursuant to such agreement. (j) Special rules. — (1) Exclusions under subsection (a)(1) and (2) apply to highly compensated employees only if no discrimination. Paragraphs (1) and (2) of subsection (a) shall apply with respect to any fringe benefit described therein provided with respect to any highly compensated employee only if such fringe benefit is available on substantially the same terms to each member of a group of employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of highly compensated employees. . . . (4) On-premises gyms and other athletic facilities. — (A) In general. —Gross income shall not include the value of any onpremises athletic facility provided by an employer to his employees. B) On-premises athletic facility. —For purposes of this paragraph, the term “on-premises athletic facility” means any gym or other athletic facility— (i) which is located on the premises of the employer, (ii) which is operated by the employer, and (iii) substantially all the use of which is by employees of the employer, their spouses, and their dependent children. . . . Study Guide 2 Page 2. 4 §119. Meals or lodging furnished for the convenience of the employer (a) Meals and lodging furnished to employee, his spouse, and his dependents, pursuant to employment. There shall be excluded from gross income of an employee the value of any meals or lodging furnished to him, his spouse, or any of his dependents by or on behalf of his employer for the convenience of the employer, but only if— (1) in the case of meals, the meals are furnished on the business premises of the employer, or (2) in the case of lodging, the employee is required to accept such lodging on the business premises of his employer as a condition of his employment. (b) Special rules. —For purposes of subsection (a)— (1) Provisions of employment contract or state statute not to be determinative. In determining whether meals or lodging are furnished for the convenience of the employer, the provisions of an employment contract or of a State statute fixing terms of employment shall not be determinative of whether the meals or lodging are intended as compensation. (2) Certain factors not taken into account with respect to meals. —In determining whether meals are furnished for the convenience of the employer, the fact that a charge is made for such meals, and the fact that the employee may accept or decline such meals, shall not be taken into account. (3) Certain fixed charges for meals. (A) In general. —If— (i) an employee is required to pay on a periodic basis a fixed charge for his meals, and (ii) such meals are furnished by the employer for the convenience of the employer, (iii) there shall be excluded from the employee’s gross income an amount equal to such fixed charge. (B) Application of subparagraph (A). —Subparagraph (A) shall apply— (i) whether the employee pays the fixed charge out of his stated compensation or out of his own funds, and (ii) only if the employee is required to make the payment whether he accepts or declines the meals. 4) Meals furnished to employees on business premises where meals of most employees are otherwise excludable. —All meals furnished on the business premises of an employer to such employer’s employees shall be treated as furnished for the convenience of the employer if, without regard to this paragraph, more than half of the employees to whom such meals are furnished on such premises are furnished such meals for the convenience of the employer. Study Guide 2 Page 2. 5 Questions re Fringe Benefits 1. The law firm of Kind & Generous specializes in estate planning, and writes wills for its support staff.
The firm charges clients $2,500 or more to prepare wills, but it doesn’t charge its staff anything. The wills are prepared by lawyers who are members of the firm, whenever they have time to so. No paying clients are turned away. So the firm doesn’t incur any out-of-pocket costs to write wills for its staff, nor does it lose any revenue by doing so. Which of the following best states the tax circumstances to staff members for whom the firm prepares wills? a. They will have to report $2,500 as income. b.
They will have to report something as income, but the amount they report may be less or more than $2,500, depending on what the firm would charge a client for a similar will. c. They will not have to report anything as income, unless and until they die and the will is actually used. d. They will not have to report anything as income (attributable to the preparation of the will), ever. 2. The law firm of Rough & Tumble specializes in criminal defense. No one in the firm knows how to prepare wills. But the firm wanted to provide its support staff with wills, at no cost to the staff.
As a result, Rough & Tumble made a written deal with Kind & Generous: Kind & Generous writes wills for Rough & Tumble’s staff at no charge; and Rough & Tumble handles criminal defense matters for Kind & Generous’s staff at no charge. Neither firm incurs out-of-pocket costs to provide these services; nor does either firm turn away any paying clients to do so. Which of the following best states the tax circumstances to Rough & Tumble staff for whom Kind & Generous prepares wills, and Kind & Generous staff for whom Rough & Tumble handles criminal defense matters? a.
The staff of both firms will have taxable income. b. The staff of neither firm will have taxable income. c. The staff Rough & Tumble will have taxable income, but the staff of Kind & Generous will not. d. The staff of Kind & Generous will have taxable income, but the staff of Rough & Tumble will not. Study Guide 2 Page 2. 6 3. A department store gives all of its employees a 20% discount from the retail price the store charges its customers. Even after the discount, the amount that employees pay is slightly more than the wholesale price the store paid to buy the merchandise in the first place.
Is the amount of the discount “income” to the store’s employees? a. Yes, because the discount is part of compensation the store’s employees receive for working there. b. Yes, because the store incurred some cost in buying the merchandise, and therefore this fringe benefit does not qualify as a no-cost benefit. c. No, because employees pay more than the wholesale price paid by the store, so this is a qualified employee discount. d. No, because the discount does not put cash in the hands of the store’s employees; it simply saves them money if they choose to buy something using the discount. 4.
A department store gives all of its employees a 60% discount from the retail price the store charges its customers. After the discount, the amount that employees pay is less than the wholesale price the store paid to buy the merchandise in the first place. Is the amount of the discount “income” to the store’s employees? Is any amount income to the store’s employees? a. Yes, because the discount is part of compensation the store’s employees receive for working there. b. Yes, because the store incurred some cost in buying the merchandise, and therefore this fringe benefit does not qualify as a no-cost benefit. . Yes, because employees pay less than the wholesale price paid by the store, so this is not a qualified employee discount. d. No, because the discount does not put cash in the hands of the store’s employees; it simply saves them money if they choose to buy something using the discount. 5. A law firm has a charge account with a restaurant near the firm’s offices, and the firm allows its lawyers and staff to charge dinner at that restaurant if they return to the office after dinner and work until 10:00 pm (or later). Is the cost of the dinners income to the lawyers and staff? a.
Yes, because the dinners are part of the compensation the firms lawyers and staff receive for working there, and the meals are not furnished on the premises of the law firm. b. Not if paying for the dinners is for the convenience of the firm, which it may be if it encourages lawyers and staff to work late. Study Guide 2 Page 2. 7 6. A law firm operates its own dining room within its suite of offices. Lawyers and staff are permitted to eat breakfast and lunch there. The dining room is for the convenience of the lawyers and staff – not for the convenience of the firm. The firm doesn’t charge anything at all for the meals.
Is the cost of the breakfasts and lunches income to the lawyers and staff? a. Yes, because the meals are part of the compensation the firms lawyers and staff receive for working there, and the meals are furnished for the convenience of the lawyers and staff rather than for the convenience of the firm. b. No because the meals are furnished on the premises of the law firm. 7. A law firm provides free coffee to its lawyers and staff. Do those who drink it have any income? a. Yes, because the coffee is part of the compensation the firms lawyers and staff receive for working there. b. No because the coffee is a de minimis fringe benefit. . A law firm provides free parking in the building where the firm’s offices are located for the firm’s associates and staff, but not to its partners. The parking costs the firm $200 per person per month – the same amount that partners have to pay. Is the cost of the parking income to the associates and staff? a. Yes, because the parking is part of the compensation the firms associates and staff receive for working there. b. Yes, because partners do not get free parking, and this discrimination against partners means that free parking for associates and staff is not a qualified transportation fringe benefit. . No, because the parking is a de minimis fringe benefit. d. No, because the parking is a qualified transportation fringe benefit. Study Guide 2 Page 2. 8 Prizes Read (in Posin & Tobin) re Prizes Pages 117-118 Internal Revenue Code provisions re Prizes, Fellowships and Scholarship Grants § 74. Prizes and awards (a) General rule. —Except as otherwise provided in this section or in section 117 (relating to qualified scholarships), gross income includes amounts received as prizes and awards. (b) Exception for certain prizes and awards transferred to charities. Gross income does not include amounts received as prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement, but only if – (1) the recipient was selected without any action on his part to enter the contest or proceeding; (2) the recipient is not required to render substantial future services as a condition to receiving the prize or award; and (3) the prize or award is transferred by the payor to a governmental unit or [charitable] organization . . . pursuant to a designation made by the recipient.
Questions re Prizes 9. [True story:] In October 2007, former Vice President Al Gore was awarded the Nobel Peace Prize for his work on the effects of climate change. He shared the award, and the $1. 5 million that goes to the winner, with the Intergovernmental Panel on Climate Change. Immediately upon being informed that he had won the Prize, Gore announced that he would donate his half of the $1. 5 million to a nonprofit organization he founded the year before called the Alliance for Climate Protection. Was his half of the $1. 5 income to him? a. Yes. b.
Not if he advised the Nobel Prize committee to pay the money directly to the Alliance for Climate Protection. c. No, because he didn’t render any services to the Nobel Prize committee in order to win the money. d. No; and it wouldn’t have been income to him under any circumstances. Study Guide 3 Page 3. 1 Interest Read (in Posin & Tobin) re Interest Pages 79 – 83 Internal Revenue Code provisions re Interest § 61. Gross income defined (a) General definition. —Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items: . . (4) Interest; § 103. Interest on State and local bonds (a) Exclusion. Except as provided in subsection (b), gross income does not include interest on any State or local bond. (b) Exceptions. Subsection (a) shall not apply to – . . . (2) Any arbitrage bond (within the meaning of section 148). (c) Definitions. For purposes of this section. . . – (1) State or local bond. The term “State or local bond” means an obligation of a State or political subdivision thereof. (2) State. The term ”State” includes the District of Columbia and any possession of the United States. § 148. Arbitrage (a) Arbitrage bond defined. For purposes of section 103, the term “arbitrage bond” means any bond issued as part of an issue any portion of the proceeds of which are reasonably expected (at the time of issuance of the bond) to be used directly or indirectly- (1) to acquire higher yielding investments, or (2) to replace funds which were used directly or indirectly to acquire higher yielding investments. (b) Higher yielding investments. – For purposes of this section– (1) In general. – The term “higher yielding investments” means any investment property which produces a yield over the term of the issue which is materially higher than the yield on the issue.
Questions re Interest 1. Tabatha Taxpayer loaned her brother Bubba $1,000, at 10% interest, for one year, so he could buy a computer. One year later, Bubba repaid the loan in full, with interest, by paying her $1,100. How much income, if any, did Tabatha have in the year in which Bubba repaid her? a. None. It was just a loan repayment, within the family. b. $100. c. $1,000. d. $1,100. Study Guide 3 Page 3. 2 2. Tabatha Taxpayer loaned her brother Bubba $100,000, at 10% interest per year, for 10 years, so he could make a down payment on a condo. The loan agreement (i. e. the promissory note) signed by Bubba provided that he would repay Tabatha $10,000 per year for nine years, and $10,000 plus any balance still due in the 10th year. The loan agreement also provided that the payments made during the first nine years would be “interest only,” not repayment of principal. How much income, if any, did Tabatha have during each of the first nine years, as Bubba repaid her $10,000 per year? a. None, because it was just a loan repayment, within the family. b. None, because for the first nine years, Bubba was simply giving Tabatha back her own money – i. . , was repaying principal. c. $10,000. d. None of the above. 3. Same facts as #2, with this exception: the loan agreement provided that the payments made during the first nine years would be “principal only,” not interest; and that all interest would be paid, with the principal, in the 10th year. a. None, because it was just a loan repayment, within the family. b. None, because for the first nine years, Bubba was simply giving Tabatha back her own money – i. e. , was repaying principal. c. $10,000. d. None of the above. 4.
Tabatha Taxpayer bought a $100,000 bond issued by the State of California. It pays 10% interest and matures in 10 years. The bond is an “interest only” bond, so that when it matures in 10 years, the entire $100,000 will be repaid. How much income, if any, did Tabatha have during each of the first nine years, as the State of California repaid her $10,000 per year? a. None, because the payments were interest, and interest paid by states is exempt from tax. b. None, because for the first nine years, California was simply giving Tabatha back her own money – i. e. was repaying principal. c. $10,000. d. None of the above. Study Guide 3 Page 3. 3 5. The State of California is facing a budget crisis, because its revenues are inadequate to cover its expenses. Could California increase its revenues by taking advantage of the fact that states do not have to pay income tax, and are able to issue bonds? That is, could California sell low-interest bonds to buyers who want tax-exempt income, and then invest the proceeds in high-interest corporate bonds, the interest from which would be used to pay the interest owed to buyers of the state bonds?
If, for example, California bought corporate bonds paying 10% and sold state bonds paying tax-exempt interest at 6%, the state would be able to keep 4% (of the 10%) it received from the corporate bonds, and the state would not have to pay tax on that 4% (because states don’t pay tax). a. Yes, this would work fine. I’m surprised no one has told Governor Schwarzenegger about this. He’d love it, and so would the state Legislature. b. Yes, this would work fine. In fact, I’m sure that California is doing this already. c.
No, this wouldn’t work, because although interest paid by states usually is exempt from tax, these bonds would be “arbitrage bonds” whose interest would be taxable. d. No, this wouldn’t work, because corporate bonds are risky, and the state might lose money on the bonds it bought but still would be obligated to pay interest on the bonds it sold, so taxes would have to be raised to pay the interest, and the whole purpose of this scheme was to avoid raising taxes. Dividends Read (in Posin & Tobin) re Dividends Pages 86 – 89 Internal Revenue Code provisions re Dividends 61. Gross income defined (a) General definition. —Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items: . . . (7) Dividends; § 1. Tax imposed (h) Maximum capital gains rate (1) [and (11)] In general. If a taxpayer has a net capital gain for any taxable year, the tax imposed by this section [shall be taxed at capital gains rates which are lower than ordinary income rates, rather than at higher ordinary income rates]. Study Guide 3 Page 3. 4 Questions re Dividends 6.
DigiGame Company, a profitable video game publisher, needs to raise $1 million dollars in order to finance the creation and marketing of its next game. DigiGame can do so by selling stocks that pay dividends or bonds that pay interest. Tyler Taxpayer is willing to provide DigiGame with the funds it needs. In return, Tyler wants his investment – whether in stock or bonds – to provide him with an after-tax income of $50,000 per year. From a tax point of view (which is not the only relevant point of view, but is the one on which this question focuses), would DigiGame have to pay Tyler more per year if he buys the company’s stock or its bonds? Disregard the cost to DigiGame of doing it one way or the other; focus on the amount DigiGame would have to pay Tyler. ) a. DigiGame will have to pay Tyler the exact same amount, regardless of whether he buys stock or bonds. b. DigiGame will have to pay Tyler more if he buys bonds than if he buys stock. c. DigiGame will have to pay Tyler more if he buys stock than if he buys bonds. d. The answer depends on what tax bracket Tyler is in. 7. Boogle Inc. is one of the most successful website operators in the world.
Its fantastic success has driven the price of its stock to $500 per share. As result of this high price, most of Boogle’s shareholders are large institutions (mutual funds, insurance companies and the like) rather than the individuals who actually use Boogle’s websites. In order to broaden its shareholder base, Boogle has decided to split each share of its stock into five shares, and to distribute four additional shares to each shareholder for each share they currently own. This will result in the price per share of Boogle’s stock dropping from $500 to $100.
But since shareholders will own five shares for every one they owned before, the total value of each shareholder’s investment will remain the same, and each shareholder will continue to own the same percentage of the company that he or she owned before the split. What will the tax consequences be to Boogle’s shareholders, when they receive their additional shares? a. They will have $100 in income for each new share they receive. b. They will have income equal to $400 times the number of shares they owned before the split. c. They will have income equal to $500 times the number of shares they owned before the split. . They will have no income at all. Study Guide 3 Page 3. 5 8. Maxisoft Corp. is one of the most successful software companies in the world. As a result of years of profitable operations, the company has millions of dollars in the bank, in addition to vast holdings of real estate and, of course, valuable intellectual property rights. Despite its success, the price of the company’s stock has fallen to just $5 per share – from a one-time high of $50 – which means that the aggregate value of all Maxisoft stock is now not much more than the cash it has in the bank.
To counteract this dangerous state of affairs, the company has decided to redeem 50% of its outstanding stock – in other words to buy back half of every shareholders’ stock – for $5 per share in cash. After the redemption, shareholders will own only half the number of shares they owned before, but their percentage ownership in Maxisoft will remain the same. And they will have received cash for the shares that are redeemed. What will the tax consequences be to Maxisoft’s shareholders, when their shares are redeemed? a. They will have $2. 0 in income for each share that is redeemed. b. They will realize $5 for each share that is redeemed. c. They will have $10 in income for each share that is redeemed. d. They will have no income at all. Rents Read (in Posin & Tobin) re Rents Page 89 Internal Revenue Code provisions re Rents § 61. Gross income defined (a) General definition. —Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items: . . . (5) Rents; Questions re Rents 9.
Twyla Taxpayer owns a duplex in Los Angeles and two cars. She lives upstairs in the duplex and drives one of the cars. Her daughter and son-in-law used to live downstairs and drive the other car. But they just moved to Nashville, where they hope to make it big in the country music business. As a result, Twyla rented the downstairs part of the duplex and the car to a Southwestern Law School student. Do the rental payments made by the student to Twyla constitute income to Twyla? a. Yes, rental payments are income to everyone who receives them. b.
Yes, because rental payments received from professional school students are income; if Twyla’s tenant had been an undergraduate at, say, UCLA, they wouldn’t be income. c. No, because rental payments received from students are not income, though if Twyla’s tenant had been a practicing lawyer, they would be income. d. No, because Twyla is not in the business of renting property or cars; she is simply making a little money from property she owns that once was used by her family. Study Guide 3 Page 3. 6 Royalties Read (in Posin & Tobin) re Royalties Pages 89-92 Internal Revenue Code provisions re Royalties 61. Gross
