Glossary of Federal Income Tax

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What's the difference b/t horizontal equity and veritical equity?
Horizontal - Theory that states similiarly situated txps should be treated the same
Vertical - Theory for taxing txp's in different bracket's differnently (Higher income txps should pay more, proportionally)
How is basis determined for a sale of property?
1012- Sale - Cost basis is determined by how much txp paid for the property
How is basis determined for a devise/ bequest of property?
1014- Cost basis is determined as the FMV at the date of hte decedent's death.
How is basis determined for a gift of property? (pain in the ass one)
1015 - The general rule is that cost basis is determined for the donee by taking the donor's basis; the excetion to this rule applies when the FMV of the property is (1)less than the donor's basis when it was given; and (2)the owner subsequently sells for a loss.
* When the donnee sells for more than FMV @ time of gift, but less donor's basis...2 ways to figure basis
(1) For a gain use donor's basis
(2) For a loss use the FMV @ date of gift
What is the rule for part gift/ part sale?
1.1015 - The donnee’s basis is the greater of the amount paid or the donor’s adjusted basis (this ends up benefiting the donnee, giving him the best of both worlds)
What are the 2 Return of Capital theories?
Cash Method - report income when it's actually received

Accrual Method - (typically found in corporations), report income when the $ is earned
Explain the Claim of Right Doctrine (Sec 1341)
Applies when txp includes income mistakenly in one year that he has to return in later years.
Txp can deduct either amt. paid in tax the earlier yr.; or the actual amount in dispute.
Under the Claim of Right Doctrine, when does the txp deduct the amt. of tax paid vs. the amt. in question?
When tax rate has risen and rate in yr. 1<yr. 2; then txp deducts the amount in ques.
When the rate decreases and rate in yr1>yr2; the txp can deduct the amt. of tax paid in the earlier yr.
What does the tax benefit rule say?
Tax Benefit Rule says the GI doesn't include income attributable to the recovery during the taxable year to the extent that such did not reduce the amt of tax imposed.
Under Sec 109, when a txp rents land, and the tenant makes improvements to such land in addition to paying rent, are the improvements taxable?
No, they are not taxable gain, but the txp cannot increase his basis when he takes control of the land again, effectively deferring the gain until the land is sold.
What does the General Rule for losses under Sec. 165 say?
General Rule. There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise. (for individuals, this is only for losses incurred in trade/buisness or transactions for profit)- There must be an overt act that irrevocably cuts ties
Sec 121 says...
Sell your house the gain is excluded from 250k to 500k.
What does the Like-Kind Exchange rule (Sec 1031) say?
No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment (not sales and repurchases, mutual sales)
- Both property exchanged and received must be for business or investment use (excluding personal use or property; house, cars, PCs)
- The 2 properties must be of “like-kind” to each other
(This refers to the nature and character of property; whether property is improved or unimproved is immaterial)
- Must not fall within the exceptions of §1031(b)…(stocks, bonds, securities, interests in partnership, certificates of trust, or choses in action)
What are the 3 requirements have to be met to get into §1031 (non-elective)
(1) Property with productive use in a trade or business / investment
(2) Exchange for like kind
(3) Property received must be held in productive use
1031 Hypo -Bob owns Bl/acre fmv 40; AB 10 - xchanges w/ Sam for wh/acre (fmv 30; AB 15) and a Horse fmv 10; AB 2
Bob’s AR = (30+ 10) = 40
Bob’s Real G = (40-10) = 30
Bob’s Recognition =10
Bob’s Basis in horse =10
Bob’s Basis in Wh/acre =10 + 10 – 10 = 10
2. Sam’s Amount Realized – (40-10)= 30
Sam’s Realized Gain – (30-15) = 15
Sam Recognition – 0
Sam’s Basis – 15+ 10 (horse’s fmv)= 25
3. Xchange horse – part of bl/acre
Gain Realized – (10-2)= 8
Gain Recognized – 8
Basis of 10
What's the formula for determining basis for a like-kind exchange
Adjusted basis of all like-kind and non-like property
Any recognized gain, liability taken on, or cash paid
any loss recognized, liability shed, or cash rec.
allocate the amt. first to non-like kind property, with the rest going to the like kind

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