Chapter 7 -insurance is tax free from gross income ONLY if it s a result of death.

-payment that s dish out DURING the insured life will not be excluded from income. however, 101(g), accelerated death benefits received from a life insurance policy on the life of a terminally ill or chronically ill are treated as if paid by reason of death Terminally ill- physician certifies as having illness or condition that can reasonably be expected to result in death within 24 months Chronically ill- certified within preceding 12 month period by licensed health care practitioner either as being unable to perform at least 2 activities of daily living for a period of at least 90 days due to a loss of functional capacity or as having severe cognitive impairment requiring substantial supervision to protect the individual from threats to health and safety. Life policy 100,000- if someone expects to live 50 yrs receive 3000 a yr. (2000 is excluded and 1000 is included in income)- if she lives longer, this breakdown of exclusion/inclusion will continue. B- Annuity 3 % rule of the cost of contract is taxable in a year, until the tax free portion equals the cost of the contract. If someone live longer than expectancy- any future payment is fully taxable If someone dies before expectancy- any unrecovered investment is allowed as a deduction on her last income tax.

10/25/11 Payment from Insurance company is tax free as a result of death. Interest on policy- not tax free. Why do insurance these types of arrangements? Structured payout- over periods (so they don t spent it all) Insurance payout the life of a beneficiary- payment will compose of interest (taxable) & principal (death benefit- tax free) Payment over the rest of my life- S. 101 use actuarial table. Ex. $1 Million policy- person elects to take it over 10 years. Each yr $100,000 (principal) exempt. There will be interest built into it. Cover the death benefit pro-rata (not in 1 shot, but limit to tax-exempt yearly). Annuity Ex. 10 yr life expectancy, insurance will pay $110,000 per yr for 10 years. $100,000 tax free, 10000 (taxable). If he live longer- nothing is exempt. (in regulation) Instead, he died before life expectancy- no one takes the money, the insurance company takes it. The uncovered portion, you do not get a deduction. Fixed term of year: Takes out a fixed 10 year payout- $100,000 per year. Die after 1 year. Uncovered portion can be use as a deduction. Selling life policy to another person- $1Mil policy for $500,000. Can sell your policy to someone. Taking a life policy on someone else (General Rule)Exception: spouse, child, employers Insurable interest (would be disadvantage if he/she die) You can sell life policy to someone else WITHOUT an insurable interest. $1 Mil policy for $500,000. 2 weeks later, the insured person died. How much is taxable? 101.a.2- if you sell it to someone else, amount up to what he/she spent is tax free. Exception: someone buy from you if they are a corporation that insured person has shares or partner interest, 101.a.2.1- then entire amount is tax free. Gift the policy- if it s a gift, entire amount is tax free stand in the insured person s shoes. (101.a.2.a) Part gift/part sell: FMV: 500,000. Sell it for 100,000. It s all a gift. (either way it s exempt) 101.a.1- general rule- it s normally tax free from gross income. Bought policy of $1mil for $100,000, worth 500k. Capital gain of 400,000

S.101(g)- terminally ill- $1 Mil policy, dying, can he sell the policy without a capital gain? it s allowed under 101(g), no restrictions getting money early. Chronic but not terminal illness- if you use money for medical reasons, it s tax free. Has to be biatical (sp) settlement provider. (latin word for long journey)

155. 1. a. nothing, excluded b. $6000 entirely taxable c. 100,000 death benefit over 25 yrs = 4000 a yr. rcving 12k, 8k is taxable. d. 26 yrs later- still get 12k forever. 8k taxable and 4k is not. Hypo. Daughter die after 10yrs- estate gets NOTHING Hypo. What if daughter terms is fixed term for 25, died after 10. 40k recovered, 60k is deduction. 2. 1 million policy for Jock. What different consequence? a. with Jock s permission- insurable interest, payout is tax free b. sell policy to Pr0, 20k is exempt (up to amount of basis) c. same as B, jock is a shareholder. If insured is a shareholder that buys the policy- full death benefit. Hypo: de minimis shareholder, does it make a difference? Nope. Hypo: policy is worth 22k, sold for 20k. no longer a shareholder. (part gift/part sell)- treat it entirely as a gift. Company stands in his shoes. 3a. bought for 40k, sell for 60k. Cap gain- 20k. child gets 100k. 60k is exempt. 40k is taxable. b. 40k spouse rule, she gets his basis. c. terminally ill- sell it for 80K. 0 gain. Full 80K is exempt. Corp- proceeds 100k, gain 20k. hypo- crippled in an accident- sells for 80k. (depends on what she use the proceeds for)

11/1/11 Life insurance/Annuity rule- what if life insurance life insurance person die and benefit kicks in? 100,000. Beneficienary takes payout over lifetime, actuarial tables. 25 yr payout- principle payout amount is 100,000 if you get 5000 a yr, exclusion ratio is 4000 is taxable. You can recoup more than principal (if you live forever) If you die early, you didn t collect all of principle. Let say you take it over 10 yr (100,000)- you get 11k a yr, 10k is recovery (tax free), 1000 is interest. If you live more than 10 yrs, it doesn t matter, it only pays 10 yrs. If you die early, YOU CANNOT TAKE DEDUCTION (that s annuity) if you die in 3 yrs, the 7 yrs payment is going to go to will/estate/intestate. *Test 1. A. All tax free b. 6000 interst a yr, 6000 is taxable c. 100k over25 yr, 4000 a yr is exempt- 12k payment, 8000 is interest (taxable) d. if c) lives beyond her 25 yrs- same rules apply (4k tax free, 8k taxable) h) what if she dies after 10 yrs, nothing would happen, the payment would just stop. h) if it s for a fixed number of years, she dies in 10 yrs, payments goes to her estate/beneficiary. 3 b) 60K FMV, insured debt of 100K- can collect tax free up to your basis. Spouse- she will stand in husband s shoes. 101.a.2.a- if someone purchases the contract, collect up to basis. Spouse stand in shoes, if purchaser s basis is the same as grantor s basis (by reference to grantor), her basis is his basis. Therefore, there s an exception to the normal rule buying from spouse is like receive gift from husband. Annuity rule- single premium annuity. You get pay till you die. How to recover from annuity- you figure out exclusion ratio, once you recover initial investment, any additional payments are taxable. 100/125 = 4/5 of payment will be exempt from tax until you recover the entire 100k. (facts, assuming 100K policy, you expect to receive a total of 125K). What if you expect 25 yrs, and if you die in a few yrs, the rest is deductions Problems: 169 1. Basis: 48K,3K a year for 24 years. (3 * 24 = 72K) 48K/72K = 2/3. (of the 3000, 2k will be exempt, 1k taxable) in yr 25, entire 3k is taxable c. what if this person dies after 9 yrs. (received27K) 2/3 18K is principal. Will get a deduction of 30k on his tax return. (48K 18K) d. 3k rcv incurrent year, as long as either live (JTWROS)- life expectancy of 34 yrs. Expect to receive 102K (3 * 34), 76,500 basis. 76,500/102,000 75% (3/4) of 3000 payment (3/4 is exempt) 2250. 750 is taxable.

Chapter 8- CODI (cancelation of debt income) As a result of a bad investment. Incur liability, but cant pay it off- (bad news economically) A-12: cancelation of debt. S.108- will probably exclude that from taxable income. Lose a tax attribute under S.108 (bad news), good news might not lose the attribute. Relief from debt is income, S108 might exclude it as income. 61.a.12- taxable 108.a.1- exclude it from taxable income 108.a.1.a- always get exclusion if you are in title 11 (Backruptcy) 108.a.1.b- insolvent- when your liability is more than assets. (45 mins in) only tax exempt up to the point that you re insolvent to. Both bankrupt and insolvent- use the bankruptcy use. Entire forgiven debt is exempt. 108.d.3- amount that your liability exceed assets the moment discharge occurs. Kirby vs. Lumber case: issue bond @100, bought it back @80% of par. money. Treasury regulations no longer have to pay back that

Debt itself- what debt will give rise to cancellation of income personal obligation of a taxpayer (recourse note), ? (55min) Disputed debt doctrine- owe 18K, agree to settle for $500. (this is not a relief of liability) Only is a income is where there is undisputed right to the original 18K claim. This is debating whether a debt actually exist. Zoran case- did he have to pay the debt? Nope, once he s on the list, he should not be given credit. Thus, he did not owe money 108.d 1) liability that you have your own- under law, it s a bad loan 2) a lean on property. the loan was a lean on chips. (Chips are NOT property- they are essentially money) Not debt are all debt for purpose of s. 108. Insolvent- not income. You will need to give up some future benefits (108.b.2.a) ex. 50k debt not income under S108. Net operating loss. (NOWL), Minimum Alt. Tax, Capital Loss, Basis loss reduction. -ex. 40k NOL, give up dollar per dollar basis. -tax credits- give up 33 cents on a dollar. (look for 10K attributes to lose)- only give up $3000 (credits is roughly 3 times as valuable as deduction). 50,000 (CODI) 0 (Insolvent) 50,000 40,000 (NOL) 10,000 10,000 (credits- 1/3 tax credit) 0

Basis reduction in assets. there are limitations on how much basis are give up. S. 108.c.5- do not have to reduce the basis in assets below the amount of liability you still have after discharge. After discharge- still have 100,000 in LIA. If basis in assets is 110,000. (idea: cant create another insolvency)- under the law, can only reduce basis by 10k. (unless you elect to reduce the basis if you are willing to change the order of the reductions). changing order of deductions ie, change basis reduction first BEFORE NOL. (108.b.2.e)

11/8/11 Gift- what s needed transfer w/o consideration Must be accepted Release of the actual property Part E. 100 assets, Lia 125. 40 discharge amount, 25 of it is insolvent. 15 is income Asset reduction- 100 tax discharge- 25, debt discharge- 40. Liabilitiy is 100 (125- 25 (tax discharge))- he s at the limit, can t write down asset 4. CODI income b. recognize income, gift tax c. estate has recivabile from nephew- bequest subject to estate tax.

Chapter 9- damages Real damages- damages actually suffered that you can count for Punitive damages- smart money- punish the person who committed the act. Goodwill- (not accounting goodwill)- asset the company asset. (company is worth so and so), if you do something to harm the company s image, the goodwill was (example) $20 mil, after the act, it s $18 mil. The damage is the difference. Structured settlement- upon settlement, usually structured over some time. Workman s comp- gets hurt on the job- no fault system, if an employee gets hurt- employee gets paid. Employer provided healthcarePhysical injury- causing physical stress. S.104- why is this person getting an award? Is he getting income? -1 company cant decide to operates as a monopoly. -the the extent you destroyed our goodwill, we will seek the difference as damgage -settlement, it s income should damages amount received about the cast casis. 193. 1. 80K tax free, 90k taxable b. 6500 gain (2k basis, 8.5k received), plantiff has 500 income, 8500 basis of land. c. 8000 income, 16k income. (glenshaw glass) d. $60k gain. (100 4-k) 2. (4000s- dnt allocate goodwill) 3. Damage of 3k, basis went from 4k to 1k. (50 mins)1k cost basis. S. 104 Damage award- affects their income earning potential. (not recovery of asset income) Physical injury- up until 1996, instead of physical injury, it covers personal injury. Ex.slander- damage, old S.104 this would be exempt income. New 104- you need to suffer an physical damage. Only physical injury.

104.A- except in a case attributable to but not exceed S. 213 (medical expense), your damages will be tax free. (but not the extend you already took a medical deduction for) 1. amount received under workman s comp (tax free) 2. amount of any damages (other than punitive damages) received, whether by court/agreement, physical/personal injury (has to be physical injury) 4. any damages received as a result of armed services for any country, it s tax free. 1a) 100,000 exempt- suffered enough mentality? b) 50,000 uninsured, 50,000 exempt (missed performance), all exempt. c) 200,000- income hypo) sasha works for Disney on ice. Sasha breaks her ankle on ice, collects $200 a week workman s comp (tax free), $1M for bad skate (compensatory- tax free), $2M compensatory (compensatory- tax free), $4M MSG tax free, punitive damage (taxable) d) 200,000- exempt (mental anguish)- mental problem is tax free e) 100,000- exempt (mental anguish) f) 200,000- (sexual harassment- could be physical/mental)- it depends upon nature of harassment g) $1M- 104.A.C.1- wrongful death- cause of action- in certain states, you can only punitively. In those instances and could only collect punitive rules- this punitive damages is tax-free. 2a) b) 1500- taxable, 1000 exempt TP Policy 3000 .60 Employer 2000 .40

4000 4000

2400 (exempted) 1600 (exempted)

0 taxable 400 taxable

Own policy s overage, it s exempt. Of the overage, 40% comes from employer- thus 400. (104.a.3) (105.a/b) c) nope, you cannot deduct reimbursement 3a) 1M is exempt, interest is taxable b) S.72 1M is exempt under 104.a.2. annuity- only the 1st million is exempt, anything else taxable c) S.79.313- IRS has tax preparer s, IRS will not rule structured settlement. Tax preparer s responsibility to come up with breakdown.

Chapter 10- Seperation And Divorce Ailmony- taxable/deductible (cannot be inherited)- once a payee died, that s it. Child support- non-deductible, not income Property settlement- non-taxable 4 situation- give rise to alimony. ***71.B2.C (decree requiring spouse to make pmt to maintain another spouse)- they can be still be in the same household still alimony payment (support decree) S.71- 215- uniform law on alimony- ignoring states 5 criteria. 1. Payment must be in cash 2. Divorce, separation, support, separated 3. Payments must not say it s not alimony 4. For anything other than support decree, spouses cannot live in the same household 5. The payment cannot continue after the death of a payee spouse Recapture provision- they don t want a property settlement disguised as alimony. (alimony cannot be front-loaded) P 204 1a. based upon. 1) not living in same house, 2) designated as alimony b. not alimony- note- not cash c. art- not cash d. non deductible, excludable 71.b1.b- not alimony e. not alimony- this provision is there to purposely help (1 spouse that has deduction that s meaningless to him)- what if they have evil purpose? f. not alimony- for a set time period (10 yr)- (can be set period or for life- whichever is shorter) g. published regulation. Q&A 12. State law doesn t save an infer contract. (stupid law- people can move from 1 state to another)- not withstanding regulation, if local law states alimony stops after death- then it is alimony. (#12 no longer the law)- statue- superceded in 1986. h. 1 payment- first pmt is alimony 2nd payment is not- would survived. i. not alimonyhypo. Same house, but different floor- not alimony. j. written support decree- its alimony. Part E 71.e- exception- it doesn t apply if spouses filing joint return together. R=D+E D=B-(C+$15,000) E=A-((B-D+C)/2)+$15,000) R=Amount recaptured in yr 3 tax return D=recapture from yr 2 E-recapture from yr1 A,B,C=payments in the first(A), second (B), and third (C) calendar years of the agreement or decree, where D>=0, E>=0

Recapture- don t want property settlement disguised as alimony. -focus on 1st 3 years- don t want to see gigantic payment in 1st yr, followed by 2nd or 3rd yr. 2a. yr. 1 80,000 Yr. 2 40,000 Yr. 3 10,000 Yr 2 alimony: 25,000: recapture: 15,000 Yr 1 alimony: 40,000: recapture: 40,000 Compare yr 3 with yr 2. 15k recapture (yr 2 recapture) Yr 1: 80, avg of 2&3. (40-15 (recapture)= 25K + 10K (yr 3)/2 = 17.5K (avg) + 15K = 32.5K recapture for yr 1. 32.5 + 15K = 47.5k (1st yr) All recapture is happening in yr 3. B. no recapture. < 15000 c. no recapture. (backloading, no a problem) d. 1. 80K 2. 50K 3. 80K Just look at yr 1. Avg (2 & 3) 65K + 15K (recapture amount) . 80 vs. 80 (0 recapture) E. 71.f.5c- Frontloading is ok, if there s no specific way of guaranteeing. F. f.5A no recapture- if either spouse dies. G. recapture provision- no recapture for decree. Mere support decree- 71.b.2c: does not apply h. 1. 120K 2. 80K 3. 60K 4. 60K Yr. 1 is NOT alimony- since they live in the same household. (since it s not alimony, no need to recapture) No front loading problem.

Indirect Payments- rather than paying you directly, I ll pay your rent. (indirect payment) 71.b.1a Exception- spouse cannot take advantage of the rule and make payment to himself. Ex. Husband owns the house, I ll leave wife the house husband continues to own the house. Pays mortgage instead of alimony- this is not allowed. (double deduction)- if a person owns property or payment to themselves. Example: husband continues to own insurance policy, beneficiary of wife. If you own insurance policy, pays premium on it- it s NOT alimony. You have to transfer the policy outright. p. 208 a. Alimony- indirect

b. Alimony- no longer owns the house c. Not alimony- paying rent/mortgage to himself (Q&A #6) 2. A. not alimony- transfer policy is a property transfer, not cash b. it would be alimony. c. initial transfer is NOT alimony, but monthly premium is alimony d. alimonye. not alimony. (brad owns the policy) only way is the spouse is transfer and is the owner.

Property settlement. 1041. 2 ways for a transfer to be an incident to a divorce. Transfer occurs within 1 yr (automatically in 1041.) if transfer is related to a divorce, a transfer within 6 yr, it falls within S. 1041. (presumption is after 6 yrs it will NOT be property settlement- has to be memorialized (written down)- can go beyond 6 years- maybe a property is involved in some sort of disputes.) Young vs. Commish218. a. b. c. d. e. Kevin- no G/L. B- AB 100K, G- 500K B- AB- 500K, sell for 350K- L of 150K(1041) AB- 100K (occurred within 6 yrs)- pursuant to the divorce. Same as C (Q&A #) Sell. No longer automatic, general presumption, not incident to divorce. Buyer gets basis of what they give up.

Child Support- tax- free, not deductible. Issue: is it a disguised payment? Payment looks too incidental. Ex. 100K then suddenly 60K alimony disguised child support. p.219 1a. 4k child support, 6k alimony. b. 6k is treated as alimony ???c. 1t.c. Q&A 18. If payment is reduced 2 or more occasions, too coincidental. Alimony is reduced. d. is payor cant make payment. Only pay 5000 of 10000. (4k child support, 6k alimony)- 4k is child support, 1k is alimony (Child support comes first)

Chapter 14- Business Deduction. S. 162- establishes most deductions business takes. 162.A There shall be allowed as deduction all ordinary and necessary expenses pertaining to any trades or business Ordinary & Necessary: Benjamin Cardozo decisionNecessary is somewhat subjective Is it ordinary? 323. 1. Elmer W. Conti- Conti criminal paying bribes. Tax court draws: protects goodwill (deductible), paying money to enhance your own reputation 162.A (ordinary and necessary expense). Made more clearly in 1984, Jenkins vs Comm. Conclusion: personal reputation satisfiy ordinary & necessary. 2.d not entitled to deduction. it has to be your trade & business, not your.

ExpensesDeducted or capitalized. 162 (a)- deductible. 263- capital expenditure that s not deductible. Indobco(sp?)Repairs vs Improvements- make an improvement on your own- deductible. When an expenditure gives rise to a major increase in value/utility/length of a life on an asset you already own- that s a capital improvement- via depreciation. If expenditure increase value relative to original purchased price, then it s also something that s also capitalized and not expensed. Midland Packing- restored building to status quo, or did they increase life/utlilty of the building? Facts: increased life of building, did they do more than cure meat? (no) Did they increase value of building? (Not really) restore building back to status quo. (to cure meat) this is a repair. p.340 1a. Repair Hypo. What if you put up a building, last part is painting, that s capital

b. Repair (small part of the roof)- replacing ENTIRE roof might be capital c. Patching- deductible. (restoring to its natural state) d. improvement- carport. e. expense- ordinary and necessary. Hypo. In each of these situatios deals with susan incurring aspetos cost. -Sue buys a building with full knowledge its filled with aspetos, then she spend money taking it out. (capital improvement)- improving the property in relative to its initial cost. -Cleaning building qualiftfy 198- containmentation site, that becomes deductible. Hypo c. sue bought building, completely unaware of the asbestos problem. (deduct the expense)overpaid for the initial building, she s making repairs and getting back to the status quo. (improvement is very small). Sue acquiring the problem, unaware of the problem remove problem and in conjunction the floor plans- capital investment. Sue constructed the building a few yrs ago, installing aspetos herself. Cops find out about it and then repair herself, removing aspetos. (Capital improvement) Idaho power situation- when a company decides to self-construct its own assets. 1. Buy land 150M, buy materials for 200M, reassign payroll 80M for building. Buy cranes and machines for 40M. 2 yrs- 8M depreciation. (all capitalize of a building- depreciate over 30 years) Salary- if people are building factory/self-constructing own asset- that salary expense gets capitalized. Whether you build your own or go out and buy factory, you SHOULD get the same answer, IRC does not favor 1 to the alternative, self construction should and shall not create expenditure. Asset within asset- 5 yr machines, you don t get to depreciate it now, it gets lumped into the building and you depreciate it at that point in time. Indouco (sp?) Supreme Court- Anytime you go out and buy service, you need to evaluate how long that service will benefit your business. Problem: Acquiring services numerous time (162.A) ordinary and necessary expense, now Supreme Court comes in and say you need to evaluate each services. Treasury decides to supercede this case, regulation that created Anti- Indouco regulation- if your acquiring an identifiable asset (held/sold/used differently), that will be capitalized if you are not acquiring, it s an expense.

11/29/11 Indebtco- announce a take over of a company. (is it worthwhile to be bought out?) Deducted expenses paid to consultants. IRS denied that expense looks like they will enjoy the benefit for years to come, maybe they should have capitalized it. Every expense should be evaluated whether it s the same year benefit or if it provides benefits for years to come. That will determined if its expensed or capitalized. Treasury stepped in, wrote regulations. 1.263.a (anti-Indebtco), created framework on whats immediately deductible- (when company go out and buy intangible asset or service), if it looks independent (life) and can be sellable, that s not expensed, that should be capitalized. If service or expense created by own employees, always going to be expensed. 1) Independent Asset- always capitalized 2) Internal software- expense (if you go out and buy it, capitalized) (building/buying own factory should NOT provide any tax benefit) S 197 governs the life of intangibles. p. 341 1. 3. Carrying on/Trade business- expense has to be associated with a trade or business. But not everything is associated with trade/business. (researching for a potential company to buy- is it deductible? It depends) CASE: (Mortan Frank) wants to own a newspaper/radio. (not in this business) get in their car and drive over US looking for radio/newspaper. (filed tax return and deduct driving expenses, at the time, didn t buy anything yet.) this is NOT deductible because they didn t own anything and they are not in trade/business. Let say they spent 20k to look for newspaper and bought it in 12/31. (Is anything deductible?- depends) S. 195- potential deduction- all of these pre-live expense, covered under this. General Rule: amortize over 180 months (15 years), can deduct 5000 right away. (2010- 10,000 immediate deduction- it phases out between 50k to 60k normally it s 50k to 55k)

S.195 Investigating, creating or incorporating a business before business is open for profit, it should be covered in S.162. 348 1a. not deductible, 180 month rule starts as soon as business starts Hypo. What if she incurs 50,000? (can deduct 5000). 55,000 expense (nothing) 52000 expense (3000 expense deductible)- the 5000 write off/deduction is an election, you don t have to take it, you can just amortized the whole thing. You elect when you file your tax return. b. Is it a continuation a trade/business? (most people will say they are- thus deductible)- 162. Expense. c. S. 195-expenditure d. S.195-b2- immediately become deductible hypo, investigate buying the Mets nothing good will ever happen. Spent 100k expense, cant deduct under 195, but can be a loss under S 165. S.162- employee (salaried worker), is in a trade/business. Fly across country for an interview, that s deductible. Ex. Accountant quit his job, interview for a baseball player position (not deductible) You are only entitle to a deduction if you are looking for a job within your own field of trade/business. Exception: amateur baseball player, signs a contract, doesn t pay his father till he signs. 20k deductible. Moment when he signs, he becomes in the trade/business, that payment is deductible. (by deferring payment) exception is deferred payment. Ex. Long hiatus, woman has a child, stay home 5-6 yrs, go back to work. Fly to Minnesota for interview, she lost status of a trade/business (how long is long, it s subjective) 2a. Not deductible- not yet in a trade/business b. not deductible- not yet in trade/business c. deductible- it will be paid after trade/business d. deductible- already in trade/business hypo. What if agency is trying to find her a secretary job and instead, sent her to a bank and bank ask if she s ok to be a teller. She takes job as teller. (Deductible- because of failures of looking for a secretary job, not for being a teller teller is irrelevant)

Compensation. Generally deductible. (building your own factory- not deductible, it s expenditure) Disguised Dividend- paying family member a huge salary, is probably not deductible. Disguised compensation- closely held corporation. Corp is a separate tax paying entity. He s employee of the corp. (2 types of compensation- payroll & dividend as owner- dividend is NOT deductible, payroll is) If you pay everything as payroll, IRS will step in and treat some of that as dividend. Case: Not wholly own, but a guy owns most of the company, 2 other shareholders minority- Exacto Spring) Earn $1.3M & $1M, IRS feels 381,000 and 700,000 should be payroll. Owns 55% of company. IRS normal approach- check comparables company, revenue of the company, how important is this guy to the corporation.

Law of 7th circuit- Posner opinion is that Hines is invaluable to the firm, if minor shareholders do not have a complaint, they the judge is fine with it. (1:20 mark) Case: Harolds. 1941- dad will get 10,000 in salary and 20% of the profits. Sons were made to the owner. Dad is making $2 million as an employee. (was it reasonable when the contract was signed) Take a much lower salary. S162.m- puts a $1 million limit of compensation. (company must be publicly trade, top 5% of highest paid workers, cannot give more than $1 million to these employees, unless it is performance related. Doesn t apply if its merit based. Employee is majority shareholder, 248/250. p. 362 1a. compensation or dividend b. 7th circuit or outside circuit? If minority shareholder doesn t have a problem, we don t have a problem. (will look at all factors to determine if it s reasonable compensation- compensation history) c. a lot more likely the court would not have problem with it S162.M million dollar limitation to the 5 top officer @publicly held company. Hypo. Boss of 10,000 employees, guaranteed salary of $3M a year. (Not CEO, or equivalent- 1M) Hypo. Bought out by Private Equity- NOT 162.M Hypo. Merit based, you don t have 162.M Rosenspan- 1. Necessary/reasonable/in trade/business. - Have to have home to be AWAY from HOME Based in NYC, travels in US 300 days a year, keeps a voting/tax address at his brother s place. IRS denies deduction because he doesn t have a home. 162- Home- home as home office of company that you work for. Rosenspan work for 2 companies, both in NYC- by the countries standard, his home as NYC. 2nd Circuit interprets home literally- as a place of residence, bed, place to live. 3rd Circuit follows 2nd Circuit. - Is it possible to not have a home. Daily commuting- 1.162-4E: are not considered business expense from personal residence to principal place of work. (It s considered personal expense). However, what if you are self-employed and must travel- (It is deductable) Exception: 3. Self employed office. 1. Go from personal residence to another temporary workplace in another metropolitan area. (commuting to Philidelphia for 3 months, it s deductible) 2. Taxpayer that has more than 1 regular work location away from her residence. In that instance, temporary location is deductible. (as long as its temporary, it s deductible) Temporary means that anticipated for less than 1 year and it is in fact less than 1 year, it s temporary spot. (this is from HOME to the TEMPOARY location)

What if its expected to be less than 1 year, at 8 months, realized it will go for another 6 months. (8 months is temporary- as soon as you realized) If its expected to last more than 1 year, and in fact less than 1 year. This is NOT temporary. (99-7 revenue ruling) Trips between jobs deductible. But going home from jobs is NOT deductible. p. 380 1a. Not deductible meals- not deductible b. deductible- transportation meals- not deductible (has to be out of town) hypo. Go to courthouse for 6 weeks (deductible- its temporary location) c. meals- non deductible- MUST BE OVERNIGHT 2a. Travel away from home- can deduct everything. Meals deductible (overnight- 50%) when you travel out of town, you can deduct 50% even if you eat by yourself. b. Outside 2nd circuit- her 162 home is Metro (primary work location), if she s in 2nd Circuit- her home is City, that s where her family lives. Time spent in Metro is 100% deductible. c. 2nd circuit- metro is home (162- she works there 5 days a week). Expenses is not deductible. Expenses to City is not deductible- it s not work, it s personal expense. outside 2nd circuit- city is home- expenses is deductible.

p. 392 In order to deduct expense, he has to be away from home. 2nd circuit- City is home/rest of country- city is home also. (city is where he s working/living) Part a.)-can he deduct expenses while he s in city? NO, because he s working/living in the city, so any expenses he incur cannot be deducted. home while he s working. answer would be different if it s a temporary assignment. (if you expect to go back to a short season of NFL year after year, it s really a permanent job) Part b.) playing football, in off season he s an insurance agent. 2 homes/2 jobs. Case- 1st Circuit- New England- Major post of duty/minor post of duty- if they have 2 jobs, evaluate these 2 jobs, which one is major/minor. The time spend in the minor job are deductible. (how do we decide?) In this case, circuit revert back to Tax Court to decide. IRS likes to decide based on Income. *if he makes more as insurance agent, his expenses in city is deductible *if he makes more as football player, his expenses in metro (need to have duplicative expenses in order for him to deduct 1 of them) (30 min in) 4. If its temporary assignment, duplicative expenses is deductible. (assignment for 9 months, while maintaining a home) Hypo. Taxpayer lives in Illinois, but works 100 days in California for 5 years in a row. (Is this a temporary assignment)- IRS said absolutely not temporary. (1 case- Mitchell case said its temporary for 5 straight years) Hypo. What if he is expected to be in city for 9 months, after 8 months, said it is up to 15 months. (can deduct up to 8 months) If you think It s less than a year and then find out it s longer, you get to deduct up to the point that you find out it will be more than 12 months. c. what result in part c? move the entire home to city, can we deduct? (cannot deduct, because it lacks duplicative expense (ie maintaining 2 household)) 5) leaves NY on Monday, have business on Tue & Wed, take 2 days off, come back on Thurs/Friday. (Monday/wed lodging is deductible, meal is 50%) The whole thing is deductible if majority of the days are business. if you spend a minute of a day for business, the whole day qualifies as business) 5b) what if travelers wife goes along? Can wife s stuff be deductible? NO. (exception: unless she works for the company as well) What if traveler arrive Monday and work till Wednesday, on personal for Thurs, Fri, Sat & Sunday, can you get plane deduction?) it s CHEAPER to fly on Sunday. 5c) fly down, but take ship back. (cannot fully deduct cruise ship)- only entitle to 2 times the federal per diem.

5d) same as a, except a trip to Mexico City instead of Florida (not domestic, international travel now)except international travel is less than 1 week, you use domestic rule. can deduct lodging, 50% of meals and entire plane ticket. 5f) what results, conduct business on Thur/Fri/Mon/Tue and return to NY the following Friday. (9 days total- how many days are they working? If Friday & Mon is business, the weekend is automatically business. Wed & Thurs is personal and Friday is also business (departure date is always business). 7 of the 9 days are business, thus 7/9 of the plane ticket are deductible. (hotels are not deductible for sat/sun) 5g) what if its to attend a business convention? Conventions in North America- no need to worry about. Anything outside that area is only deductible if you can show there s a reason only be held in a specific location. Cruise Ship- convention on cruise ship are frowned upon, only deductible if ports of calls are within United States. (cant have a port of call outside US)

Necessary Rental Expense: Rental expense- deductible expense. Problem is with rental expense and disguised ownership. (Stars Estate Case) Ex- 5000 deduct over 50 yrs, instead of depreciate over 50 years, they call it a lease for 5 years and reserve the right to take the pipes back. disguised rent.

Education Expense: is it generally deductible? What s NOT deductible: Bachelor degree/minimum degree education are never deductible. Only deductible improving skills in trade/business that you re already in. Full time student not in trade/business. Pursuing an accounting degree (minimum degree). Teacher in virginia, take continuing education. She wins the case, no obligation in law to take the cheapest alternative. (option: read books in summer or travel to NYC for school) CaseProblem: -Alice becomes a doctor decides to go to law school: (not deductible)- she s a bad doctor, can be helpful if she understood the law. -Barbara becomes a dentist decides to take a course in ordonitis. (Does this prepare her for a new career it s deductible. (same business or trade) -Cathy becomes accountant, takes law school. Not deductible. -Denise, attorney, decides to go to tax training. Arguable, probably not deductible. Hypo: 2. assuming Densis expenses are not deductible. Participate Floridas. Travel for education is just as education are deducible 3. High School history teacher, never travel itself is a deductible expense. (Traveling itself because )

4. Dentist you gotta watch it live. Conference committee report. Meals/Entertainment Expense George Cohen Case: S 274 (1962)- too many ppl not keeping their receipts. Limitation on entertainment expense. Anything over > $75 must have receipt.

What s covered in 274? Business Meal, Entertainment, gifts, employee awards, and business travel. Key rule- only 50% is covered for business meal, entertainment (subject to additional restriction) In order for them to be deductible, must be directly to a trade/business (business is going on- ie. Ordering sandwiches for a meeting) or associated with trade/business. (around 12 noon, go to lunch and come back to business meeting. Either BEFORE/AFTER there s business related. Meal/Entertainment- cannot be lavish/extravagant. Only deductible if 1 of the employee is present. Overnight business travel- 50% deductible. You can eat the meal by yourself. Entertainment Facilities- deduct 50% of the face value of ticket. Country Club membership are NEVER deductible. None of these rules apply if you are not being reimbursed. 1. $100 lunch includes $5 in tax/$15 tips. (must be directly/associated with trade/business- they do have an agenda) (taxpayer must be present- employee is there) (cannot be lavish/extravagant- martini might be an issue. Not lavish in NY.) - 50% deductible (tax/tip is also 50% deductible) Cab ride to restaurant- 100% deductible) 1c. not deductible- gotta be there (274.k.1.b) Hypo. Entertainment facility is not deductible. Value of box is not, but ticket is 50% 1e) what happens if it reimburse- no income, nothing. (274.k.2) Airline pilot problem- uniforms- are they deductible? Have to be required as part of employment AND cannot be adapted to be general product outside of work. Advertising- deductible. Professional Dues- deductible. Lobbying cost- if I lobby federal government to change tax law- not deductible. Lobby anything at state level- not deductible Local lobbying- deductible.162.e Question 3. Airline pilotuniform $250- deductible, dry clean- deductible,

newspaper for a new job- would be deductible if it s for same job Union dues- deductible Local lobbying- deductible (congressman, councilman no) Political Contribution is NEVER deductible. $500 for gym- no way S. 165. Business Losses- is it deductible? A business loss is deductible. Personal loss is not deductible. Business loss are deductible within a certain range. Let say you have a business asset, you sell it for less than you pay for it. (realized loss)- MUST HAVE REALIZED LOSS (trade/exchange) for it to satisfy 165. If something is not destroyed, but damaged. Take the FMV before/after as a loss. S. 280.B- building/land- if building is destroyed. Building cost basis is transferred into the land. Cannot take a loss in a destroyed building. Problems: 417. 1. mobile cost basis for 40, worth 22, insurance money 15. 15K, adjusted basis is 22K, 7K is loss b. worth 10K after the accident. (10K- 30K = 20K), insurance 15K deductible loss 5K c. taxpayer incurring 17k repairs. (AB- 22K 20K (15K insurance, 5K tax benefit), new basis is 2000. Repairing cost 17K = new AB 19K) Depreciation- S. 168, read subsections. No need to read cases. 168.k (bonus depreciation) Final Exam

40 questions 25 T/F 5 fill in 10 multiple choice

Chapter 7: Life Insurance Proceeds Ch.5-7, 5-35,Chapter 8: Discharge of Indebtedness Chp. 5-34 Chapter 9: Damages and Related Chp. 5-11 Chapter 10: Separation and Divorce Chp 4-21 Chapter 14: Business Deductions Chp 5-17(meals and lodging) 5-5-19, 9-3-9-25, 9-39-9-42 Ch8 Depreciation