law school outline: federal personal income tax


Federal Personal Income Tax

  1. Course information

  1. Do the problems.
  2. Exam is short answer.
  3. Tests on everything. Mostly basic stuff, but lots of it. No more difficult than the problems in the books. Open book � no restrictions.

  1. Summary Flowchart

  1. General Income

  1. �61
  2. Gain/Loss

  1. Amount Received

  1. Cash
  2. FMV of property
  3. Relief of obligation

  1. Non-recourse
  2. Direct payment/assumption

  1. Adjusted Basis

  1. �1011
  2. �1012

  1. Cash paid
  2. Liability Assumed
  3. Property received permanently excluded from income
  4. Property received included in income

  1. �1016: Depriciation/improvements
  2. �1015 Gift
  3. �1014 Inheritance
  4. �1041 Spouse
  5. �1.1659 Rental property

  1. Alimony
  2. Exceptions

  1. Borrowings
  2. �109 Exclusion
  3. �102 Gift
  4. �104 Inheritance

  1. Expenses

  1. �162 Trade or Business
  2. Reimbursed employee expenses
  3. Losses �165(c)(1), (2) & (3)

  1. Rental property

  1. �212 Non-business expenses

  1. Maintenance
  2. Depriciation; post-conversion depreciation
  3. Up-for rent

  1. �215 Alimony
  2. �162(c)(1) Reasonable Salaries

  1. Criteria
  2. Contingent

  1. �162(a)(2) Traveling expenses

  1. Transportation, meals, lodging
  2. Away from home

  1. �165/16? Depriciation

  1. Method
  2. Recovery period
  3. Convention

  1. �1.1625 Educational expenses

  1. Test of deductibility
  2. Test of nondeductibility

  1. �163 Interest

  1. T or B
  2. Investment
  3. Personal
  4. Qualified residence
  5. Acquisition indebt.

  1. �195 Start-up

  1. Invest
  2. Trans (�165(c)(2))
  3. Start-up (�165(c)(2))
  4. Carrying On (�195)
  5. 5 years (�195)

  1. Misc. business expenses

  1. Substantiation
  2. Business meals

  1. 50%
  2. Directly related to
  3. Not lavish
  4. Presence

  1. Restrictions on deductions

  1. �274
  2. �163(h)
  3. �465 � At risk
  4. �469 � Passive
  5. �263
  6. �262
  7. �195
  8. �431(h)

  1. Accounting method

  1. Cash

  1. Receipt

  1. Constructive receipt
  2. Cash equivalent

  1. Payment

  1. Cap. Vs. exp.
  2. �461(g)

  1. Accrural

  1. Income

  1. Fixed
  2. Amount

  1. Deduction

  1. Fixed
  2. Amount
  3. Economic performance

  1. Advance payment

  1. Introduction

  1. Statute of limitations is 3 years from date of undisputed possession (6 yrs if amount > 25% AGI), unless fraud.
  2. Statutory origin

  1. Constitution: Article 1, Section 8, clause 1

  1. Direct taxes must be apportioned amongst the states

  1. 16th Amendment excludes income tax from this requirement

  1. Indirect taxes must be uniform

  1. Internal Revenue Code of 1986 is U.S. Code Annotated �26
  2. Codification of exercise of Congress� Federal Taxing Power, via House Ways & Means Committee to the House, and Senate Finance Committee to the Senate. Combined version presented to President for signature or veto.
  3. The IRS is a division of the Treasury Department.
  4. Treasury Department has power of interpretation and legislation to fill in rules and regulations for enforcement.

  1. Public policy

  1. Taxation = discouraging the transaction, relieve from tax = encouraging transaction.
  2. Modified flat tax is preferable and superior alternative

  1. Codes that are binding

  1. IRC
  2. Regulations
  3. Revenue Rulings: Issued by the Treasury Dept, and apply to certain fact patterns.
  4. Private Letter Rulings: Narrow tax answers, available only under Freedom of Information Act. IRS says you can�t rely upon them.
  5. Acquiescence: Indicates Treasury Department�s intention to follow Tax Court decision.

  1. Courts

  1. Supreme Court: Rarely grants writ of cert. Only to settle point of contention between Courts of Appeals.

  1. U.S. Circuit Courts of Appeals: Panel of three judges review the application of the law, not facts.

  1. District Courts: Alternative to tax court. Taxpayer must pay the entire tax before going to the District Court. Taxpayer entitled to jury.
  2. Tax Courts (Article I executive branch court): Suits against Commissioner of IRS to set aside deficiency. No juries. Judges are usually familiar with tax code. Follows the precedent set by the jurisdiction�s Appellate Court. Doesn�t handle claims for refunds.

  1. Small Claims Division

  1. U.S. Court of Appeals for Federal Circuit

  1. U.S. Claims Courts: Similar to District Court, but no jury trial available.

  1. Gross Income

  1. Inclusions: All income from whatever source derived, regardless of form or source, even if not enumerated in code, unless excluded by law (�61).

  1. Money, property, products, services (including by barter, although practically not usually reported), indirect payments, taxes paid by TP unless gift, illegal gains, in-kind (exchange of) services, kickbacks, punitive damages, treasure trove at time reduced to undisputed possession, windfalls, prizes, lotteries, discharge of indebtedness.
  2. That which increases taxpayer�s net worth (not just a change in form), or is a compensation for services.
  3. Income from investments, including life insurance and trusts.
  4. The income must be realized.
  5. Reimbursements by employer for employee expenses are a wash, and neither the income nor expense is reported

  1. Exclusions

  1. Borrowings (with contemporaneous acknowledgment of obligation to repay)
  2. Rebates
  3. Return of capital
  4. Repayment of loan.
  5. Imputed income: Value of housekeeping services to one�s own family.
  6. �101: Life insurance proceeds, unless paid by employer
  7. �102: Gifts (not shams), inheritances, bequests, devises.

  1. Motive of the donor controls: Gift must be from detached and disinterested generosity. Totality of circumstances should be examined. "Gifts" in exchange for business referrals are income.
  2. $10k limit on gifts .... ?
  3. Monies from employers to employees cannot be gifts, unless traditional retirement gifts (�132) and certain achievement awards (�72). Severance package is not a gift. No deduction for employer for gifts exceeding $25 (�274).
  4. Tips and gratuities don�t count as gifts.
  5. Inheritance includes will contest settlement and all other income as a result of being an heir, but not compensation for past services or services to estate.
  6. Does not include income derived from gift or inheritance, or gifts of future income.

  1. �107: Rental value of parsonages.
  2. �109: Improvements by lessee on lessor�s property, unless substituted for rent. If substituted for rent, FMV is taxable to both lessee and lessor. But the IRS can�t tell if you are bartering.
  3. �121: Gain on sale of principal residence ($250k/$500k).
  4. Personal injury (but not punitive) damages
  5. Reimbursements to employees for expenses serving employer�s business, unless motive is additional compensation for employee.
  6. Frequent flier points aren�t considered income because practically it would be too difficult to track. Income if excahnged for cash.
  7. Qualified scholarships

  1. Gains / Losses

  1. Amount Realized (�1001b)

  1. Money / Cash received
  2. Includes taxpayer�s liabilities relieved (even if originated in donative intent), and indebtedness extinguished or assumed by purchaser, regardless of FMV of property.
  3. FMV of property and services received, unless gift exclusion

  1. � Adjusted Basis (�1011)

  1. Cost (�1012)

  1. Cash paid
  2. Liability assumed by taxpayer
  3. FMV of property or services rendered (as received, without regard to incumbrances).
  4. Gifts: Donor�s basis carries over to donee, but basis for determining loss is FMV at time of gift if FMV<A/B. Gift tax = FMV minus Adjusted Basis. If part gift/part sale, gain is AR-AB, loss not allowed. Basis = greater of amt paid by donee or donor�s AB+gift tax. No gift if in consideration for something, such as giving up marital rights (pre-nup or �1041). Different standard for gift tax. (�1015)
  5. Inheritance: "Stepped up" basis = FMV at date of death for property included in taxable estate. Surviving spouse�s � of the community property estate is also stepped up. Property acquired by decedent within 1 year of death from donor, and the donor inherits the property, no step-up. (�1014).
  6. Deferral vs. Permanent Exclusion: Property received included in income goes towards basis. Excluded property is not included in basis.
  7. Reduced by deductions taken.

  1. +/- Adjustments (�1016)

  1. + Improvements
  2. � Depreciation and amortization

  1. = Gain or Loss (�1001a)

  1. No gain or loss realized on the transfer of property or money between spouses, or former spouses (if incident to divorce, within 6 years of divorce, because it is a like-kind division of property between co-owners). Transferee�s AB = transferor�s AB (�1041). Taxable transaction in non-community property states.
  2. Evaluate gain or loss as capital / ordinary (see below)

  1. Above the line deductions (mainly liberal business deductions)

  1. All deductions reduce the adjusted basis of the item.
  2. Business deductions (Schedule C; �62) � red flag if more than 25% of gross income; only ones which are unreimbursed

  1. Test (failure = capital) �162

  1. Ordinary & necessary

  1. Ordinary: Common within business community
  2. Necessary: Appropriate and helpful to trade or business

  1. Expense

  1. Otherwise capital expenditure, which goes into adjusted basis of item or business itself, and is then depreciated over time (�263).

  1. Goodwill (name recognition) is capital, business (and personal) reputation is an expense
  2. Equity infusion
  3. General plan of rehabilitation and renovation
  4. Acquisition and construction costs
  5. Those which substantially prolong useful life, but does not include repairs
  6. Changing capital structure.
  7. Adding value

  1. Expense < 1 year < capital expenditure

  1. Carrying on

  1. Expanding an existing business (but not creating a new business)
  2. Start-up expenses

  1. Investigatory expenses of a new business are nondeductible, unless done as part of an ongoing related business.
  2. Transactional

  1. Personal stock losses can be deducted here (�212)
  2. Once past this point, but before "carrying-on" actually starts, �165c2 allows deduction.

  1. Once the business is past the "carrying-on" part, these expenses are capitalized and can be amortized over 5 years under �195, if elected.

  1. Trade or business, production of income, or income-producing property.

  1. General business expenses (liberal) - �162

  1. Advertising
  2. Auto
  3. Dues, journals; if directly related to taxpayer�s business.

  1. Social, athletic and sporting club dues are not deductible.

  1. Goods purchased for resale and cost of materials
  2. Insurance
  3. Legal expenses.
  4. Meals & entertainment (50% reduction)

  1. Family expenses are expressly prohibited, but lots of fudge room (�262).
  2. Country club dues are not deductible.
  3. Must be directly related to or associated with trade or business
  4. Entertainment facilities (yacht, villa) are not deductable.
  5. Taxpayer must be present.
  6. Can�t be lavish or extravigant.

  1. Office expenses
  2. Rent & utilities
  3. Repairs (those which "keep" the asset, rather than create or "put" the asset)
  4. Salary (reasonable payment for services, $1M cap)

  1. Severence pay
  2. Golden parachute and high salaries can trigger excise taxes
  3. Unreasonable salaries not deductible by employer
  4. Factors for reasonableness

  1. Nature and extent of services performed
  2. Comparison with other similar salaries

  1. Contingent payment considered reasonable if free bargain, and reasonable when K made.

  1. Travel (reasonable & necessary), but not commuters fares

  1. Incurred away from home (principal place of business)

  1. If no perminant residence, then not deductible.

  1. In pursuit of business (significant portion)

  1. Staying for the weekend for pleasure is likely ok.

  1. Includes meals for overnight trips and lodging, but not personal expenses.
  2. Spouse not deductible.
  3. Duplicated expenses (two houses due to traveling) = one of the two is deductible.
  4. Business business expenses are deductible (cost of traveling from office to courthouse)
  5. Factors

  1. Amount earned in each location
  2. Nature and extent of business activities

  1. One year is the limit for being "away from home."
  2. Transporting client is deductible.

  1. Losses (�165c1)

  1. Must be "realized"
  2. Limited to cost basis.
  3. Dissallowed if sale to related party, motivated by tax avoidance, or public policy.

  1. Other expenses

  1. Educational expenses

  1. Yes

  1. To maintain skills; or
  2. Those required by employer or the law
  3. Includes travel, meals, etc; one year limit

  1. No

  1. Obtaining a degree to pursue a new line of work, but LLM is ok.
  2. Minimal requirements for qualification in employment

  1. Depreciation (ACRS � tangible property)

  1. Intro

  1. Annual deduction for property primarily used in a trade/business or held for the production of income.

  1. Does not include inventory and personal property.
  2. Only if property will be consumed, wear out, become obsolete or otherwise useless to taxpayer; or if property is held for the production of income.
  3. Goodwill, customers, suppliers, license, permit, etc. can be depriciated over 15 years.

  1. Salvage cost is treated as 0
  2. Property�s basis is deducted over the useful life of the property, determined by statute.

  1. Method

  1. 200% (accelerated)

  1. Applies to personal property with < 10 year recovery period
  2. 1 yr / (recovery period) = first year rate of depreciation x 200% = remaining years rate of depreciation
  3. Switch to straight-line or 150% at mid point (or later) of recovery period, depending on which method would result in higher recovery.

  1. 150% (accelerated)

  1. Applies to personal property with 15 and 20 year recovery period
  2. 1 yr / (recovery period) = first year rate of depreciation x 150% = remaining years rate of depreciation
  3. Switch to straight line at mid point (or later) of recovery period, depending on which method would result in higher recovery.

  1. Straight line (normal)

  1. Applies to non-residential real property, residential rental property, or when elected.
  2. Preferred by IRS because spreads recovery out over longer period of time.
  3. Net cost / recovery period = annual deduction. First year is 50% because of mid-year convention.

  1. Alternative method

  1. Straight line
  2. Applies to non-residential real and residential rental real property with 40 year recovery period.
  3. Declining balance: (Original net cost � prior depreciation) / remaining useful life = annual deduction. Basis is reduced even if taxpayer does not take deduction.

  1. Recovery period

  1. "Useful life" over which the property is depreciated
  2. Defined in �168(c)
  3. Usually 5 years; 6 years for alternative method.

  1. Real property recovery period is 27.5 yrs.
  2. Residential real property is 39 years.
  3. Tangible property is 3, 5, 7, 10, 15 or 20 years, depending on statute.

  1. Convention (determines when property was placed into service)

  1. Half-year: All personal property; applies also to when property is removed from service.
  2. Mid-quarter: When 40% of total basis of property is placed in service during last three months of taxable year (goal is to prevent end-loading)
  3. Mid-month: Applies to non-residential real property and residential rental property.

  1. Relationship to basis

  1. Cost basis (�1012)
  2. Improvements (�1016)
  3. Adjusted basis (�1101)
  4. Adjusted basis of the property is reduced by amounts deducted for depreciation.

  1. Bonus depreciation (�179)

  1. Extra deduction for real property placed in service during the tax year.
  2. Deduction is capped per �179(b)(1), at around $20k. Reduced dollar for dollar for cost basis in excess of $200k.

  1. Limitations (�280F)

  1. Automobiles are depreciated under straight line method over 5 year period, limited to $12,800 over the initial five years.

  1. But lease payments can be deducted.

  1. Property used > 50% of the time for personal use must be depreciated using the alternative depreciation system (�280Fb2). Earlier deductions must be recaptured.
  2. Depreciation must be substantiated by records.
  3. Land cannot be depreciated

  1. Expenses for production of income such as rents and royalties (�212)

  1. Costs of investing

  1. Limitations

  1. Interest is excluded
  2. Amounts "not-at-risk": Losses limited to amount at risk (�465)

  1. Determined by

  1. Money invested
  2. Adjusted basis of property contributed (which is reduced by previous deductions)
  3. Amounts personally liable for (including home mortgage, even if non-recourse)

  1. Disallowed losses can be carried over to future years
  2. Financing for real estate: Non-recourse (not personally liable via personal note � only property can be taken)

  1. Non-qualified: Losses cannot be deducted if taxpayer is related to lender, unless commercially reasonable (narrow).
  2. Qualified: Losses can be deducted

  1. No one else can be liable for the amount;
  2. From the government;
  3. Not a convertable debt; and
  4. Qualified person:  Engaged in the business of lending, but who is not a related person, the seller, or receiving a fee.

  1. Passive activities (tax shelters)

  1. Losses from passive activities can not be deducted against income from active activities or portfolio income, and cannot exceed gross income for passive activities. (�469)

  1. Passive activities

  1. Those not engaged in for profit. AKA hobby losses.
  2. Those which taxpayer does not materially participate in

  1. < 500 hrs/year
  2. < 100 hrs/year but not less than anyone else
  3. Significant participation
  4. Facts & circumstances test

  1. Limited partnership
  2. Rental real estate (but this is very complicated � see statute)
  3. Portfolio income is not a passive activity, nor a active activity � third category.

  1. If passive activity, �183 determined deductibility, i.e. taxes are deductible, not much else.
  2. Disallowed losses are carried forward to future years. Deductible (even against active activities if no other passive gains to use up against) when interest in passive activity is sold.

  1. Substantiation

  1. Reasonable expenses don�t need receipts or records.
  2. Traveling expenses, business gifts, entertainment expenses, meals and property all need records and/or receipts.
  3. Deductions limited to face amount of expense.

  1. Transaction entered into for profit or production of income (�212)

  1. Requirements

  1. Ordinary and necessary expenses

  1. Depreciation (�167/8)
  2. Maintenence (�212), including investment maintenence
  3. Loss (�165): Occurs when A/R < [lesser of A/B or FMV]

  1. For carrying on of

  1. Production or collection of income (reasonable expectation of profit)
  2. Determination, collection or refund of any tax
  3. Management, conservation, maintenance of property held for production of income.

  1. Rental property can be former personal property which has been abandoned for personal use and converted into a rental property. Most courts require actual rental for 2 yrs or more.

  1. Examples

  1. Rental houses (below the line)
  2. Investments (below the line)
  3. Rents & royalties (above the line)
  4. Seminars, conventions and similar meetings are specifically excluded (�274).

  1. Bad debt

  1. Bona fide
  2. Worthless in taxable year
  3. Limited to basis
  4. If nonbusiness, then short-term capital loss.

  1. Personal (�62; taken without regard to standard deduction)

  1. Losses from sale or exchange of property
  2. Deductions for rents and royalties
  3. Retirement savings ($2k to IRA's annually)

  1. Farm
  2. Interest paid (�163)

  1. Personal

  1. Credit cards: No longer
  2. Student debt interest: Yes, for first 60 months during which interest is due.

  1. Trade or business
  2. Investment
  3. Passive activity

  1. Adjusted Gross Income

  1. Used as a measuring device to restrict deductions for

  1. Charitable
  2. Medical
  3. Casualty & theft
  4. Misc. Itemized
  5. Overall itemized
  6. Phase-out of personal exemption

  1. Below the line, itemized deductions (mainly conservative personal itemized deductions; Schedule A). Taken when elected in lieu of standard deduction and personal exemptions for dependents (�151).  If AGI > $121k, deductions are phased out (s68).

  1. Medical expenses (floor of 7.5% AGI; �213)
  2. State and local tax (�164)
  3. Casualty & theft (floor of 10% AGI; �165), in the amount of the adjusted basis.
  4. Gifts to charity (capped at 50% of AGI; �170)

  1. Including car trips for charity (14 cents/mile), but not services performed.
  2. Gifts over $250 must be substantiated by contemporaneous written acknowledgment from donee organization.

  1. Job related (floor of 2% AGI)

  1. No income/expense if reimbursed by employer: treated as a wash.
  2. Being an employee is considered carrying-on a trade or business, thus expenses incurred in obtaining another job in the same line of work are deductible under the business deductions analysis. Does not apply to new line of work nor first job. Only that in excess of 2% AGI is deductible.

  1. Unreimbursed expenses related to employment, such as that for uniforms that are specially required and can�t be used outside of work.
  2. Commuting to/from work is not deductible.
  3. Expenses reimbursed by employer are treated as a wash.

  1. Alimony

  1. Payer takes deduction (�215), payee pays income tax (�71). Otherwise �1041 applies and there are no tax consequences.
  2. Requirements

  1. Must be paid in cash, check or money order
  2. Received by or on behalf of spouse under divorce or separation instrument

  1. Paying spouse�s rent for her house, or life insurance policy owned by her on his life.
  2. If under separation instrument, then parties must not be in same household.

  1. Not designated in divorce decree as non-alimony payment
  2. Parties not living together
  3. Does not continue past death of payee
  4. Not for child support (child support is not deductable, nor income for payee)

  1. Recapture of frontloading

  1. Year two: $Y2-($Y3+15k)
  2. Year one: (($Y2-recapY2)+$Y3)+15K

  1. Misc. Deductions (floor of 2%; �63, �67)
  2. Qualified residence (below the line)

  1. Acquiring, constructing or improving, when such debt is secured by the residence

  1. Closing points (but not broker�s commissions)
  2. Moving expenses (if job related and more than 50 miles)
  3. $250k/$500k in gain can be excluded for principal residence, unlimited number of times
  4. $1M debt limit

  1. Home equity indebtedness when secured by residence, not to exceed the smaller of FMV or $100k.
  2. Selling costs
  3. Vacation home which is rented out part/full time is evaluated under �183 and �280A. For-profit rental expenses can be fully deducted; non-profit rental expenses are deductible to the extent of the gross income.

  1. Capital Gains (best characterization is LTCG with OrdLoss)

  1. Capital assets (s1221)

  1. All property held by taxpayer
  2. Excluding (non-capital gains/losses are "ordinary" and are not limited)

  1. Inventory & property held for sale to customers
  2. Copyrightable materials
  3. Accounts receivable
  4. Government publications
  5. Depreciable personal property or real property used in a trade or business (s1231)

  1. Sub hodgepodge (insurance):  If compulsory or involuntary conversion from fire, storm, shipreck, casualty or theft, then net gains are sent to main hodgepodge, and net losses are ordinary.  Capital asset must have been held for longer than one year, and either used in trade or business or entered into for profit.
  2. Main hodgepodge:  If held longer than one year, gains/losses offset each other.  Net gains are all capital, and net losses are ordinary.  Net losses over the past 5 years > $8k (cumulative) must be applied against current capital gains as ordinary income (recapture rule).

  1. Sale or exchange

  1. If between family members, losses are not deductible.

  1. Gain

  1. Gains are given preferential treatment through lower taxation rates.
  2. Long-term capital gains ( > 18 mos): 20% max (10% min)
  3. Short-term capital gains ( < 18 mos): Taxed as ordinary income

  1. Loss

  1. Deductible if incurred in trade or business, transaction entered into for profit, or casualty.
  2. Deductible to the extent that there were gains.
  3. Additional losses can be deducted against other income up to $3,000, short-term first.
  4. Excess amounts can be carried forward to future years (retaining character as short/long term loss, although if confusion, then as short-term).
  5. Long-term capitol loss (> 18 mos)
  6. Short-term capitol loss (< 18 mos)

  1. Gains/losses offset according to characterization is LT/ST:  LT-<LT>=NetLT; ST-<ST>=NetST

  1. Tax Accounting

  1. Timing

  1. Methods

  1. Calendar year
  2. Fiscal year (ends ont he last day of any month other than December)

  1. Method must clearly reflect income.
  2. Once chosen, approval of the Commissioner is required to change.
  3. Year is terminated upon death.

  1. Method: Select at outset of business.

  1. Cash Basis

  1. Goal: Pay expenses this year, receive income next year.
  2. Income

  1. The second you receive the cash, check (treated as cash) or property, it�s income.

  1. Constructive receipt: Credited to account, or taxpayer otherwise has access to $ or property. Not constructively received if subject to substantial limitations or restrictions.
  2. Note which is assignable and transferable is income.

  1. Contingencies

  1. Expenses

  1. The second you disburse (mail) the check, it�s an expense. Credit card expenses are incurred at time of purchase, not when bill is paid.
  2. Prepaid expenses

  1. Asset life > 12 mos: Capitalize and amortize.
  2. Asset life < 12 mos: Deduct in current year.
  3. Prepaid interest must be capitalized and amortized.
  4. Points can be deducted if incurred to purchase or improve principal residence.

  1. Contingencies

  1. Accrual

  1. Must use if inventory-based, tax shelter, or "C" Corporation (unless small).
  2. Income

  1. Test

  1. Right to receive becomes fixed; and
  2. Amount can be determined with reasonable accuracy.

  1. Contingencies (economic & legal): If taxpayer has the money, tax has to be paid. Legal contingency can cause deferral if in litigation.
  2. Prepaid income: Must be included within income for the year of receipt, except for periodical subscriptions and club dues. Prepayment for services over two year period can be counted as income over the two year period (2 yr max).

  1. Deductions

  1. Test

  1. Fact of liability becomes fixed;
  2. Amount can be determined with reasonable accuracy;
  3. Certain tests of economic performance are satisfied.

  1. Services performed
  2. Property/goods provided
  3. Not required if:

  1. All events test satisfied;
  2. Economic performance occurs within reasonable time;
  3. Item recurring in nature; and
  4. Item is either not material or accrual matches expense.

  1. Contingencies

  1. Economic: All events test is satisfied even if contingencies not met.
  2. Legal: All events test not satisfied if item is subject of litigation.

  1. Matching

  1. Expenditure related to production of income is matched against the income to be reported in that year.

  1. Rates

  1. Income: 15%, 28%, 31%, 36%, 39.6%
  2. Long-term capital gains ( > 18 mos): 20% max (10% min)
  3. Short-term capital gains ( < 18 mos): Taxed as ordinary income.

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