Professor Davis

Can bring Code Book (& can write all you can in the Book), Calculator & IC map to exam.

Additional Study Guides - Chirelstein - Federal Inc. Taxation 9th Edition // Bankman, Griffith, Pratt - Examples & Explanations for Fed. Inc. Tax. 3rd Edition

Do the problems.

Basic IT System:

1.  Income - what is the authority to have IC at a federal level? Constitution says taxes must be apportioned based on pop. (odd, should go by income of such states.)

  1. 1st IC was in Civil War. 1st IC was struck down as unCon. b/c was a direct tax.
  2. 1913 - 16th amend. says Fed Gov’t can tax on income. B/f IC, fed gov’t was funded by excise tax, especially on exports.

2.  People consider fair taxes to be taxes based on your ability to pay.

3.  Sources of IT Law: (in decreasing authority)

  1. Constitution
  2. Statutes - from Congress & Pres. - To overturn a statute, must find a Constitutional problem.
  3. Regulations - from Dept. of Treasury - To overturn a reg, must show it violates the statute. Could argue interpretation violates Con., reg giving too much authority to a dept… Regs. (like statutes) are binding on gov’t & taxpayers (tps).
  4. Revenue Rulings from IRS - are binding on gov’t, not on tps. Similar to cases. (same authority as rev. procs)
  5. Revenue Procedures from IRS - are binding on gov’t, not binding on tps. Rev. Procs are supposed to be strictly mechanics -- should not be substantive law.
  6. Private Letter Ruling (PLR) - For the tp that requested the ruling,, the PLR is binding on gov’t, even if is wrong. Can be revoked if you did not make fair disclosure… PLR’s however are NOT precedent for other tps. -- Can withdraw requests for PLR if you think you are going to get a NO on ques & want to do opposite on return. (Must include PLR w/return if get it). While not precedent, can use as evidence of IRS positions (can tell if IRS has been consistent or inconsistent) -- could prove IRS is acting in a way inconsistent w/your client… or that IRS does not have a consistent position on an issue.
  7. If Statute is changed, cannot rely on regs or cases Þ must look to Legislative History of bills. Legis history & regs usually use very similar language & Legis. are a good indication of what will be in regs.
  8. Cases used to clarify terms. EX. Guinan p122 PPR was unclear Þ case was needed to decide what PPR is w/multiple houses.
  9. Case told us what factors were important in determining PPR & defined PPR. Cases take unclear wds in statutes & give guidance (driven by statutory lang.).
  10. Cases give us Judicial Doctrine - which give us a “tax common law.” EX. assignment of income doctrine -- she cannot make 100k & give 50k to spouse who is in a lower tax bracket -- nothing in stats say you can’t do this, but common law has arisen from cases.

Code:

1.  § 1041 - Transfer of property b/w spouses or incident to divorce.

2.  § 121 - Exclusion of gain from sale of principal residence: - 2 main requirements: Ownership, Use (PPR)

Problem involving § 1041 & § 121 -- pp. 114-124; 840-844. -- Remember see last page of notes: remainder left over after § 121 falls under §1221 & lower tax rate may apply!!

1.  Problem #1: DIVORCE - PPR, SPOUSAL OWNERSHIP -- Client bought house in 2002, she is getting divorced 6 months after purchase. As part of property settlement w/husband she get a house in MS. Settlement also gave house in Florida to Husband, divided time evenly b/w 2 places.

  1. Answers to ques:
  2. Paid 200k asking for 500k, hoping to get b/w 450k & 500k, no renovations.
  3. Purchased late August 2002.
  4. Registered to vote in MS, tax returns to FL, MS license, car tags in MS.
  5. Neither lived in house b/f purchased.
  6. Title in both names when purchased summer 2004 MS house to her, FL house to him.
  7. Her Academic Yr in MS / him in FL / summer & breaks went b/w houses.
  8. Homestead exemption on both houses.
  9. Will be filing individual tax returns.
  10. She works for habit for humanity, nothing in FL.
  11. Her mail mostly to MS, banks in FL & MS.
  12. Spent 1 summer entirely in FL, he spent 1 entirely in MS.
  13. Filed out non-resident income tax for in MS. - Filed as non-resident b/c instructions on form.
  14. Selling house b/c want more land.
  15. Advice:
  16. Don’t Sell b/f Sept - must not let closing date occur until 2 yrs has passed.
  17. Where transferred FL house to husband, § 1041 -- work out prop settlement b/f divorce is final fall under 1041(a)(1) Þ no recognition of gain. (for FL house)
  18. MS house - do you have any gain & how much? Yes b/w 250k & 300k (diff b/w sell price & basis)
  19. Basis - investment in property. 1041(b). Initially 1/2 house was hers, 1/2 house his. If she takes his 1/2 by gift, she gets his basis in property Þ has full 200k as basis.
  20. Next must determine if qualify for § 121 & if so, how much?
  21. Ownership, Use (PPR) must be met.
  22. Ownership - owned 50% until summer, but get credit for husband’s ownership under § 121(d)(3)(A).
  23. She used it Þ sufficient (does not matter if hubby used house).
  24. Short-term temporary absences do not count against you in PPR determination.
  25. PPR established - generally do not have to meet State residency requirements, only have to meet Federal Tax residency. Additionally if state resident, may not be Fed. Tax resident.
  26. PPR largely determined by time spent in house, where job is, mail sent, drivers license, file taxes…
  27. How much can exclude? Assume filing individual return, can exclude 250K under § 121(b)(1). If sell for 300k, must claim 50k as income.

3.  If not divorced & sell, one spouse must own & both must reside to qualify for 500k in joint return. Here, would only qualify for 250k b/c hubby not residing.

2.  Problem #2: PART OWNERSHIP (DIVIDED INTEREST) & PPR -- Parents & 3kids. Parents own 2 homes, H1, H2, & die. The 3 kids, A,B, & C, inherit 2 homes tgh. (each owns undivided 1/3 interest in homes). A lives in H1 for more than 2 yrs., B lives in H2 for more than 2 years, C lives in his own house. 3 kids want to sell both houses Þ sell H1 for a gain of 300k (A has 100k on 1, B has 100k on 1, C has 100k on 1), H2 has a gain of 60k (each kid get 20k gain). Can any get § 121 exclusion & how much? § 121

  1. Gain of prop. which is jointly owned, each get allocated gain in proportion to amt. owned Þ on H1, 100k each; H2, 20k each Þ 120k ttl gain.
  2. 1st ques: Is this their PPR? for A & B yes, Have lived there for more than 2 years.

c.  Since each own 1/3, are they prevented from using § 121? NO; Look to Fed. Statute (passed by Cong. & Pres.) then to Regulations (passed by dept of treasury) Þ go to § 121 regs. (§ 1.121 p941) see 1.121-2(2) Joint owners - if jointly own, but file sep returns each may exclude up to 250k attributable to interest in prop.

d.  A & B qualify for § 121, C does not Þ A can exclude 100k (report 20k), B can exclude 20k (report 100k), C must report full 120k gross income. **ONLY QUALIFY FOR HOUSE WHERE MEET OTHER § 121 REQUIREMENTS (Ownership, PPR).

e.  If had 2 houses which were 1/2 owned by 2 people both were PPR for 1 person, if tried to swap ownership to recognize full gains, disposition of property under §121 would kick in & wouldn’t qualify & have to recognize gain on initial swap. When sold to TP, could recognize full gain, but really wouldn’t make a diff (would all even out). Additionally 121 has specific provision dealing w/transfers b/w related parties. All really depends on gain at time of swap, could be profitable…

3.  Does VACANT LAND beside house qualify for PPR? See § 1.121-1(b)(3) - Can include, but must meet requirements.

  1. EX. How much land can you include? 100 acres may be too much to claim as PPR, decided on a case by case basis.
  2. What if you can’t sell it & split it up to sell - you used it all as PPR, § 121 always refers to sale in singular, no real help from statute or reg. Þ have to analyze using what you have in stat. & reg. There is a gov’t side & taxpayer side… Þ would end up in court.
  3. Figuring gain from each piece, if partitioned & sold, can be problematic. -- Difficult to tell what value attached to each piece of prop. when originally purchased.

4.  FAILURE TO MEET PPR: Guinan 2003 p122 - want to know which house has greatest gain, if another house exists w/greater gain & they are going to be selling it soon, won’t want to use § 121 exclusion… Would have advised them to spend more time in the house, send mail to house, bank in town, register cars, get license…

FILING RETURNS AND AUDITS:

  1. S of L: on hearing from gov’t that you messed up is:
  2. Generally 3 years from date of filing of non-fraudulent, sufficient return. S of L clock does not start ticking until file return (i.e. file for an extension, doesn’t start until filing date). If file early, S of L does not b/g until April 15.
  3. Alternative S of L if you understate income by more than 25% - S of L is 6 Years.
  4. If you do not file or do commit fraud, S of L never runs.
  5. Usually IRS will start audit w/in 3 yrs, not finish & will ask you to extend S of L. If you do not extend, they will assert tax liability & give you 30-day letter. (Do not want this to happen) Þ usually want to agree to extension. BUT if client has a huge item in return IRS has yet to challenge, do not extend S of L. Negotiate term of S of L extension (make sure there is a S of L end date & what issues will be addressed in extension…).
  1. Most likely you will not hear until yr 2 or 3 that you are being audited.
  1. Levels of Audits:
  2. Correspondence Audit - May get letter stating pay more money or tell us why you don’t owe. Phone calls & letters.
  3. Office Audit - IRS Office sends notice telling you to bring books & records to IRS Office. Usually limited to certain issues.
  4. Field Audit - IRS comes to you. Looking at a wide range of issues or same topic for multiple years. Keep log of what IRS asks for so you know what they are looking at. Felony to lie to IRS.
  1. Steps & Results in Audit:
  2. May say no additional tax due or may negotiate on what you owe. Then you will pay liability & are done.
  3. If cannot reach agreement, get a Thirty-Day Letter (this is your statutory notice of deficiency). [or if you don’t like your agent can request 30-dy letter & get new agent] Formal notification that gov’t is asserting you owe additional tax liability. You have 30 dys to take action.
  4. Can concede liability - weigh tax liability & expense of pursuing.
  5. Can request Administrative Appeal - can claim unRble IRS agent (try to get someone who will compromise).
  6. Do nothing for 30 dy period & at end of 30 dys will get a 90 Day Letter (your ticket to tax court litigation).
  7. W/in 90 days can concede,
  8. Can file petition in Tax Court to challenge tax liability gov’t is asserting you owe. Once you file petition IRS is prohibited from seizing assets…
  9. During 30 & 90 day Letter period, gov’t cannot act on you, unless they can establish you will hide assets or be a flight risk.
  10. If do not act at all w/in 90 days, gov’t can b/g seizing assets.
  11. Tax Court - No jury trial. Hears only deficiency claims. If you lose can pay concede or can Appeal to normal Federal Appeal Courts, jurisdiction based on tp’s residence. Do not hear refund claims.
  12. Fed. Appeal Court Level - lose, petition to cert appeal to Supreme Court. Unlikely they will take (usually take only if there is a split b/w circuits on a major issue).
  1. TP files return, pays taxes due & realized they have overpaid taxes. Can file amended return & request refund.
  2. If IRS rejects:
  3. Can concede.
  4. Can request Administrative Appeal w/in IRS.
  5. Can sue in District Court (claims court). DC only has jurisdiction over refund claims. (Tax courts hear deficiency claims) May prefer DC b/c can get jury trial or for forum shopping Þ if this is a deficiency & want jury trial, can pay then request refund. May problem if client does not have money to pay the tax.
  6. S of L for requesting refund 3 yrs from filing or 2 yrs from payment.
  1. May prefer Tax Court to District Court b/c DC judges & juries do not have specific knowledge & may not get a good trial whereas in TC get specialist judges. Additionally may be a difference in precedent.
  2. Golsen Rule - TC conceding that they must follow precedent of circuit for which case will be appealed.
  1. Attny / Client issues: Put everything in writing; Always do ultimately what client wants; A/C privilege does not always attach to all areas, must find out what is protected; Go to specialists if you need them (accountants…), BUT no client / accountant privilege Þ go through attny’s offices.

Always ask (1) Is there GI? § 61 (2) If there is GI, is there a specific exclusion? § 108

GROSS INCOME - CHAPTER 2 pp. 21 - 52. See probs. p21 review.

  1. Above the Line Deductions v. Below the line deductions - ALD’s are better. BLD’s have more limitations (§§ 67 68). § 62 lists whether things are ALD or BLD
  2. ALD - generally business deductions.
  3. BLD
  1. Taxable income GI - ALD - BLD, then apply tax rates.
  1. Tax Rates - measures how rates vary w/income.
  2. Progressive - as income increases, tax rate increases (tied to idea of ability to pay). Most widely used BUT how progressive should this be?
  3. EX.