Notes

1.   Of course, state legislatures may carve out exceptions. Purchases of food might be subject to a sales tax that is lower than for other goods. Purchases of services might not be subject to a sales tax.

2.   Heavy smokers or drinkers are not deterred from indulging in their habits by such taxes. Light smokers or drinkers are more responsive to such taxes. The persons whom we might wish to deter are in fact not likely to be deterred.

3.   Taxpayers who are married filing jointly are subject to this tax to the extent their wages or self-employment income exceed $250,000. Taxpayers who are married filing separately are subject to this tax to the extent their wages exceed one-half that amount. All other taxpayers are subject to this tax to the extent their wages exceed $200,000. I.R.C. §§ 3101(b)(2), 1401(b)(2). Moreover, an individual is subject to a 3.8% Medicare tax on her “net investment income” to the extent her modified AGI (adjusted gross income) exceeds a threshold amount. I.R.C. § 1411(a). The threshold amount is $250,000 for taxpayers who are married filing jointly, one-half that amount for taxpayers who are married filing separately, and $200,000 for all others. I.R.C. § 1411(b).

4.   Self-employed taxpayers must pay both halves of these taxes. See § 1401.

5.   This figure is derived from the accompanying table, SOI Tax Stats at a Glance. The portion of total tax revenues derived from corporate income taxes is 10.0%, from employment taxes (Social Security and Medicare) 33.2%, from excise taxes 1.9%, from gift taxes 0.06%, and from estate taxes 0.6%. Do these percentages surprise you?

6.   Your author had a double major as an undergraduate – Political Science and the Far Eastern & Russian Institute. His LL.M. is not in tax law. He learned income tax law the same way you are going to: by reading the Code, studying texts, and talking to people.

7.   The personal exemption deduction has been suspended until 2026. § 151(d)(5).

8.   We refer to this phenomenon as the declining marginal utility of money.

9.   Constitutional scholars have observed that the phrase “direct taxes” (see Art. I, § 9, cl. 4 of U.S. Constitution) refers to taxes whose burden cannot be transferred to another, e.g., head taxes. Implicitly, “indirect taxes” are taxes whose burden can be transferred to another, e.g., excise taxes. The point at which a transferee is not willing to pay the “indirect tax” constitutes a practical limit on congressional power to increase such taxes.

10.  See William P. Kratzke, The (Im)Balance of Externalities in Employment-Based Exclusions from Gross Income, 60 The Tax Lawyer 1 (2006).

11.  See William P. Kratzke, Tax Subsidies, Third-Party Payments, and Cross-Subsidization: America’s Distorted Health Care Markets, 40 U. Mem. L. Rev. 279, 311-12 (2009) (tax subsidized health insurance makes more money available to health care providers).

12.  We will not spend any more time on the AMT. You should be aware that it exists and of its basic approach to addressing a particular (perceived) problem.

13.  26 U.S.C. § 3101(a) (for “Old-Age, Survivors, and Disability Insurance;” 6.2%); 26 U.S.C. § 3101(b) (for “Hospital Insurance;” 1.45% and 2.35% for amounts over a certain threshold).

14.  26 U.S.C. § 3111(a) (for “Old-Age, Survivors, and Disability Insurance;” 6.2%); 26 U.S.C. § 3111(b) (for “Hospital Insurance;” 1.45%).

15.  That is, gain on the sale of property that a taxpayer owns for more than one year.

16.  “Gross income,” § 61, is a topic that we take up in chapter 2. It encompasses all “accessions to wealth.” However, there are some “accessions to wealth” that we do not include in a taxpayer’s “gross income.” We consider some of those in chapter 3. The Code defines these exclusions in §§ 101 to 139G. The Code also defines the scope of certain inclusions in §§ 72 to 91 – and implicitly excludes what is outside the scope of those inclusions.

17.  Section 63(b) provides for a reduction of taxable income by personal exemptions and of the deduction provided in § 199A. The personal exemption deduction has been suspended, and § 199A provides a deduction for certain pass-through entities. We leave these aside for purposes of this illustration.

18.  The latest tax brackets are in the front pages of your student edition of the Code and Regulations.

19.  See Marbury v Madison, 5 U.S. 137, 177 (duty of courts to say what the law is and to expound and interpret it). In other countries, court constructions of a code are persuasive authority only. A code still prevails in such countries over court pronouncements insofar as they might guide persons other than parties to a case.

20.  In Mayo Found. for Med. Educ. and Res. v. U.S., 562 U.S. 44 (2011) the Supreme Court held that reviewing courts should give Chevron deference when passing upon the validity of Treasury Department (i.e., IRS) regulations. 562 U.S. at 55-56 (upholding regulation providing that employee normally scheduled to work 40 or more hours per week does not perform such work incident to and pursuant to course of study; employer not exempt from paying employment taxes). Chevron, U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984) established a two-part framework by which courts determine whether to defer to administrative rulemaking: (1) Has Congress addressed the precise question at issue? If not: (2) Is the agency rule “arbitrary or capricious in substance, or manifestly contrary to the statute.” If not, then the reviewing court is to defer to the agency rule. 562 U.S. at 52-53. In King v. Burwell, 576 U.S. ___, 135 S. Ct. 2480 (2015), the Court refused to defer to the IRS on the question whether the tax credits of 26 U.S.C. § 36B were available to those who purchased health insurance through federal exchanges rather through than state exchanges. An IRS regulation said “yes.” The Court nevertheless made its own determination because this was an extraordinary case.

21.  See Simon v. Eastern Kentucky Welfare Rights Organization, 426 U.S. 26, 40-45 (1976) (taxpayer unable to show that tax benefit given to other taxpayers caused injury to itself that any court-ordered relief would remedy).

22.  See Boris I. Bittker, A “Comprehensive Tax Base” as a Goal of Income Tax Reform, 80 Harv. L. Rev. 925, 934 (1967) (arguing that many of the changes necessary to create truly comprehensive tax base would be unacceptable).

23.  Henry C. Simons, Personal Income Taxation 50 (1937).

24.  The Venezuelan Bolivar fits this description.

25.  A person tends to value what she already has more than what she does not have.

26.  The only exception to this principle is the trade or business of trafficking in certain controlled substances. See § 280E.

27.  … or amortization or cost recovery.

28.  But see Commissioner v. Groetzinger, 480 U.S. 23 (1987) (full-time gambler who makes wagers solely for his own account is engaged in a “trade or business” within meaning of § 162).

29.  The deduction of “miscellaneous deductions” has been suspended until 2026. § 67(g).

30.  Title I. – Income Tax

31.  There was no SHS definition of “income” in 1920.

32.  Insofar as compensation for nonphysical personal injuries appears to be excludable from gross income under 26 C.F.R. § 1.104-1, the regulation conflicts with the plain text of § 104(a)(2); in these circumstances the statute clearly controls. See Brown v. Gardner, 513 U.S. 115, 122 (1994) (finding “no antidote to [a regulation’s] clear inconsistency with a statute”).

33.  Though it is unclear whether an income tax is a direct tax, the Sixteenth Amendment definitively establishes that a tax upon income is not required to be apportioned. [citation omitted].

34.  Pollock II also held that a tax upon the income of real or personal property is a direct tax. 158 U.S. at 637. Whether that portion of Pollock remains good law is unclear. See Graves v. New York ex rel. O’Keefe, 306 U.S. 466, 480 (1939).

35.  For the same reason, we infer from Knowlton that a tax laid upon an amount received in settlement of a suit for a personal nonphysical injury would also be an excise. See 178 U.S. at 55.

36.  Aside from being part of the restructuring agreement, the taxpayer’s transfer of $6,123 cash to the PCA has little significance for the purposes of the present appeal.

37.  I.R.C. § 108(a)(1)(B) provides that “gross income does not include any amount which (but for this subsection) would be includable in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if … the discharge occurs when the taxpayer is insolvent.” …

38.  Despite the technical accuracy of the decision, one wonders about the propriety of the government’s exhaustive pursuit of this matter in view of the taxpayers’ dire financial situation and continued insolvency.

39.  This is the limit for 2018 to 2025. Then the limit will again be $1,000,000. Moreover, § 163(h) will again allow a deduction for interest that taxpayer pays on $100,000 of home equity indebtedness.

40.  For 2018 to 2025, taxpayer may deduct a total of $10,000 for state and local property taxes, state and local personal property taxes, and state, local, and foreign income taxes. Foreign property taxes are not deductible. Beginning in 2026, all these taxes will be deductible without limit.

41.  The Tax Code makes a substantial contribution to urban sprawl.

42.  Many gamblers have learned the hard way that there is a limit to what they can deduct from their gambling winnings. § 165(d) (wagering losses deductible only to extent of gain from wagering transactions; until 2026, wagering “losses” include deductions otherwise allowable).

43.  Memorandum R-49 listed 10 criteria for classifying mortgages as substantially identical.

44.  By exchanging merely participation interests, rather than the loans themselves, each party retained its relationship with the individual obligors. Consequently, each S & L continued to service the loans on which it had transferred the participation interests and made monthly payments to the participation-interest holders.

45.  Multi-party transfers of multiple pieces of real property will be (already are?) the domain of real estate specialists – and beyond the scope of this introduction to tax-deferral through basis transfers.

46.  According to undisputed testimony in the tax court, it was the consensus of the Bruce board that the Celotex assets were selling at a bargain price and also that the dovetailing of the two companies’ sales operations would result in substantial economies.

47.  Two years previously, Gilbert accomplished a merger with Bruce of another corporation controlled by him, Empire National Corporation, and in the process he had made some unauthorized withdrawals of Empire funds, all of which he paid back.

48.  When attempting to file in the New York County Clerk’s office on June 13 or 14, Bruce was told that it would have to pay a mortgage tax of at least $10,000 because the assignment included real property. …

49.  As of the date of trial in the tax court, less than $500,000 had been raised through sales of the assigned assets. Pursuant to an agreement reached between Bruce and the government in 1970, 35% of these proceeds have been paid over to the government pending the outcome of this lawsuit.

50.  If Gilbert had been intending to abscond with the $1,953,000, it is difficult to see how he could have hoped to avoid detection in the long run. Since his equity in the corporation itself was worth well over $1,953,000, it would have been absurd for him to attempt such a theft.

51.  The cases including “tips” in gross income are classic examples of this. See, e.g., Roberts v. Commissioner, 176 F.2d 221.

52.  See generally Committee on the Budget United States Senate 114th Cong., Tax Expenditures: Compendium of Background Material on Individual Provisions, S. Prt. 114-31 at 1045-51 (2016), available at http://www.gpo.gov/fdsys/pkg/CPRT-114SPRT24030/pdf/CPRT-114SPRT24030.pdf (Exclusion of Interest on Public Purpose State and Local Government Bonds).

53.  The exclusion also does not extend to interest derived from a bond “not in registered form.” § 103(b)(3) as defined in § 149. This basically means that the bond must be offered to the public, have a maturity date more than one year after the date of issue, and not be offered exclusively to persons who are not U.S. persons and/or payable only outside of the United States. Moreover, the interest on some private activity bonds is excluded from a taxpayer’s gross income. See § 141(e) and §§ 142 to 145.

54.  However, such interest might be a “tax preference” item, § 57(a)(5) (private activity bonds), and so subject to the AMT. § 55(b)(2)(B).

55.  Section 101(d)(1)(B) (repealed) provided a $1000 exclusion from gross income for a surviving spouse beneficiary in addition to the exclusion provided by pro-rating a payment between recovery of basis and taxable income. This $1000 additional exclusion has been repealed, but the regulations still incorporate it.

56.  Application of the rules for the commercial sale of a life insurance policy require access to information not always readily available. The Tax Cuts and Jobs Act added § 101(a)(3). Section 101(a)(3) defines a “reportable policy sale” to be an acquisition of an interest in a life insurance policy when the acquirer has no family, business, or financial interest with the insured other than an interest in the life insurance policy. Every person who acquires such an interest in a life insurance policy must report it to the IRS and to all persons, including the issuer, named in such notice. § 6050Y(a). The issuer of the policy is to notify the IRS and the seller(s) of the amount of investment in the insurance contract. § 6050Y(b). Payment of death benefits triggers a reporting requirement on the part of the payor of the gross amount of payments and an estimate of the buyer’s investment in the contract. § 6050Y(c).

57.  … in my view.

58.  “The better and more accurate statement of the reason for the exclusion from the employee’s income of the value of subsistence and quarters furnished in kind is found, we think, in Arthur Benaglia, 36 B.T.A. 838, where it was pointed out that, on the facts, the subsistence and quarters were not supplied by the employer and received by the employee ‘for his personal convenience[,] comfort or pleasure, but solely because he could not otherwise perform the services required of him.’ In other words, though there was an element of gain to the employee, in that he received subsistence and quarters which otherwise he would have had to supply for himself, he had nothing he could take, appropriate, use and expend according to his own dictates, but, rather, the ends of the employer’s business dominated and controlled, just as in the furnishing of a place to work and in the supplying of the tools and machinery with which to work. The fact that certain personal wants and needs of the employee were satisfied was plainly secondary and incidental to the employment.”

59.  “[T]he provisions of an employment contract … shall not be determinative of whether … meals … are intended as compensation.”

60.  See Boris I. Bittker, Martin J. McMahon, Jr., & Lawrence A. Zelenak, Federal Income Taxation of Individuals ¶ 4.05[2] at 4-21 (3d ed. 2002).

61.  The Tax Cuts and Jobs Act (2017) deleted alimony from the list of items included in “gross income” and renumbered the remaining items. “Discharge of indebtedness income” is now included in “gross income” at § 61(a)(11).

62.  Had Zarin not paid the $500,000 dollar settlement, it would be likely that he would have had income from cancellation of indebtedness. The debt at that point would have been fixed, and Zarin would have been legally obligated to pay it.

63.  The Commissioner argues that the decision in Hall was based on United States Supreme Court precedent since overruled, and therefore Hall should be disregarded. Indeed, the Hall court devoted a considerable amount of time to Bowers v. Kerbaugh-Empire Co., 271 U.S. 170 (1926), a case whose validity is in question. We do not pass on the question of whether or not Bowers is good law. We do note that Hall relied on Bowers only for the proposition that “‘a court need not in every case be oblivious to the net effect of the entire transaction.’” United States v. Hall, 307 F.2d at 242, quoting Bradford v. Commissioner, 233 F.2d 935, 939 (6th Cir. 1956). Hall’s reliance on Bowers did not extend to the issue of contested liability, and even if it did, the idea that “Courts need not apply mechanical standards which smother the reality of a particular transaction,” id. at 241, is hardly an exceptional concept in the tax realm. See Commissioner v. Tufts, 461 U.S. 300 (1983); Hillsboro Nat’l Bank v. Commissioner, 460 U.S. 370 (1983).

64.  The cited regulation does not apply to exchanges of debt instruments between holders and so does not apply to cases such as Cottage Savings Ass’n v. CIR.

65.  These paragraphs summarize the regulations at Reg. § 1.1001-3 – and admittedly omit many details.

66.  “The professions to which the provision refers are medicine, nursing, and teaching.” Staff of Jt. Comm. on Taxation, General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984 1200 (Jt. Comm. Print 1984).

67.  The loss was the difference between the adjusted basis, $1,455,740, and the fair market value of the property, $1,400,000. … [You should recognize that this was the treatment that the Tax Court accorded such transactions in Collins, supra.]

68.  The Commissioner determined the partnership’s gain on the sale by subtracting the adjusted basis, $1,455,740, from the liability assumed by Bayles, $1,851,500. Of the resulting figure, $395,760, the Commissioner treated $348,661 as capital gain, pursuant to § 741 of the Internal Revenue Code of 1954, and $47,099 as ordinary gain under the recapture provisions of § 1250 of the Code. The application of § 1250 in determining the character of the gain is not at issue here.

69.  Crane also argued that, even if the statute required the inclusion of the amount of the nonrecourse debt, that amount was not Sixteenth Amendment income because the overall transaction had been “by all dictates of common sense … a ruinous disaster.” The Court noted, however, that Crane had been entitled to and actually took depreciation deductions for nearly seven years. To allow her to exclude sums on which those deductions were based from the calculation of her taxable gain would permit her “a double deduction … on the same loss of assets.” The Sixteenth Amendment, it was said, did not require that result.

70.  The Commissioner might have adopted the theory, implicit in Crane’s contentions, that a nonrecourse mortgage is not true debt, but, instead, is a form of joint investment by the mortgagor and the mortgagee. On this approach, nonrecourse debt would be considered a contingent liability, under which the mortgagor’s payments on the debt gradually increase his interest in the property while decreasing that of the mortgagee. Note, Federal Income Tax Treatment of Nonrecourse Debt, 82 Colum. L. Rev. 1498, 1514 (1982); Lurie, Mortgagor’s Gain on Mortgaging Property for More than Cost Without Personal Liability, 6 Tax L. Rev. 319, 323 (1951); cf. Brief for Respondents 16 (nonrecourse debt resembles preferred stock). Because the taxpayer’s investment in the property would not include the nonrecourse debt, the taxpayer would not be permitted to include that debt in basis. Note, 82 Colum. L. Rev. at 1515; [citation omitted].

71.  Professor Wayne G. Barnett, as amicus in the present case, argues that the liability and property portions of the transaction should be accounted for separately. Under his view, there was a transfer of the property for $1.4 million, and there was a cancellation of the $1.85 million obligation for a payment of $1.4 million. The former resulted in a capital loss of $50,000, and the latter in the realization of $450,000 of ordinary income. Taxation of the ordinary income might be deferred under § 108 by a reduction of respondents’ bases in their partnership interests.

72.  We will not consider § 483, but its rules are similar to those we examine here for the transactions to which it applies.

73.  Google “mortgage interest amortization schedule.” Choose one. I found the one at https://financial-calculators.com/amortization-schedule to be user friendly to political science majors and others resistant to finance formulas. The user can play around with the variables that determine interest and principal.

74.  Table 1 in chapter 2 provides values that are compounded annually. Hence, these values are not quite accurate in the context of § 1272, which requires daily compounding.

75.  Technically, § 1272(a)(3 and 4) requires a recalculation of interest based upon an increasing “issue price” and a decreasing length of time until redemption.

76.  Table 3 in chapter 2 provides values that are compounded annually. Hence, these values are not quite accurate in the context of § 1274, which requires semiannual compounding.

77.  The standard deduction assures that some income is not subject to any income tax.

78.  Only $10,000 of each taxpayer’s taxable income would be subject to the 20% rate of income tax.

79.  Three different standard deductions would alter the precise tax burdens.

80.  This is really a misnomer. The “assignment of income” doctrine prevents assignment of income. A more accurate name would be the “non-assignment of income” doctrine.

81.  A bracket breakpoint is the dividing point between two marginal rate brackets.

82.  In 1951, a separate rate schedule was created for unmarried heads of household with dependents (“head of household” status). Because the bracket breakpoints and standard deduction were more than half of those for joint returns, marriage penalties arose for some taxpayers eligible for filing as head of household.

83.  Lucas v. Earl, 281 U.S. 111 (1930).

84.  Poe v. Seaborn, 282 U.S. 101 (1930).

85.  This relationship between rate schedules is the same as that between joint returns and separate returns for married couples under present law.

86.  Because income splitting had been available in community property States prior to 1948, a marriage bonus had already existed in such States.

87.  Even if the bracket breakpoints and the standard deduction amounts for unmarried taxpayers (and for married taxpayers filing separate returns) were half of those for married couples filing a joint return, the current tax system would not be marriage neutral. Many married couples would still have marriage bonuses. As described below, the joint return in such a system would allow married couples to pay twice the tax of a single taxpayer having one-half the couple’s taxable income. With progressive rates, this income splitting may result in reduced tax liabilities for some couples filing joint returns. For example, consider a married couple in which one spouse has $60,000 of income and the other has none. By filing a joint return, the couple pays the same tax as a pair of unmarried individuals each with $30,000 of income. With progressive taxation, the tax liability on $30,000 would be less than half of the tax liability on $60,000. Thus the married couple has a marriage bonus: the joint return results in a smaller tax liability than the combined tax liability of the spouses if they were not married.

88.  This discussion assumes that the dilemma cannot be resolved by moving to a proportional tax (i.e. a single rate on all income for all taxpayers) system. A proportional system would automatically produce marriage neutrality and equal taxation of couples with equal incomes.

89.  The stock of The Heim Company was owned as follows: plaintiff 1%, his wife 41%, his son and daughter 27% each, and his daughter-in-law and son-in-law 2% each

90.  These decisions were distinguished by Judge Magruder in Commissioner v. Reece, 1 Cir., 233 F.2d 30. In that case, as in the case at bar, the taxpayer assigned his patent to a corporation in return for its promise to pay royalties, and later made a gift of the royalty contract to his wife. It was held that this was a gift of income-producing property and was effective to make the royalties taxable to her. See also Nelson v. Ferguson, 56 F.2d 121 (3rd Cir.), cert. denied, 286 U.S. 565; Commissioner v. Hopkinson, 126 F.2d 406 (2d Cir.); and 71 Harvard Law Review 378.

91.  … including social security, medicare, and unemployment taxes, as well as income taxes.

92.  See generally Paula Wolff, Annot., What constitutes trade or business under Internal Revenue Code (U.S.C.A. Title 26), 161 A.L.R. Fed. 245 (2008).

93.  Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987) (alternative minimum tax; citation omitted).

94.  §§ 183(a) and (b)(2). Furthermore, a taxpayer must attribute to such an activity a share of deductions allowable without regard to whether an activity is engaged in for profit, e.g., real estate taxes, to the activity, § 183(b)(1). This may have the effect of reducing by displacement the allowable deduction for expenses attributable to the hobby or amusement activity. Moreover, the deductions are “below-the-line” and subject to the 2% floor of § 67 for miscellaneous deductions. For the years 2018 to 2025, no deduction is allowed for “miscellaneous deductions.” § 67(g). A presumption in favor of the taxpayer to the effect that the “activity is engaged in for profit” arises if he derives gross income from the activity greater than deductions attributable to it for three of the previous five consecutive tax years. § 183(d).

95.  A special rule applies to taxpayers who sell motor vehicles from inventory. § 163(j)(1 and 9) (additional floor financing costs also deductible).

96.  Private Letter Ruling 9331001.

97.  Ordinary expenses: Commissioner v. People’s Pittsburgh Trust Co., 60 F.2d 187, expenses incurred in the defense of a criminal charge growing out of the business of the taxpayer; American Rolling Mill Co. v. Commissioner, 41 F.2d 314, contributions to a civic improvement fund by a corporation employing half of the wage earning population of the city, the payments being made, not for charity, but to add to the skill and productivity of the workmen …; Corning Glass Works v. Lucas, 59 App. D.C. 168, 37 F.2d 798, donations to a hospital by a corporation whose employees with their dependents made up two-thirds of the population of the city; Harris & Co. v. Lucas, 48 F.2d 187, payments of debts discharged in bankruptcy, but subject to be revived by force of a new promise. Cf. Lucas v. Ox Fibre Brush Co., 281 U.S. 115, where additional compensation, reasonable in amount, was allowed to the officers of a corporation for services previously rendered.

98.  The two sections are in pari materia with respect to the capital-ordinary distinction, differing only in that § 212 allows deductions for the ordinary and necessary expenses of nonbusiness profitmaking activities. See United States v. Gilmore, 372 U.S. 39, 44-45 (1963). …

99.  … [W]herever a capital asset is transferred to a new owner in exchange for value either agreed upon or determined by law to be a fair quid pro quo, the payment itself is a capital expenditure, and there is no reason why the costs of determining the amount of that payment should be considered capital in the case of the negotiated price and yet considered deductible in the case of the price fixed by law. See Isaac G. Johnson & Co. v. United States, 149 F.2d 851 (C.A.2d Cir.1945) (expenses of litigating amount of fair compensation in condemnation proceeding held capital expenditures).

100. § 167. Depreciation.

101. § 263. Capital expenditures.

102. For purposes of the issue here presented, the key phrase of § 167(a)(1) is “property used in the trade or business.” …

103. § 161. Allowance of deductions. In computing taxable income under § 63(a), there shall be allowed as deductions the items specified in this part, subject to the exceptions provided in part IX (§§ 261 and following, relating to items not deductible).”

104. The Committee on Terminology of the American Institute of Certified Public Accountants has discussed various definitions of depreciation and concluded that:

105. The general proposition that good accounting practice requires capitalization of the cost of acquiring a capital asset is not seriously open to question. The Commissioner urges, however, that accounting methods, as a rule, require the treatment of construction-related depreciation of equipment as a capital cost of the facility constructed. Indeed, there is accounting authority for this. See, e.g., W. Paton, Asset Accounting 188, 192-193 (1952); H. Finney & H. Miller, Principles of Accounting – Introductory 246-247 (6th ed. 1963) (depreciation as an expense should be matched with the production of income); W. Paton, Accountants’ Handbook 652 (3d ed. 1943); Note, 1973 Duke L.J. 1377, 1384; Note, 52 N.C. L. Rev. 684, 692 (1974).

106. § 261. General rule for disallowance of deductions. In computing taxable income no deduction shall in any case be allowed in respect of the items specified in this part.

107. Approximately 21% of National Starch common was exchanged for Holding preferred. The remaining 79% was exchanged for cash.

108. Compare the Third Circuit’s opinion, 918 F.2d at 430, with NCNB Corp. v. United States, 684 F.2d 285, 293-294 (4th Cir. 1982) (bank expenditures for expansion-related planning reports, feasibility studies, and regulatory applications did not “create or enhance separate and identifiable assets,” and therefore were ordinary and necessary expenses under § 162(a)), and Briarcliff Candy Corp. v. Commissioner, 475 F.2d 775, 782 (2d Cir. 1973) (suggesting that Lincoln Savings “brought about a radical shift in emphasis,” making capitalization dependent on whether the expenditure creates or enhances a separate and distinct additional asset). See also Central Texas Savings & Loan Assn. v. United States, 731 F.2d 1181, 1184 (5th Cir. 1984) (inquiring whether establishment of new branches “creates a separate and distinct additional asset” so that capitalization is the proper tax treatment).

109. Petitioner contends that, absent a separate-and-distinct-asset requirement for capitalization, a taxpayer will have no “principled basis” upon which to differentiate business expenses from capital expenditures. We note, however, that grounding tax status on the existence of an asset would be unlikely to produce the bright-line rule that petitioner desires, given that the notion of an “asset” is itself flexible and amorphous. See Johnson, 53 Tax Notes, at 477-478.

110. See, e.g. McCrory Corp. v. United States, 651 F.2d 828 (2d Cir. 1981) (statutory merger under 26 U.S.C. § 368(a)(1)(A)); Bilar Tool & Die Corp. v. Commissioner, 530 F.2d 708 (6th Cir. 1976) (division of corporation into two parts); E. I. du Pont de Nemours & Co. v. United States, 432 F.2d 1052 (3rd Cir. 1970) (creation of new subsidiary to hold assets of prior joint venture); General Bancshares Corp. v. Commissioner, 326 F.2d 712, 715 (8th Cir.) (stock dividends), cert. denied, 379 U.S. 832 (1964); Mills Estate, Inc. v. Commissioner, 206 F.2d 244 (2d Cir. 1953) (recapitalization).

111. See, e.g., Motion Picture Capital Corp. v. Commissioner, 80 F.2d 872, 873-874 (CA2 1936) (recognizing that expenses may be “ordinary and necessary” to corporate merger, and that mergers may be “ordinary and necessary business occurrences,” but declining to find that merger is part of “ordinary and necessary business activities,” and concluding that expenses are therefore not deductible); Greenstein, The Deductibility of Takeover Costs After National Starch, 69 Taxes 48, 49 (1991) (expenses incurred to facilitate transfer of business ownership do not satisfy the “carrying on [a] trade or business” requirement of § 162(a)).

112. § 166. Bad debts.

113. Reg. § 1.166-5 Nonbusiness debts.

114. This difference in treatment between the loss on the direct loan and that, on the indemnity is not explained. See, however, Whipple v. Commissioner, 373 U. S. 193 (1963).

115. “A debt is proximately related to the taxpayer’s trade or business when its creation was significantly motivated by the taxpayer’s trade or business, and it is not rendered a non-business debt merely because there was a non-qualifying motivation as well, even though the non-qualifying motivation was the primary one.”

116. “You must, in short, determine whether Mr. Generes’ dominant motivation in signing the indemnity agreement was to protect his salary and status as an employee or was to protect his investment in the Kelly Generes Construction Co.” “Mr. Generes is entitled to prevail in this case only if he convinces you that the dominant motivating factor for his signing the indemnity agreement was to insure the receiving of his salary from the company. It is insufficient if the protection or insurance of his salary was only a significant secondary motivation for his signing the indemnity agreement. It must have been his dominant or most important reason for signing the indemnity agreement.”

117. “Even if the taxpayer demonstrates an independent trade or business of his own, care must be taken to distinguish bad debt losses arising from his own business and those actually arising from activities peculiar to an investor concerned with, and participating in, the conduct of the corporate business.” 373 U.S. at 202.

118. § 29.23(a)-4. REPAIRS.—The cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinarily efficient operating condition, may be deducted as expense, provided the plant or property account is not increased by the amount of such expenditures. Repairs in the nature of replacements, to the extent that they arrest deterioration and appreciably prolong the life of the property, should be charged against the depreciation reserve if such account is kept. (See §§ 29.23(l)-1 to 29.23(l)-10, inclusive.) [The regulation that the court quoted became the substance of Reg. § 1.162-4 (superseded after 2011). As we shall see, Treasury and the IRS have substantially revised it.]

119. This was the test of Plainfield-Union Water Co. v. Commissioner, 39 T.C. 333, 334 (1962), nonacq. on other grounds, 1964-2 C.B. 8.

120. Guidance Regarding Deduction and Capitalization of Expenditures Related to Tangible Property, 78 Fed. Reg. 57686-01 (2013).

121. No claim for deduction was made by the taxpayer for the amounts spent in traveling from Mobile to Jackson. …

122. [The pertinent regulation] does not attempt to define the word “home,” although the Commissioner argues that the statement therein contained to the effect that commuters’ fares are not business expenses, and are not deductible “necessarily rests on the premise that home,’ for tax purposes, is at the locality of the taxpayer’s business headquarters.” Other administrative rulings have been more explicit in treating the statutory home as the abode at the taxpayer’s regular post of duty. See, e.g., O.D. 1021, 5 Cum. Bull. 174 (1921); I.T. 1264, I-1 Cum. Bull. 122 (1922); I.T. 3314, 1939-2 Cum. Bull. 152; G.C.M. 23672, 1943 Cum. Bull. 66.

123. Conceivably men soon may live in Florida or California and fly daily to work in New York and back. Possibly they will be regarded as commuters when that day comes. But, if so, that is not this case and, in any event, neither situation was comprehended by Congress when § [162] was enacted.

124. The language is:

125. After denying the Government’s motion for a directed verdict, the District Judge charged the jury that it would have to “determine under all the facts of this case whether or not” the Commissioner’s rule was “an arbitrary regulation as applied to these plaintiffs under the facts in this case.” He told the jury to consider whether the meal expenses were “necessary for the employee to properly perform the duties of his work.” “Should he have eaten them at his home, rather than . . . away from home, in order to properly carry on this business or to perform adequately his duties as an employee of this produce company[?]” “You are instructed that the cost of meals while on one-day business trips away from home need not be incurred while on an overnight trip to be deductible, so long as the expense of such meals … proximately results from the carrying on the particular business involved and has some reasonable relation to that business.” Under these instructions, the jury found for the respondent. The District Court denied the Government’s motion for judgment notwithstanding the verdict.

126. Prior to the enactment in 1921 of what is now § 162(a)(2), the Commissioner had promulgated a regulation allowing a deduction for the cost of meals and lodging away from home, but only to the extent that this cost exceeded “any expenditures ordinarily required for such purposes when at home.” Treas. Reg. 45 (1920 ed.), Art. 292, 4 Cum. Bull. 209 (1921). Despite its logical appeal, the regulation proved so difficult to administer that the Treasury Department asked Congress to grant a deduction for the “entire amount” of such meal and lodging expenditures. See Statement of Dr. T. S. Adams, Tax Adviser, Treasury Department, in Hearings on H.R. 8245 before the Senate Committee on Finance, 67th Cong., 1st Sess., at 50, 234-235 (1921). Accordingly § 214(a)(1) of the Revenue Act of 1921, c. 136, 42 Stat. 239, for the first time included that language that later became § 162(a)(2). …

127. Because § 262 makes “personal, living, or family expenses” nondeductible, the taxpayer whose business requires no travel cannot ordinarily deduct the cost of the lunch he eats away from home. But the taxpayer who can bring himself within the reach of § 162(a)(2) may deduct what he spends on his noontime meal although it costs him no more, and relates no more closely to his business, than does the lunch consumed by his less mobile counterpart.

128. The Commissioner’s interpretation, first expressed in a 1940 ruling, I.T. 3395, 1910-2 Cum. Bull. 64, was originally known as the overnight rule. See Commissioner v. Bagley, [374 F.2d 204,] 205.

129. The respondent seldom traveled farther than 55 miles from his home, but he ordinarily drove a total of 150 to 175 miles daily.

130. The taxpayer must ordinarily “maintain a home for his family at his own expense even when he is absent on business,” Barnhill v. Commissioner, 148 F.2d 913, 917, and if he is required to stop for sleep or rest, “continuing costs incurred at a permanent place of abode are duplicated.” James v. United States, 308 F.2d 204, 206. The same taxpayer, however, is unlikely to incur substantially increased living expenses as a result of business travel, however far he may go, so long as he does not find it necessary to stop for lodging. …

131. The court below thought that “[i]n an era of supersonic travel, the time factor is hardly relevant to the question of whether or not … meal expenses are related to the taxpayer’s business. …” 369 F.2d 87, 89-90. But that completely misses the point. The benefits of § 162(a)(2) are limited to business travel “away from home,” and all meal expenses incurred in the course of such travel are deductible, however unrelated they may be to the taxpayer’s income-producing activity. To ask that the definition of “away from home” be responsive to the business necessity of the taxpayer’s meals is to demand the impossible.

132. Flowers denied a deduction claimed by the taxpayer as not involving expenses required by the taxpayer’s employer’s business. It is now established, however, that a taxpayer may be in the trade or business of being an employee. See, e.g., Primuth v. Commissioner, 54 T.C. 374, 377-78 (1970) (citing cases); Rev. Rul. 77-16; Rev. Rul. 60-16. Thus, expenses necessitated by the exigencies of an employee’s occupation, without regard to the demands of the employer’s business, are also deductible.

133. Under the general provision of § 162(a), no deduction is allowed for expenses incurred in preparing to enter a new business and the phrase “in the pursuit of a trade or business” has in cases concerned with such expenses been read to “presuppose [ ] an existing business with which (the taxpayer) is connected.” Frank v. Commissioner, 20 T.C. 511, 513-14 (1953). See, e.g., Weinstein v. United States, 420 F.2d 700 (Ct. Cl.1970).

134. The Tax Court has, with a notable exception, consistently held that a taxpayer’s home is his place of business. See Daly v. Commissioner, 72 T.C. 190 (1979); Foote v. Commissioner, 67 T.C. 1 (1976); Montgomery v. Commissioner, 64 T.C. 175 (1975), aff’d, 532 F.2d 1088 (6th Cir. 1976); Blatnick v. Commissioner, 56 T.C. 1344 (1971). The exception, of course, is the present case.

135. In this respect, Mr. and Mrs. Hantzis’ situation is analogous to cases involving spouses with careers in different locations. Each must independently satisfy the requirement that deductions taken for travel expenses incurred in the pursuit of a trade or business arise while he or she is away from home. See Chwalow v. Commissioner, 470 F.2d 475, 477-78 (3d Cir. 1972) (“Where additional expenses are incurred because, for personal reasons, husband and wife maintain separate domiciles, no deduction is allowed.”); Hammond v. Commissioner, 213 F.2d 43, 44 (5th Cir. 1954); Foote v. Commissioner, 67 T.C. 1 (1976); Coerver v. Commissioner, 36 T.C. 252 (1961). This is true even though the spouses file a joint return. Chwalow, supra, 470 F.2d at 478.

136. The concurrence reaches the same result on essentially the same reasoning, but under what we take to be an interpretation of the “in pursuit of business” requirement. We differ from our colleague, it would seem, only on the question of which precondition to deductibility best accommodates the statutory concern for “‘the taxpayer who, because of the exigencies of his trade or business, must maintain two places of abode and thereby incur additional and duplicate living expenses.’” See supra. Neither the phrase “away from home” nor “in pursuit of business” effectuates this concern without interpretation that to some degree removes it from “the ordinary meaning of the term.” (Keeton, J., concurring). However, of the two approaches, we find that of the concurrence more problematic than that adopted here.

137. In Peurifoy, the Court stated that the Tax Court had “engrafted an exception” onto the requirement that travel expenses be dictated by business exigencies, allowing “a deduction for expenditures … when the taxpayer’s employment is ‘temporary’ as contrasted with ‘indefinite’ or ‘indeterminate.’” 358 U.S. at 59. Because the Commissioner did not challenge this exception, the Court did not rule on its validity. It instead upheld the circuit court’s reversal of the Tax Court and disallowance of the deduction on the basis of the adequacy of the appellate court’s review. The Supreme Court agreed that the Tax Court’s finding as to the temporary nature of taxpayer’s employment was clearly erroneous. Id. at 60-61.

138. For reasons explained by the court, the temporary nature of her employment does not bring the case within those as to which Congress was mitigating the burden of duplicative expenses when enacting § 162(a)(2).

139. See Sarah Backer, 1 B.T.A. 214; Norvin R. Lindheim, 2 B.T.A. 229; Thomas A. Joseph, 26 T.C. 562; Burroughs Bldg. Material Co. v. Commissioner, 47 F.2d 178 (C.A.2d Cir.); Commissioner v. Schwartz, 232 F.2d 94 (C.A.5th Cir.); Acker v. Commissioner, 258 F.2d 568 (C.A.6th Cir.); Bell v. Commissioner, 320 F.2d 953 (C.A.8th Cir.); Peckham v. Commissioner, 327 F.2d 855, 856 (C.A.4th Cir.); Port v. United States, 163 F. Supp. 645. See also Note, Business Expenses, Disallowance, and Public Policy: Some Problems of Sanctioning with the Internal Revenue Code, 72 Yale L.J. 108; 4 Mertens, Law of Federal Income Taxation § 25.49 ff. Compare Longhorn Portland Cement Co., 3 T.C. 310; G.C.M. 24377, 1944 Cum. Bull. 93; Lamont, Controversial Aspects of Ordinary and Necessary Business Expense, 42 Taxes 808, 833-834.

140. In challenging the amendments, Senator Williams also stated:

141. Specific legislation denying deductions for payments that violate public policy is not unknown. E.g., Internal Revenue Code of 1954, § 162(c) (disallowance of deduction for payments to officials and employees of foreign countries in circumstances where the payments would be illegal if federal laws were applicable; cf. Reg. § 1.162-18); § 165(d) (deduction for wagering losses limited to extent of wagering gains). See also Stabilization Act of 1942, § 5(a), 56 Stat. 767, 50 U.S.C. App. § 965(a) (1946 ed.), Defense Production Act of 1950, § 405(a), 64 Stat. 807, as amended, c. 275, § 104(i), 65 Stat. 136 (1951), 50 U.S.C. App. § 2105(a) (1952 ed.), and Defense Production Act of 1950, § 405(b), 64 Stat. 807, 50 U.S.C. App. § 2105(b) (1952 ed.) (general authority in President to prescribe extent to which payments violating price and wage regulations should be disregarded by government agencies, including the Internal Revenue Service; see Rev. Rul. 56-180). Cf. § 1.162-1(a), which provides that “Penalty payments with respect to Federal taxes, whether on account of negligence, delinquency, or fraud, are not deductible from gross income;” Joint Committee on Internal Revenue Taxation, Staff Study of Income Tax Treatment of Treble Damage Payments under the Antitrust Laws, Nov. 1, 1965, p. 16 (proposal that § 162 be amended to deny deductions for certain fines, penalties, treble damage payments, bribes, and kickbacks).

142. Cf. Paul, The Use of Public Policy by the Commissioner in Disallowing Deductions, 1954 So. Calif. Tax Inst. 715, 730-731: “… Section 23(a)(1)(A) [the predecessor of § 162(a)] is not an essay in morality, designed to encourage virtue and discourage sin. It ‘was not contrived as an arm of the law to enforce State criminal statutes. …’ Nor was it contrived to implement the various regulatory statutes which Congress has from time to time enacted. The provision is more modestly concerned with ‘commercial net income’ – a businessman’s net accretion in wealth during the taxable year after due allowance for the operating costs of the business. … There is no evidence in the Section of an attempt to punish taxpayers … when the Commissioner feels that a state or federal statute has been flouted. The statute hardly operates ‘in a vacuum’ if it serves its own vital function and leaves other problems to other statutes.”

143. The rule is otherwise where the corporate employee is entitled to, but does not seek, reimbursement from the corporation. Stolk v. Commissioner, 40 T.C. 345, 357 (1963), aff’d. per curiam 326 F.2d 760 (2d Cir. 1964); Coplon v. Commissioner, T.C. Memo. 1959-34, aff’d. per curiam 277 F.2d 534 (6th Cir. 1960).

144. [Prior to enactment of the Tax Cuts and Jobs Act, § 274(a) allowed limited deductibility of entertainment expenses when they were trade or business expenses.]

145. S. Rept. 1881, 87th Cong., 2d Sess. (1962) states in part:

146. The Tax Cuts and Jobs Act curtailed the immediate availability of NOLs to reduce a taxpayer’s taxable income. Previously, all taxpayers could carry back an NOL two years, and in some cases five years. Also, there was no 80% of taxable income cap on the taxpayer’s NOL deduction.

147. An insurance company other than a life insurance company (i.e., property and casualty insurance companies) must carry an NOL back two years. Its NOLs expire after twenty years. § 172(b)(1)(C).

148. The rule of § 461(l) is to be applied at the partner or subchapter S shareholder level. § 461(l)(4) Also, § 461(l) is to be applied after § 469 (disallowance of passive activity losses and credits).

149. The TCJA was signed into law on December 22, 2017. On March 23, 2018, Congress amended § 199A to provide a deduction from the income of certain agricultural or horticultural cooperatives. See § 199A(g). That deduction is beyond the scope of this introductory discussion.

150. “Taxable income” is gross income minus allowable deductions, § 63(a), except for the deduction that § 199A itself allows. § 199A(e)(1).

151. “Net capital gain” is a taxpayer’s “net long-term capital gain” minus “net short-term capital loss.” § 1222(11); see chapter 10, infra. For non-corporate taxpayers and for purposes of § 199A, § 1(h)(11) includes within net capital gain dividends paid by domestic corporations, dividends paid by corporations incorporated in a country with which the United States has a tax treaty, or dividends paid by foreign corporations whose stock is readily traded in an established securities market in the United States.

152. See § 199A(f)(1)(A)(i) (§ 199A applies at the individual or S corporation shareholder level).

153. Partners who derive income from a partnership in a capacity other than as a partner or who receive guaranteed payments may not avail themselves of a deduction under § 199A. § 199A(c)(4).

154. QBI does not include “qualified REIT dividends” or “qualified publicly trade partnership income.” § 199A(c)(1). Section 199A(a)(1)(B) names these income items separately and includes them in a taxpayers “combined qualified business income amount,” i.e., CQBIA.

155. Specifically, the net amount of QBI does not include capital gains/losses, dividend income, interest income not properly allocable to a trade or business, gains/losses from commodities transactions or gains/loss from foreign currency transactions, gains/losses from certain “notional” contracts, amounts received from annuity contracts not connected with a trade or business properly allocable to one of these items. § 199A(c)(3)(B).

156. “Taxable income” is a taxpayer’s gross income minus either itemized deductions or the standard deduction, computed without regard to the deduction that § 199A allows. § 63(a and b); § 199A(e)(1).

157. A “qualified REIT dividend” is any dividend from a real estate investment trust that is neither a capital gain dividend nor a “qualified dividend” under § 1(h)(11). § 199A(e)(3).

158. “Qualified publicly traded partnership income” is the net amount of a partner’s allocable share of income tax items from a publicly traded partnership not treated as a corporation, § 199A(e)(4)(A) (referencing § 199A(c)(3 and 4), or gain from the sale of an interest in a publicly traded partnership to the extent it is treated as an amount realized from the sale or exchange of property other than a capital asset. § 199A(e)(4)(B).

159. Special rules reduce the CQBIA of a “qualified trade or business” that is a patron of a “specified agricultural or horticultural cooperative.” See § 199A(b)(7). These rules prevent double-counting some income for deduction purposes. The details are beyond the scope of this discussion.

160. “Qualified business property” is depreciable property that the taxpayer uses in his qualified trade or business to produce QBI and holds at the close of the taxable year. § 199A(b)(6)(A). The depreciation period must not have ended before the close of the taxable year, § 199A(b)(6)(A)(iii), but that period is extended to the later of the date that is ten years after the property was placed in service or the last day of the last full year to which the applicable recovery period would apply. § 199A(b)(6) (without regard to the alternate depreciation system).

161. Taxpayer had a lot of itemized deductions.

162. This example is derived from Conference Report on H.R. 1, Tax Cuts and Jobs Act, H. Rep. 115-466 (1^st Sess. 2017).

163. … i.e., the lesser of 20% of QBI or 50% of W-2 wages. Thus, the Code requires a pro-rated application of rules applicable to a non-SSTB taxpayer.

164. Section 199 provided a deduction to all taxpayers, including C corporations, engaged in domestic production activities. The business activity on which § 199A focuses is different, but the intent to stimulate only domestic business activity is apparent.

165. I.R.C. § 611(a).

166. Commissioner v. Southwest Exploration Co., 350 U.S. 308, 312 (1956) (depletion allowance “based on the theory that the extraction of minerals gradually exhausts the capital investment in the mineral deposit”).

167. Id. at 312.

168. Id.

169. Id.

170. 5 William H. Byrnes, IV & Christopher M Sove, Mertens Law of Fed. Income Tax’n § 24:132 (rev. 2013), available on Westlaw.

171. See, e.g., Commissioner v. Southwest Exploration Co., 350 U.S. 308, 309 (1956) (Court granted cert “because both the drilling company and the upland owners cannot be entitled to depletion on the same income”).

172. See Palmer v. Bender, 257 U.S. 551, 557 (1933) (conveyance of leased property in exchange for cash bonus, future payment, plus 1/8 royalty sufficient to claim depletion allowance deduction, irrespective of fact that taxpayer may have retained no legal interest in the mineral content of the land).

173. Reg. § 1.611-1(b)(1).

174. I.R.C. § 613(a) (percentage method applicable to “mines, wells, and [certain] other natural deposits”).

175. I.R.C. § 612 (same as adjusted basis in § 1011 for “purpose of determining gain upon sale or other disposition of” the property).

176. Reg. § 1.611-2(a)(1) (mines, oil and gas wells, and other natural deposits); Reg. § 1.611-3(b) (timber).

177. Reg. § 1.611-2(a)(1) (mines, oil and gas wells, and other natural deposits).

178. Reg. § 1.611-3(b)(1) (timber).

179. I.R.C. § 1016(a)(1)(2); Reg. § 1.611-2(b)(2) (cost depletion for mines, oil and gas wells, and other natural deposits); Reg. § 1.611-3(c)(1) (timber).

180. I.R.C. § 1254(a).

181. I.R.C. § 613(a and b) (the percentages range from 5% to 22%).

182. I.R.C. § 613(a).

183. Id. But see §§ 613(d), 613A.

184. See Reg. § 1.613A-3 (details of exemption for independent producers and royalty owners).

185. I.R.C. § 613A(c)(1).

186. I.R.C. § 613A(d)(1).

187. For an argument that the depletion deduction provides a tax incentive for companies that extract minerals but does little to preserve the environment from which the minerals were extracted, see Wendy B. Davis, Elimination of the Depletion Deduction for Fossil Fuels, 26 Seattle U. L. Rev. 197 (2002).

188. The IRS now publishes Statistics of Income historical and data tables only online. The relevant tables are at http://www.irs.gov/file_source/pub/irs-soi/histab13e.xls (line 66).

189. In the Tax Reform Act of 1986, P. L. 99-514, Sec. 201, Congress made substantial changes to I.R.C. § 168. In particular, Congress deleted the “recovery property” concept from the statute.

190. Section 1245 property is, inter alia, any personal property which is or has been property of a character subject to allowance for depreciation provided in § 167. § 1245(a)(3).

191. As recently as tax year 1992, the limit was $10,000. Obviously § 179 serves a different purpose than it did when it was enacted.

192. There are many detailed definitions and conditions to § 168(k) that are more than we need to consider at this point. You should understand that Congress has used “bonus” depreciation as a tool of stimulating the economy and that Congress has regularly extended the applicability of § 168(k).

193. The Tax Cuts and Jobs Act deleted “computer and peripheral equipment” from the list of “listed property.”

194. The sum of the amounts in § 280F(a)(1)(A) for 2018 is $41,360.

195. To illustrate: Suppose that taxpayer spends $1000 on a benefit. The expense might be deductible, or it might be creditable. In the table, compare the net cost to taxpayers in different tax brackets of the benefit when its cost is deductible or 20% of its cost is creditable. If the Code provides for a deduction, which taxpayers pay more for the benefit and which taxpayers pay less?

196. See § 163(h)(3)(F)(i) (disallowing deduction for home equity indebtedness; capping interest on new acquisition debt to indebtedness of $750,000 ($375,000 for married, filing separate return)); § 165(h)(5) (limiting personal casualty loss deduction to losses incurred in Federally declared disaster); § 217 (moving expenses, see also § 132(g)(2)); § 67(g) (“miscellaneous deductions” otherwise subject to a 2%-of-AGI floor, which include employee trade or business expenses and the expenses paid or incurred for production of income or to hold property for the production of income (§ 212)).

197. For all but the highest income earners, the tax cuts were not “epic” or the “biggest in history” as the President claimed.

198. Among the provisions that we do not cover are § 163(h)’s allowance of a deduction for home mortgage interest and §§ 221/62(a)(17)’s deduction of $2500 of interest paid on education loans (a § 62 deduction) which is subject to an income phaseout. A deduction of interest paid on home equity indebtedness has been suspended until 2026. § 163(h)(3)(F)(i)(I). The deduction of interest paid on acquisition indebtedness has been temporarily limited to the interest paid on $750,000 of indebtedness rather than $1,000,000 of indebtedness. § 163(h)(3)(F)(i)(II).

199. See National Federation of Business v. Sebelius, 567 U.S. 519, 567 (2012) (Congress may shape individual decisions through exercise of taxing power).

200. See § 501(a).

201. Unlike the exclusion from gross income for interest income derived from state and municipal bonds, the market for “capital gain” property does not drive the price down to reflect the tax benefits of owning such property.

202. This paragraph is a generalization and omits a daunting number of details that a course in non-profit organizations might cover. We are not going to summarize rules governing contributions of “qualified conservation easements,” amounts paid to maintain certain students as members of the taxpayer’s household, or other more narrowly-focused rules.

203. Id.

204. The limit is otherwise 50%. Tax Cuts and Jobs Act temporarily increased the limit to 60% for cash contributions. Section 170 had suspended temporarily the 50% limit for cash contributions to organizations providing relief in named hurricane and wildfire areas. The Tax Cuts and Jobs Act limit does not depend upon providing relief from particular disasters.

205. See Brad Bedingfield & Nancy Dempze, The Disappearing 60% Deduction – New Charitable Giving Limits Are Not as Generous as They Appear, Taxation of Exempts 36-41 (Sept.-Oct. 2018) (explaining contribution limit under TCJA).

206. Stated differently, the contributions to organizations with a higher rank on the list reduce dollar for dollar the limits applicable to contributions to organizations with a lower rank on the list.

207. There are other devices by which taxpayers and/or their employers can fund a pension. The mechanics of these devices will fall into one of these patterns. We defer consideration of them to a course on pension planning.

208. Recall that in Horst, taxpayer failed in his effort to execute such an inter-generational transfer of tax burdens. Taxpayer Horst’s technique of tax-burden-shifting has become a tool to encourage funding education expenses.

209. States may not deny same-sex couples the right to marry. See Obergefell v. Hodges, 576 U.S. ___, ___, 135 S. Ct. 2584, 2604-05 (2015) (fundamental liberty as well as Due Process and Equal Protection rights).

210. For tax years 2018 to 2025, the personal exemption amount is zero. § 151(d)(5)(A). However, for purposes of determining dependency, the personal exemption amount is not taken into account. § 151(d)(5)(B). For tax year 2019, the personal exemption amount is $4200. Rev. Proc. 2018-57, § 3.25.

211. We defer discussion of some of these presumptions to more advanced courses. See § 318.

212. These selected parts of § 267 apply to transactions between family members. Be aware that the scope of § 267 is broader than merely transactions involving family members. We defer discussion of these other transactions to later tax courses.

213. Farid-es-Sultaneh examined some of these same questions in the pre-marriage context.

214. The tax rate in 1939 was 18 percent; in 1940, 24 percent.

215. The rationale which supports the principle, as well as its limitation, is that the property, having once served to offset taxable income (i.e., as a tax deduction) should be treated, upon its recoupment, as the recovery of that which had been previously deducted. See Plumb, The Tax Benefit Rule Today, 57 Harv. L. Rev. 129, 131 n. 10 (1943).

216. This opinion represents the views of the majority and complies with existing law and decisions. However, in the writer’s personal opinion, it produces a harsh and inequitable result. Perhaps, it exemplifies a situation “where the letter of the law killeth; the spirit giveth life.” The tax-benefit concept is an equitable doctrine which should be carried to an equitable conclusion. Since it is the declared public policy to encourage contributions to charitable and educational organizations, a donor, whose gift to such organizations is returned, should not be required to refund to the Government a greater amount than the tax benefit received when the deduction was made for the gift. Such a rule would avoid a penalty to the taxpayer and an unjust enrichment to the Government. However, the court cannot legislate and any change in the existing law rests within the wisdom and discretion of the Congress.

217. The installment method does not apply to recognition of losses.

218. Section 453(e)(2)(B) names certain interests or transactions that would substantially diminish a risk of loss, i.e., the holding of a put with respect to the property (or similar property), the holding by another person of a right to acquire the property, or a short sale or any other transaction.

219. [Before there was an income tax, there was no need to determine what the basis of property was. Furthermore, it would be unfair to assess an income tax on a taxpayer based upon gain that occurred prior to the effective date of the income tax. The Revenue Act of 1916 provided that for “purposes of ascertaining the gain from the sale or other disposition of property … acquired before March 1, 1913, the fair market price or value of such property as of March 1, 1913 shall be the basis for determining the amount of such gain derived.” Revenue Act of 1916, ch. 463, § 2(c), 39 Stat. 756, 758 (1916). Thus when the Court refers to the value of Mrs. Logan’s shares, it is also referencing the shares’ basis.]

220. If the sales agreement incorporates an arithmetic component that is not equal for all taxable years, basis is to be allocated in accordance with that arithmetic component. Reg. § 15A.453-1(c)(3)(i).

221. The Tax Cuts and Jobs Act added § 471(c) to the Code. Section 471(c) permits a taxpayer who sells from inventory, is not otherwise required to use the accrual method of accounting, and whose average annual gross receipts are less than $25M to use its own method of accounting so long as that method does not treat inventory as an incidental material or supply.

222. This matching principle applies to both corporate and non-corporate taxpayers.

223. A “future” entitles the holder to purchase the commodity in the future for a fixed price.

224. At the time, corporate taxpayers enjoyed long term capital gain tax rates lower than the tax rates on their other income.

225. One year is not more than one year.

226. A corporation may claim losses from the sale or exchange of capital assets only to the extent of its capital gains. § 1211(a).

227. “Adjusted taxable income” equals: (taxable income) + (§ 1211(b) deduction) + (personal exemption deductions) – ((deductions allowed) – (gross income) [but not less than $0]). § 1212(b)(2)(B).

228. – $5000 + $3000 = – $2000.

229. – $8000 + $3000 = – $5000.

230. For a spectacular application of this principle, see United States v. Generes, 405 U.S. 93 (1972).

231. Section 11 imposes income taxes on corporations.

232. “Ordinary income” is the income subject to the highest rates imposed on individual taxpayers. It includes gains from the sale or exchanges of non-capital and non-§ 1231 assets, offset by allowable losses on the sales of the same assets. §§ 64, 65.

233. … as modified in § 1(i) and as indexed for inflation, id.

234. … and estates and trusts.

235. In other years, the tax rate on “adjusted net capital gain” has depended on taxpayer’s marginal tax bracket otherwise applicable to all his “taxable income.”

236. I.e., the amount of a taxpayer’s “taxable income” below which he pays a tax of 0% on his “adjusted net capital gain” income.

237. I.e., the amount of a taxpayer’s “taxable income” below which he pays a tax of 15% on his “adjusted net capital gain” income.

238. I.e., those taxpayers whose modified adjusted gross income exceeds $250,000 in the case of taxpayers married filing jointly, half that amount in the case of married taxpayers filing separately, and $200,000 in the case of all other taxpayers – to the extent of the excess. § 1411(b).

239. … unless a taxpayer’s modified AGI (as defined) less a threshold amount is less.

240. Taxpayers could engage in such systematic mismatching prior to 1962.

241. Congress enacted § 1245 in 1962. Revenue Act of 1962, P.L. 87-834, § 13(a).

242. Congress enacted § 1250 in 1964. Revenue Act of 1964, P.L. 88-272, § 231(a).

243. “Disposition” is a broader term than “sale” or “exchange.” A corporation that distributes property to a shareholder has not sold or exchanged it, but has disposed of it. Such a disposition triggers a tax on the gain computed as if the corporation had sold the property to the shareholder. § 311(b). Some or all the gain might be depreciation recapture.

244. Actually, if the disposition is other than by sale, exchange, or involuntary conversion, gain taxable as ordinary income is measured by subtracting adjusted basis from the lesser of recomputed basis or the fmv of the property, not the amount realized. § 1245(a)(1).

245. This would include cases where section 1231 gains equal section 1231 losses.