Structure Analysis: Federal Income Tax on Individuals IPM 39-40 I. Structure 1. GROSS INCOME a.

Determine GROSS INCOME 61 all income from whatever sources derived add up all of the items under 61 If it is not in 61 then apply Glenshow Glass factors Accession to wealth Realized TP had complete dominion 71-90 describes items specifically included in gross income 101-150 describe items specifically excluded from gross income b. Determine adjusted gross income (AGI)- by subtracting above the line deductions Subtract from gross income above-the-line deductions DEFINITION above the line: taken after calculating gross income and before calculating adjusted gross income (reduce gross to adjusted gross income) To know if above look at 62(a) Or 1040 form lines 23-37 62(a)(1) employee business expenses above the line BUT other trade expenses get reported on Schedule C which is reported on line 12 of 1040 trade or business expenses regardless of whether they elect the standard or itemized deduction, gets deducted. 62(a)(10) alimony report on 1040 line 31a c. Determine taxable income subtract below the line deductions A TP is allowed to either take a standard deduction (which is the 57,000) or itemize deduction. Whichever # is bigger, that is the one the TP should chose Standard deduction the sum of the basic standard deduction and any additional standard deduction Standard deduction is adjusted for inflation by 63(c)(4) Either standard deduction + personal exemption or itemized deduction + personal exemption To get the most, bunch the itemized deduction in one year, and take the other year the standard deduction Itemized deductions made for people with high AGI For individuals and corps 161-199 For individuals only 211-222 For corps only 241-249 LIMITATIONS on below the line deductions 67(b) subject ot 2% limitation if not on this list. Miscellaneous itemized deductions are deductible to extent they are above 2% of the AGI. only affects the miscellaneous deductions

 Only the miscellaneous ones (it is not listed in (b)) 68 limits on itemized deduction based on adjusted gross income 68 is a phase out of itemized deductions as a TPs AGI gets too high Section 67 & 88 appear on Schedule A (68 is on line 29, 67 is on line 26) Discrepancy between the form and code- the 100,000 is adjusted for inflation (68(b)(2)) personal exemptions are described in 151-153 2. REALIZATION a. Realization an event that significantly alters the form of the TPs wealth b. The realization requirement provides the TP with a tax deferral, not an exemption. Eventually, the TP will realize and pay tax on that gain Tax deferred is taxed reduced c. Lock and effect a taxpayer is unlikely to sell and reallocate their investments because they will realize a gain and will consequently be taxed on it Inefficient- ties up the flow of capital in the marketplace Delay/Deferment- you will be taxed, just not now right away d. Cottage Savings- an exchange of property gives rise to a realization event under 1001 only if the properties exchanges are materially different (legally distinct entitlements) Substance over forum the TP can decide when to have the realization 3. DISCHARGE OF LOANS AND DEBTS a. Loans are not taxable the receipts are offset by debt so the TP has no gain Loans do not accession to wealth or increase the TPs net worth b/c the loan proceeds are accompanied by an equal and offsetting liability Repayment does not result in deductible expense b. However, if the creditor forgives debt, taxpayer must claim the forgiven amount as income even though the forgiveness provides no cash to pay the tax c. If a loan is discharged for less than the amount owed, the borrower must include in income the amount of the discount (61) d. James v. U.S. a TP has income when the TP acquires earning, lawfully or unlawfully, without the consensual recognition of an obligation to repay and no restriction on disposition e. U.S. v Kirby Lumber IPM 50( discharged debt is an accession to income) Debts are often forgiven when TPs are in financial trouble; 108, 1017 provide that TPs who otherwise had taxable income when a debt was forgiven could usually defer tax on the discharge of indebtedness If the TP is relieved of nonrecourse debt, the debt relief is included in the TPs amount realized for the purpose of computing her gain/loss realized in the property transaction (1001) f. 108 exclusion discharged debt is gross income unless: (a)(1)(A) the discharge occurs in a title 11 case (BK) (a)(2)(B) the discharge occurs when the taxpayer is insolvent (a)(3)(C) farm issues (a)(4)(D) the discharge is from qualified real property business indebtedness TP other than C corporation

g. 108(b)- if 108(a) exclusion apply, may need to be repaid by reduction of other good things available to TP h. Adjustment to basis 108(b)(2)(D) Capital Loss carryovers (may result in reduction in basis) 4. PROPERTY DISPOSITION & BASIS a. Basis affect the amount of gross income on sales or other property income b. 61(a)(3) gross income gains derived from dealings in property What is a gain? 1001 1001 formula is Amount realized adjusted basis = gain or loss gain is the excess of the amount realized over the unrecovered cost (adjusted basis or other basis for the property sold or exchanged Amount Realized equals the money received plus the fair market value of any other property 1001(b) Adjusted Basis (unrecovered cost) 1011 1011(a) adjusted basis is equal to the basis as determined under 1012 (or other appropriate section) adjusted as provided in 1016 1016 requires a TP to adjust her basis to reflect recovery of investment or any additional investments i. Ex. A buys a home for $100,000 and subsequently added a room to the home at a cost of 50,000. The original basis in the home was 100,000, the amount A paid for the home she must adjust the basis in her home to reflect the additional investment which the new room represents. Therefore As adjusted basis is 150,000. Formula becomes Amount realized Adjusted basis (original basis in the property 1012, 1014, 1015 plus or minus adjustments 1016) = gain or loss Ex. A purchases a share of stock in XYZ Corp for $80.00. After 12 years, A sold the stock for 200. How much is gross income? amount realized (200) adjusted basis (80) = gain / income (120). Basis prevents dollars that have already been taxed from being taxed a second time. However if A receives $10 dividend from XYZ Corp, that divident would not constitute a tax-free return of capital which must be reflected by a downward adjustment of As basis in the stock. i. Dividend would constitute profit form As investment in XYZ and would be treated as gross income. Viewed as earnings on a profit from ones investment much the way rent represents earnings on ones property or interest. c. How a person acquires the property 1012 by purchase the original basis is cost (what the TP spend to get the property), except as otherwise provided [for capital gains and losses]. The Cost of property shall not include any amount in respect of property taxes Acquisition of property by PURCHASE original basis is COST

 Acquisition of property as substitute for income original basis as FMV i. Fair Market Value FMV price at which property would exchange hands b/w reasonable buyer and reasonable seller when both have full/reasonable knowledge of relevant facts and neither is under distress to deal Loss is computed the same way as gain under the 1001 formula (AR B) If the property is used for income production, the loss is deductible no matter the cause; if personal, only casualty losses are deductible under 165 1014(a)(1) received from Decedent Basis of property acquired from a decedent except as otherwise provided, the basis shall be FMV of the property at the date of decedents death (if not sold, exchanged, or otherwise disposed of before the decedents death by such person) When basis goes up from the original owner to the new owner that got the property from the decedent, the revenue deplete i. Economic effects of the step up code -> dispose the asset before death ii. Lock in effect of 1014- TP holds the property instead of selling it so that it will pass on to their heirs and have a higher adjusted tax basis 1. Inefficient for the markert 2. Loss of revenue for the IRS iii. Why keep it? Provides an estate tax basis 1. Administraility - Too difficult to determine what the decedents FMV was at the time of purchase 2. Intergration of tax basis and estate tax IPM 53 (will not be on the test) 1014(e) it is in the code to prevent anti-abuse IPM 47 Carryover basis 1015