This chapter discusses various types of gross income including compensation, business income, rental income, dividends, alimony, and discharge of debt. It provides exhibits on key topics such as the constructive receipt doctrine, community property income, items included in gross income, prizes and awards, scholarships and fellowships, and below-market interest loans. The exhibits describe the relevant tax rules and concepts for each topic in a clear and concise manner.
Agenda: Tax Updates for Individuals; Tax Update for Businesses; Fiscall Cliff; Disposition of Assets or Business Interests; Depreciation; Basis Issues; Business Income and Deductions; Estate Planning; Other Cases and Rulings.
Tax Guide to Overseas Real Estate Investments for U.S. InvestorsDurise
Before you even begin to consider a jump into the foreign real estate investment pool, it’s important to become as knowledgeable about the entire process as possible. One item that is particularly important to research and understand is the tax implications that go along with property investing overseas. To that end, we’ve put together this tax guide to help U.S. real estate investors gather some much needed tax information.
Agenda: Tax Updates for Individuals; Tax Update for Businesses; Fiscall Cliff; Disposition of Assets or Business Interests; Depreciation; Basis Issues; Business Income and Deductions; Estate Planning; Other Cases and Rulings.
Tax Guide to Overseas Real Estate Investments for U.S. InvestorsDurise
Before you even begin to consider a jump into the foreign real estate investment pool, it’s important to become as knowledgeable about the entire process as possible. One item that is particularly important to research and understand is the tax implications that go along with property investing overseas. To that end, we’ve put together this tax guide to help U.S. real estate investors gather some much needed tax information.
You may have to pay federal income taxes on your Social
Security benefits. This usually happens only if you have
other substantial income (such as wages, self-employment,
interest, dividends and other taxable income that must be
reported on your tax return) in addition to Social Security
benefits.
You may have to pay federal income taxes on your Social
Security benefits. This usually happens only if you have
other substantial income (such as wages, self-employment,
interest, dividends and other taxable income that must be
reported on your tax return) in addition to Social Security
benefits.
Chapter
4
Gross Income
OBJECTIVES
After completing Chapter 4, you should be able to:
1. Define and distinguish among the various concepts of income: economic, accounting, and legal.
2. Recognize the various items included in gross income.
3. Determine when items are included in income.
4. Understand the rules governing alimony.
5. Differentiate alimony from child support.
6. Comprehend the rules for recapturing alimony.
7. Understand the rules governing the discharge of indebtedness for both solvent and insolvent taxpayers.
OVERVIEW
Gross income, according to the Internal Revenue Code, includes all income unless specifically exempted by law. This comprehensive definition requires a more probing discussion of what must be included in income. Further, we must concern ourselves with “how much” must be included in income and what portion of total income may be excluded.
The Concept of Income
A frustrating characteristic of the English language is that a single term can be used to express a variety of concepts. Take the concept of income: economists, the courts, and accountants use this term, but for each, the definition imparts a singular view.
¶4001
ECONOMIC INCOME
The economic concept of income is more general than the accounting definition. The most commonly accepted definition of economic income is that of J. R. Hicks. He defines economic income as being “the maximum amount a person can consume during a week and still expect to be as well-off at the end of the week as he was at the beginning.” J. R. Hicks, Value and Capital (Oxford: Clarendon Press, 1946), p. 172. This assumes that there were no capital contributions or withdrawals during the period measured. The economist’s definition is not practical for tax purposes because the concept of “well-being” is not capable of objective measurement. The economic concept of income places a heavy emphasis on the future. No objective rules exist for determining well-being at any moment in time. Economists must deal in terms of real wealth, which includes holding gains and losses rather than monetary wealth alone. H. C. Simons maintained, “The precise, objective measurement of income implies the existence of perfect markets from which one, after ascertaining quantities, may obtain the prices necessary for routine valuation of all possible inventories of commodities, services, and property rights.” Personal Income Taxation (Chicago: University of Chicago Press, 1921), p. 50. Since no such markets exist where the necessary prices for valuation may be obtained, the economic concept is an inappropriate measure of taxable income.
¶4015
THE LEGAL/TAX CONCEPT OF INCOME
The legal concept of income is also less precise than that of the accountant. Congress has not defined income, but has specified how particular items of income are to be taxed. The concept of income has crystalized through a series of court cases. The legal concept is different from the economic and accounting concepts. Gross income includes “ ...
ACCT323 Final exam1.Which of the following represents .docxannetnash8266
ACCT323 Final exam
1.
Which of the following represents the largest percentage of state tax revenue?
Sales tax
Individual income tax
Other
Property tax
None of these
2.
Congress recently approved a new, bigger budget for the IRS. What taxation concept evaluates the cost of administering our tax law?
Convenience
Economy
Certainty
Equity
None of these
3.
The city of Granby, Colorado recently enacted a 1.5% surcharge on vacation cabin rentals that will help pay for the city's new elementary school. This surcharge is an example of _______.
A sin tax to discourage undesirable behavior
A government fine
An earmarked tax
Both A and C
None of these
4.
If Susie earns $750,000 in taxable income, how much tax will she pay as a single taxpayer for year 2012?
$231,639.50
$262,500.00
$239,261.00
$236,435.00
None of these
5.
Which of the following is not considered a primary authority?
Tax Court case.
Regulation.
Revenue Ruling.
Tax service.
None of these.
6.
Which of the following is not a factor that determines whether a taxpayer is required to file a tax return?
rev: 03_21_2013_QC_28372
Filing status.
Taxpayer's gross income.
Taxpayer's occupation.
Taxpayer's age.
None of these.
7
.
Corporations are required to file a tax return only if their taxable income is greater than:
$0.
$1,000.
$600.
$750.
None of these. Corporations are always required to file a tax return.
8.
Lavonda discovered that the U.S. Circuit Court of Appeals for the Federal Circuit has recently issued a favorable opinion with respect to an issue that she is going to litigate with the IRS. Lavonda should choose which of the following trial courts to hear her case:
Tax Court only.
U.S. Court of Federal Claims only.
U.S. District Court only.
Tax Court or the U.S. District Court.
Tax Court or the U.S. Court of Federal Claims.
9.
Jason's employer pays year-end bonuses each year on December 31. Jason, a cash basis taxpayer, would prefer to not pay tax on his bonus this year (and actually would prefer his daughter to pay tax on the bonus). So, he leaves town on December 31, 2011 and has his daughter, Julie, pick up his check on January 2nd, 2012. Who reports the income and when?
Julie in 2011
Julie in 2012
Jason in 2011
Jason in 2012
None of these
Top of Form
10.
Investing in municipal bonds to avoid paying tax on interest earned and to earn a higher after-tax yield is an example of:
conversion
tax evasion
timing
income shifting
None of these
Bottom of Form
11.
Which of the following increases the benefits of income deferral?
increasing tax rates
smaller after-tax rate of return
larger after-tax rate of return
smaller magnitude of transactions
None of these
12.
Which of the following is an example of the timing strategy?
A corporation paying its shareholders a $20,000 dividend
A parent employing her child in the family business
A taxpayer gifting stock to his children
A cash-basis busi.
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Fundamentals of Taxation 2005 – A Forms ApproachSolutions Manu.docxbudbarber38650
Fundamentals of Taxation 2005 – A Forms Approach
Solution
s Manual
PAGE CHAPTER 14DISCUSSION QUESTIONS AND PROBLEMS
Discussion Questions
1.Discuss the formation of a partnership. Is any gain or loss recognized? Explain?
2. What entity forms are considered partnerships for federal income tax purposes?
3. How does taxation for the corporate form and the partnership form differ?
4. What is the concept of basis? In your discussion, differentiate between outside basis and inside basis.
5. Elaborate on the term basis-in – basis-out. What does that phrase mean in the context of a partnership formation?
6. How can two partners, each with a 50% interest in a partnership, have different amounts of outside basis at the formation of a partnership? Shouldn’t the two partners contribute the same amount to have the same interest?
7. When a partnership receives an asset from a partner, does the partnership ever recognize a gain? What is the basis of the asset in the hands of the partnership after contribution?
8. Discuss the concept of steps into the shoes. Does how this concept pertains to the partnership, the partners, or both?
9. Why would smaller partnerships (and other businesses for that matter) use only the tax basis of accounting, which does not follow GAAP?
10. How is depreciation calculated by the partnership when a partner contributes a business asset?
11. Discuss the concepts of ordinary income and separately stated items concerning partnerships. When must a partnership item of income or loss be separately stated and why?
12. Can a partner have a salary from a partnership? Why? What is a guaranteed payment?
13. Are guaranteed payments treated as an ordinary income items or as separately stated items?
14. Is the Section 179 expense deduction allowed for partnerships? If so, is Section 179 an ordinary income item or a separately stated item? Why?
15. If a partner owns a 20% interest, does that necessarily mean that he or she will receive 20% of the net income from the partnership? Explain?
16. Is partnership income considered self-employment income? If so, how is it calculated?
17. Why must some income and gain items be separately stated in a partnership?
18. Explain why nontaxable income and nondeductible expenses increase or reduce outside basis?
19. When is it mandatory that a partner calculate his or her partner interest basis (outside basis)? What items affect the outside basis of a partner?
20. How does a partner’s share of partnership liabilities affect his or hers outside basis?
21. The general rule is that partners do not recognize any gain when he or she receives a distribution. In what circumstances might a partner recognize a gain on a current distribution?
22. Define precontribution gain? What causes a partner to recognize it?
23. Describe the rules concerning the basis of property distributed to a partner. How does the concept of “basis-in, basis-out” apply to part.
This is the first half of a presentation I gave at Pace University Law School's Program: New Directions: Practical Skills for Returning to Law Practice
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Unrelated Business Income Tax Information for Charities & Other Nonprofits CBIZ, Inc.
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Tax Research Memorandum To Bruce Wilson From .docxaryan532920
Tax Research Memorandum
To: Bruce Wilson
From: Tax Accountant, CPA
Date: December 31, 2015
Re: Tax Treatment of Lottery Winnings
Facts
You won $2,000,000 in the state lottery. The lottery pays out the prize money in 20 annual
installments of $100,000 each. After receiving three $100,000 installments ($300,000), you
sold the remaining $1,700,000 for $1,000,000. You want to report the $1,000,000 as long-
term capital gain, on which the tax rate is 15%, rather than reporting it as ordinary income, on
which you would be required to pay your 35% marginal tax rate.
Issue
The issues are (1) whether lottery winnings can be taxed at the long-term capital gains tax
rate, and (2) whether selling the right to the cash flow from the winnings for a lump sum after
owning the right to such cash flow for more than one year qualifies for long-term capital
gains tax treatment.
Rule
Lottery rights are not a capital asset, and selling those rights, even after holding them for over
one year, falls under the “substitute for ordinary income doctrine, which provides that when a
party receives a lump sum payment as essentially a substitute for what would otherwise be
received at a future time as ordinary income, that lump sum payment is taxable as ordinary
income as well.” R.W. Womack v. Comm’r, 510 F. 3d 1295 (11th Cir. 2007).
Analysis
It is well established that Lottery rights are not a capital asset. Watkins v. Comm’r, 447 F. 3d
1269 (10th Cir. 2006); Lattera v. Comm’r, 437 F. 3d 399 (3d Cir. 2006), cert. denied, 127 S.
Ct. 1328 (2007); United States v. Maginnis, 356 F. 3d 1179 (9th Cir. 2004); Davis v. Comm’r,
119 T.C. 1 (2002). Although 26 U.S.C. §1221 defines Capital Asset quite broadly, and does
not specifically except lottery winnings from the definition, the 11th Circuit has found that
“the statutory definition of capital asset has never been read as broadly as the statutory
language might seem to permit, because such a reading would encompass some things
Congress did not intend to be taxed as capital gains.” Womack, 510 F.3d 1295; Maginnis, 356
F.3d at 1181;. All of these decisions are based on the so-called substitute for ordinary income
doctrine, which provides that when a party receives a lump sum payment as “essentially a
substitute for what would otherwise be received at a future time as ordinary income, that
lump sum payment is taxable as ordinary income as well.” Comm’r v. P.G. Lake, Inc., 356
U.S. 260, 265, 78 S. Ct. 691, 694 (1958). Womack, 510 F.3d 1295. The courts have focused
on two significant factors in determining that lottery rights are not a capital asset and,
therefore, the sale of such asset would not constitute a long term capital gain:
1. The taxpayer did not make any underlying investment of capital in return for the receipt of
the lottery right, and
2. The sale of the right did not reflect an accretion in value over cost to any underlying asset
held by t ...
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It is crucial for the taxpayers to understand about the TDS Return Filing Due Date, so that they can fulfill your TDS obligations efficiently. Taxpayers can avoid penalties by sticking to the deadlines and by accurate filing of TDS. Timely filing of TDS will make sure about the availability of tax credits. You can also seek the professional guidance of experts like Legal Pillers for timely filing of the TDS Return.
Business Valuation Principles for EntrepreneursBen Wann
This insightful presentation is designed to equip entrepreneurs with the essential knowledge and tools needed to accurately value their businesses. Understanding business valuation is crucial for making informed decisions, whether you're seeking investment, planning to sell, or simply want to gauge your company's worth.
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Implicitly or explicitly all competing businesses employ a strategy to select a mix
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2. Chapter 4 Exhibits
1. Constructive Receipt Doctrine
2. Community Property Income
3. Items Included in Gross Income
4. Compensation vs. Gift
5. Prizes and Awards
6. Employee Achievement Awards
7. Scholarships and Fellowships
8. Business Income
9. Below-Market Interest Loans—Types of Loans
Chapter 4, Exhibit Contents A CCH Federal Taxation Basic Principles 2 of 31
3. Chapter 4 Exhibits
10. Below-Market Interest Loans—Tax Effect
11. Rental Income
12. Tenant Improvements
13. Dividend Income
14. Alimony—Post-1984 Agreements
15. Alimony and Child Support (Post-1984 Divorces)
16. Alimony Recapture
17. Discharge of Debt
18. Discharge of Debt—Bankruptcy
Chapter 4, Exhibit Contents B CCH Federal Taxation Basic Principles 3 of 31
4. Constructive Receipt Doctrine
“When is income taxable?”
Generally, any compensation granted to an individual to
which the individual has an absolute right is regarded
as constructively received income.
Chapter 4, Exhibit 1 CCH Federal Taxation Basic Principles 4 of 31
5. Community Property Income
Property acquired after marriage is community property.
Income from community property is community income
Property acquired before marriage remains separate property.
What happens to income from separate property?
Chapter 4, Exhibit 2a CCH Federal Taxation Basic Principles 5 of 31
6. Community Property Income
CA Rule – Income from separate property remains separate.
Applies to California, Arizona, Nevada, New
Mexico, Washington and Wisconsin.
TX Rule - Income from separate property is community
income. Therefore, if spouses filed separate
returns, the income would be shared between them.
Applies to Texas, Idaho and Louisiana.
Chapter 4, Exhibit 2b CCH Federal Taxation Basic Principles 6 of 31
7. Items Included in Gross Income
Code Sec. 61(a) lists 15 items that generally must be included in gross income:
Compensation for services, Annuities
including fees, commissions, fringe Income from life insurance and
benefits, and similar items endowment contracts
Gross income derived from business Pensions
Gain derived from dealings in Income from discharge of
property indebtedness
Interest Distributive share of partnership
Rents gross income
Royalties Income in respect of a decedent
Dividends Income from an interest in an estate
Alimony and separate maintenance or trust
payments
Special circumstances may result in the exclusion or deferral of any of these items.
Chapter 4, Exhibit 3 CCH Federal Taxation Basic Principles 7 of 31
8. Compensation vs. Gift
The facts and circumstances dictate whether something received is
taxable compensation or a tax-free gift
Compensation is generally included in gross income.
Gifts are generally excluded from gross income.
Example
FACTS: Grandma offers 16-year-old Billy $10,000 if he quits smoking and playing pinball over the next
five years. He does, and upon attaining the age of 21, she pays him $10,000.
QUESTION: Is the $10,000 received by Billy taxable income or a gift?
SOLUTION: The $10,000 is taxable income since there were strings attached.
Chapter 4, Exhibit 4 CCH Federal Taxation Basic Principles 8 of 31
9. Prizes and Awards
Prizes and awards are generally taxable based on fair market value at
time of receipt.
However, if ALL of the following 4 conditions occur, then they are
excludable :
1. Connected with the fields of science, charity, or the arts
2. Involuntary selection process (i.e., through no effort of recipient)
3. No future services required of recipient
4. Assigned to a governmental agency or tax-exempt charitable
organization (rather than constructively received).
Chapter 4, Exhibit 5a CCH Federal Taxation Basic Principles 9 of 31
10. Prizes and Awards
Example
FACTS: Mother Tanesha, a U.S. citizen, is awarded the Nobel Peace Prize, which includes a
$500,000 cash award. The award was unsolicited and no future services were required of
Mother Tanesha. Furthermore, she endorsed the check over to the Sisters of Charity, a
qualified tax-exempt charity, rather than depositing it in her bank account.
QUESTION: Does Mother Tanesha have taxable income?
SOLUTION: YES! She constructively received the $500,000 when she endorsed the check
over to the charity. By endorsing the check, she exercised dominion and control over the
money, even though she did not deposit it. She could have avoided taxable income if she
had directed the Nobel Committee to pay the Sisters of Charity directly.
Chapter 4, Exhibit 5b CCH Federal Taxation Basic Principles 10 of 31
11. Employee Achievement Awards
Employee achievement awards are generally taxable, except that the
value of awards for length of service or safety achievement delivered
at a “meaningful presentation” are excluded up to
1. $400 if the plan is non-qualified (i.e., discriminates in favor of
highly paid employees), or
2. $1,600 if the plan is qualified (i.e., does not discriminate in favor
of highly paid employees).
(If an employee receives both qualified and nonqualified awards, then
the overall exclusion may not exceed $1,600.)
Chapter 4, Exhibit 6 CCH Federal Taxation Basic Principles 11 of 31
12. Scholarships and Fellowships
The value of scholarships or fellowships are generally taxable, but may be
excluded if they are:
1. To a degreed candidate attending an educational institution
2. For tuition and course related material (not room and board)
3. As a result of academic achievement, and not connected with
services provided.
Example: A “scholarship” received by a beauty queen for winning the
Miss Georgia Peanut contest would actually be a taxable award for
services rendered, even if she were a degreed candidate and the money
was spent on tuition. It would really be compensation disguised as a
scholarship.
Chapter 4, Exhibit 7 CCH Federal Taxation Basic Principles 12 of 31
13. Business Income
Sole proprietor
Include all business income (less cost of goods sold) in
gross income.
Partnerships and S corps
Partnerships and S corps are not taxed, but their taxable
income is taxed to individual partners and shareholders.
Partners and shareholders must include their proportionate
share of business income in their gross income, regardless
of whether or not the income was distributed.
Chapter 4, Exhibit 8 CCH Federal Taxation Basic Principles 13 of 31
14. Below-Market Interest Loans—Types of Loans
What types of loans are subject to imputed interest calculations?
All of the following loans are subject to imputed interest:
Gift loans (made out of love or generosity). Note that the “gift” is NOT the principal
portion of the loan, rather, the amount of interest that is below market.
Compensation-related loans (employer loans to employees)
Corporation-shareholder loans (a corporation’s loans to ANY of its shareholders)
If all of the following apply:
Interest charged is less than the applicable federal rate (AFR)
Sum of all loans between lender and borrower exceeds $10,000
The loan was made after June 7, 1984
Chapter 4, Exhibit 9 CCH Federal Taxation Basic Principles 14 of 31
15. Below-Market Interest Loans—Tax Effect
The two steps for each of the three below-market interest
loans are not easy to conceptualize. See if this makes sense:
Step 1: “Pretend” that the borrower has “paid” the
imputed interest to the lender as an interest payment.
Step 2: “Pretend” that the lender has returned the
imputed interest back to the borrower as either a gift,
compensation, or a dividend.
Chapter 4, Exhibit 10a CCH Federal Taxation Basic Principles 15 of 31
16. Below-Market Interest Loans—Tax Effect
What is the tax effect of imputed interest on below-market loans?
Type of Loan Step Lender Borrower
Gift Loan Step 1: Interest income. Interest expense.
Step 2: Nondeductible gift, possibly subject Tax-free gift received.
to gift tax.
Compensation Step 1: Interest income. Interest expense.
-related Loan Step 2: Compensation expense. Compensation income.
Corporation to Step 1: Interest income. Interest expense.
Shareholder Step 2: Nondeductible dividend deemed paid. Dividend income.
Loan
Chapter 4, Exhibit 10b CCH Federal Taxation Basic Principles 16 of 31
17. Rental Income
Tax Effect on Landlord: ALL rent received is taxable income,
including future years’ rent received in advance
Tax Effect on Tenant with a Business Lease: If rent is paid in advance,
no deduction for rent expense is allowed until the year the payment is
due.
Example
FACTS: Tenant pays Landlord $10,000, covering the first and last year’s rent.
QUESTION: What is the tax effect on Landlord and Tenant?
SOLUTION: $10,000 taxable income to Landlord; $5,000 deduction to Tenant.
Chapter 4, Exhibit 11 CCH Federal Taxation Basic Principles 17 of 31
18. Tenant Improvements
When are tenant improvements taxable to cash-basis landlords?
1. If in lieu of rent (or if repairs paid for by lessee are the
responsibility of the lessor): lessor has rental income to the extent
of the market value of the improvements.
2. If NOT in lieu of rent: Not taxable.
When the property is sold, the improvements will be taxed assuming
they add value that results in a higher sales price.
Chapter 4, Exhibit 12 CCH Federal Taxation Basic Principles 18 of 31
19. Dividend Income
The term “dividend” means any distribution of property
made by a corporation to its shareholders out of its
earnings and profits.
There are two common types of dividends:
Cash Dividends – taxable.
Stock Dividends – generally not taxable. There are 5
exceptions to this rule. If a stock dividend meets one
or more of these exceptions, it is taxable.
Chapter 4, Exhibit 13 CCH Federal Taxation Basic Principles 19 of 31
20. Alimony—Post-1984 Agreements
Payments under instruments executed after December 31,
1984, that meet the following requirements are deductible
as alimony:
Payments must be made in cash
Payments must be made under a divorce or separation
instrument
Parties must live in separate households after a
divorce or separation decree is entered
Alimony must end at the payee’s death
Parties involved may not file a joint return
Chapter 4, Exhibit 14 CCH Federal Taxation Basic Principles 20 of 31
21. Alimony and Child Support
(Post-1984 Divorces)
What is the tax treatment for alimony and child support?
Alimony Child Support
Taxable to Payee? Yes No
Deductible to Payor? Yes (“for” AGI) No
Chapter 4, Exhibit 15 CCH Federal Taxation Basic Principles 21 of 31
22. Alimony Recapture
Alimony is required to be recaptured if:
1) Payments made in the 2nd post-separation year exceed
payments in the 3rd post-separation year by more than
$15,000 and/or
2) Payments made in the 1st post-separation year exceed the
average payments made in the 2nd and 3rd post-separation
years by more than $15,000.
Chapter 4, Exhibit 16a CCH Federal Taxation Basic Principles 22 of 31
23. Alimony Recapture
Step 1: Year 2 Recapture
Year 2 Payment
Less Year 3 Payment
= Excess Payment
Less $15,000
= Amount subject to recapture for Year 2
Chapter 4, Exhibit 16b CCH Federal Taxation Basic Principles 23 of 31
24. Alimony Recapture
Step 2: Year 1 Recapture
Year 1 Payment
Less (Year 2 Payment - Year 2 Recapture + Year 3 Payment) / 2
= Excess Payment
Less $15,000
= Amount subject to recapture for Year 1
Chapter 4, Exhibit 16c CCH Federal Taxation Basic Principles 24 of 31
25. Alimony Recapture
Step 3: Total recapture
The total amount subject to recapture equals Year 2
recapture plus Year 1 recapture.
The amount recaptured is included in the payor’s income and
allowed as a deduction from the payee’s income in Year 3.
Chapter 4, Exhibit 16d CCH Federal Taxation Basic Principles 25 of 31
26. Alimony Recapture
Example:
Bob makes the following alimony payments to Mary:
Year 1 - $70,000
Year 2 - $40,000
Year 3 - $20,000
Chapter 4, Exhibit 16e CCH Federal Taxation Basic Principles 26 of 31
29. Alimony Recapture
Tax Effects of Alimony Payments and Recapture
Bob Mary
Year 1 ($70,000) deduction $70,000 income
Year 2 ($40,000) deduction $40,0000 income
($20,000) deduction $20,000 income
$32,500 recapture ($32,500) recapture
Year 3 $12,500 income ($12,500) deduction
Chapter 4, Exhibit 16h CCH Federal Taxation Basic Principles 29 of 31
30. Discharge of Debt
Forgiveness of debt is generally includable in gross income.
There are 2 exceptions in which taxes on a forgiveness of debt are
deferred (i.e. excluded from gross income):
1. The debt is discharged in a Chapter 11 bankruptcy filing.
The amount of debt discharged reduces certain tax attributes that
otherwise could have provided a tax benefit in the future.
2. The borrower is insolvent outside of bankruptcy
(i.e., Liabilities > FMV of assets immediately prior to discharge)
However, the amount excluded from gross income cannot exceed the
amount by which the taxpayer is
insolvent.
Chapter 4, Exhibit 17 CCH Federal Taxation Basic Principles 30 of 31
31. Discharge of Debt—Bankruptcy
Offsetting reduction of tax attributes. As a price for the deferral
(exclusion from gross income), the Code requires that the amount deferred
be applied to reduce seven tax attributes in the order listed below. However,
the Code offers a special election to first reduce the tax basis of
depreciable property or real property held as inventory.
1. Net operating losses and loss carryovers
2. General business credits under Code Sec. 38
3. Minimum tax credits under Code Sec. 53
4. Net capital loss and loss carryovers
5. Basis of depreciable assets or nondepreciable real assets held
as inventory
6. Passive activity losses
7. Foreign tax credit carryovers under Code Sec. 27
Chapter 4, Exhibit 18 CCH Federal Taxation Basic Principles 31 of 31