...suggested to Mr. Potato to permit the Troy Fire Department rights to conduct training exercises on the land, and as part of those training exercises, to burn the house down to cinders. II ISSUES 1. Is Mr. B. Potato entitled to a charitable contribution deduction for the donation of his property to the Troy Fire Department to conduct training exercises on the land that include burning the house down to cinders? 2. Is Mr. B. Potato subject to negligence or substantial understatement penalties if the deduction is taken, but then not allowed? III CONCLUSIONS 1. Mr. B. Potato is not entitled to a charitable contribution deduction for the donation of the use of his property to the Troy Fire Department to conduct training exercises that include burning his house to ground. 2. Mr. Potato will be liable for accuracy-related penalty for negligence and substantial understatement if the deduction is taken, but then not allowed. IV ANALYSIS A. IS MR. POTATO ENTITLED TO A CHARITABLE CONTRIBUTION DEDUCTION FOR THE DONATION OF THE USE OF HIS PROPERTY TO THE TROY FIRE DEPARTMENT TO CONDUCT TRAINING EXERCISES? IRC Sec. 170(a)(1) provides, in relevant part, that deduction is permitted for any charitable contribution, payment that is made within...
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...will have only one entrance that is neither as accessible nor as attractive. The city does plan to widen the street in order to build bike paths which are now required in its new city plan. However, it will be easier for the city to widen the street if it acquires an easement across Mrs. Martin’s property. Mrs. Martin is interested in providing this easement to the city but would like assurance that she will receive a charitable contribution deduction for the easement. ISSUE AND CONCLUSION 1 Will the donation of the easement by Mrs. Martin qualify as a charitable contribution deduction? No, the donation of the easement will not qualify as a charitable contribution deduction. ANALYSIS 1 B-1 B-3 B-2 IRC §170 provides that contributions individuals make are deductible in the tax year paid. Unless the IRC provides an exception, it is the general rule that all charitable contributions made to a qualified organization, listed under IRC §170(c), shall be allowed a deduction. IRC §170(c) provides further clarification that a charitable contribution made to a municipality qualifies as a “State” for purposes of being a qualified donee as long as it is used for public purposes. Under IRC §170(h)(4)(B)(ii)(II), the municipality must also have the commitment to protect the conservation purpose of the donation and the resources to enforce the conservation restrictions. At...
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...EXECUTIVE SUMMARY The taxpayer, Craig Terry, deducted $6,000 in charitable contribution to his church, which operates his children’s school. The IRS disallowed $4,800 of this deduction claiming that it was tuition. When Terry made the contribution, he was not acting out of pure generosity, but in anticipation that his children would receive an education. Terry made a quid pro quo contribution, in which only the excess of the value of the services received is deductible. We rule in favor of the IRS due to overwhelming legislative support, as outlined below. FACTS * In 2006, Craig Terry “contributes” $6,000 to his church which operates the school that his two children attend. * The school charges no tuition for students to attend, but the families are provided with a suggested donation of $200, which is how much it costs to educate a child per year. However, no child is refused admission to the school if their family is unable to contribute. * The IRS disallows $4,800 of the charitable contribution stating it is tuition. * Terry responds that because the school charges no tuition, the entire $6,000 is deductible. Terry, also, argues that because the IRS allows the Church of Scientology to deduct fees paid to the church for religious education, he should be allowed this deduction as well. ISSUES Per IRC section 170(c)(2)(B), “a charitable contribution is defined as a contribution or gift to or for the use of a corporation, trust, or community chest, fund...
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...Checkpoint Contents Federal Library Federal Source Materials Federal Tax Decisions American Federal Tax Reports American Federal Tax Reports (Prior Years) 2002 AFTR 2d Vol. 89 89 AFTR 2d 2002-966 (240 B.R. 216) - 89 AFTR 2d 2002-783 SKLAR v. COMM., 89 AFTR 2d 2002-808 (282 F.3d 610), Code Sec(s) 170; 6103; 6104; 6651, (CA9), 02/27/2002 Notes Top of Form [pic][pic][pic][pic][pic]Saturday Feb. 09, 2013 2:32 PM CST Folder: My Folder sklar Bottom of Form American Federal Tax Reports SKLAR v. COMM., Cite as 89 AFTR 2d 2002-808 (282 F.3d 610), 02/27/2002 , Code Sec(s) 170; 6651 Michael SKLAR; Marla SKLAR, PETITIONERS-APPELLANTS v. COMMISSIONER of Internal Revenue, RESPONDENT-APPELLEE. Case Information: |Code Sec(s): |170; 6651[pg. 2002-808] | |Court Name: |U.S. Court of Appeals, Ninth Circuit, | |Docket No.: |Docket No. 00-70753, | |Date Decided: |02/27/2002. | |Prior History: |Tax Court, (2000) [pic]TC Memo 2000-118,[pic] RIA TC Memo ¶2000-118, [pic]79 CCH TCM 1815 (opinion by | | ...
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...sole proprietorship to a public charity for its use. The fair market value of the asset was $800 and his basis was $600. A. The deduction allowed for the contribution of inventory is the lower of its fair market value or the donor's basis on the date of the contribution. Therefore, the deduction is limited to $600. B. Durwood Dodson contributed some shares of common stock that he had held long-term to a private charity. The basis of the stock was $8,000 and it had a fair market value of $7,000. B. The deduction allowed for the contribution of stock to a private charity where the stock is held long-term (over one year) when the donor's basis ($8000) is greater than the stock's fair market value ($7000) is its fair market value on the date of the contribution. Therefore, the deduction is limited to $7,000. C. Esther Ensign contributed tangible personal property that she had held long-term to a public charity. The asset had a fair market value of $10,000 and a basis of $6,000. The charity intended to sell the asset and use the proceeds for charitable purposes. C. The deduction allowed for the contribution of property held long term which is not used for a charitable purpose (such as the property is sold and only the proceeds are used for the charitable purpose) is the donor's basis on the date of the contribution. Therefore, the deduction is limited to...
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...CHAPTER 5 ITEMIZED DEDUCTIONS DISCUSSION QUESTIONS AND PROBLEMS Discussion Questions 1. What is the difference between deductions from AGI and deductions for AGI? Answer: For AGI expenditures are outflows made for the production of income or for a trade or business and are included in the calculation of adjusted gross income. From AGI deductions are primarily personal expenditures that are allowed to reduce taxable income. 2. What are the six types of personal expenses that can be classified as itemized deductions on Schedule A, Form 1040? Answer: Personal expenses allowed as itemized deductions include medical expenses, state and local taxes, interest, charitable gifts, casualty losses, and miscellaneous deductions. 3. Describe the concept of a 7.5% floor for medical deductions. Answer: The 7.5% floor means that medical expense deductions are not allowed until the total medical deductions exceed 7.5% of AGI. Thus, medical expenditures, net of insurance reimbursements, must be substantial in order to gain any tax benefit. 4. Can an individual get a medical deduction for a capital improvement to their personal residence? If so, how is it calculated? Answer: For medical capital expenditures that improve the taxpayer's property, the deduction is available only to the extent that the medical expenditure exceeds the increase in the FMV of the residence. 5. What are the general requirements...
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...Issue: How to plan with charitable deductions to public charities, private operating foundations and private non-operating foundations. For this issue, the focus will be on charitable contributions and deductions of individuals. Definitions: Public charities: All organizations, foreign and domestic, described in IRC 501(c)(3) are private foundations except the types of organizations set forth in IRC 509(a)(1), (2), (3), or (4). Some examples of the exceptions that would qualify as public charities, as defined in 509(a)(1) and IRC 170(b)(1)(A)(i)-(v) are: churches, educational organizations, and hospitals. Private operating foundations, as best discerned from IRC 170, are foundations whose income or assets are used for operations that directly benefit the public, rather than for grant making. Some examples would be zoos, museums and libraries. Private non-operating foundations are foundations whose income or assets are disbursed to other, charitable organizations. Some examples are foundations that support cancer research. For this topic: Contribution base means adjusted gross income (AGI). For this topic: Capital gain property is defined as any capital asset that, if sold, would result in a long-term capital gain. Additionally, any property that is used in the trade or business should be treated as a capital asset. Analysis: IRC 170(a)(1) states: There shall be allowed as a deduction any charitable contribution…which is made within the taxable...
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...Chapter 16 - Corporate Operations Chapter 16 Corporate Operations SOLUTIONS MANUAL Discussion Questions 1. [LO 1] In general terms, identify the similarities and differences between the corporate taxable income formula and the individual taxable income formula. Similarities: Both start with the gross income (income after exclusions) for the taxable year. Both formulas reduce gross income by deductions to determine taxable income. Both formulas apply tax rates to taxable income to determine the tax liability. Finally, both formulas reduce the tax liability by credits and tax payments to determine taxes due or the refund. Both formulas include are allowed to take deductions for business expenses to come to taxable income. Differences: Individuals distinguish deductions between for and from AGI deductions and they report adjusted gross income. Corporations don’t distinguish deduction types and don’t report adjusted gross income. This means corporations don’t itemize deductions nor do they deduct standard deductions. Finally, unlike individuals corporations don’t deduct personal exemptions. 2. [LO 1] Is a corporation’s choice of its tax year independent from its year-end for financial accounting purposes? No. The tax year must be the same year as it uses for financial accounting. 3. [LO 1] Can taxable corporations use the cash method of accounting? Explain. The three types of overall accounting methods which are available to corporations are accrual, cash, and hybrid. Generally...
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...Individual Deductions SOLUTIONS MANUAL Discussion Questions 1. [LO 1] It has been suggested that tax policy favors deductions for AGI compared to itemized deductions. Describe two ways in which deductions for AGI are treated more favorably than itemized deductions. Itemized deductions must exceed the standard deduction before taxpayers receive any tax benefit from the deductions (this is equivalent to an overall floor limit). In contrast, business deductions that are deductible for AGI (above the line) reduce taxable income without being subject to an overall floor limit. Also, itemized deductions are subject to many mechanical limitations including ceilings, floors, and phase-outs whereas business deductions are generally not subject to these limits (there are limits on certain specific deductions, but this will be described in greater detail in chapter 8). 2. [LO 1] How is a business activity distinguished from an investment activity? Why is this distinction important for the purpose of calculating federal income taxes? Both business and investment activities are motivated primarily by profit intent, but they can be distinguished by the level of profit-seeking activity. A business activity is commonly described as a sustained, continuous, high level of profit-seeking activity, whereas investment activities don’t require a high level of involvement. The distinction can be important for the location of deductions, because business deductions are claimed...
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...income tax for the 2013 tax year. We would like to inform you that the transaction would qualify for a charitable deduction that may reduce your taxable income. In reaching this conclusion, we consulted the United States Internal Revenue Code (IRC); Internal Revenue Service (IRS) Publication 526, Charitable Contributions; and IRS Publication 950, Introduction to Estate and Gift Taxes. Facts The facts as we understand them are as follows: You would like to transfer to a charitable remainder trust (CRT) the title to your second house, allowing you to accomplish two objectives. First, your sister would be allowed to live in the house during her lifetime. The current market rent rate in Rancho Cucamonga is $1,081 per month, or $12,972 per year, but she would not be charged rent. Second, the title would pass to California State University, Fullerton (CSUF) as a charitable contribution upon her death. The current value of the house is $235,145. Applicable Laws A donor may be subject to the gift tax when giving a gift. The IRS defines a gift as money or property, or the use of either, that is given without receiving something of equal value in return. A donor is, however, allowed to give each donee up to $13,000 per year in gift value without having to pay the gift tax. In the year when property is transferred to a CRT, the taxpayer can usually claim a deduction for the future value of that property. The future value is the expected value of the property at the time...
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...CHAPTER 2 CORPORATIONS: INTRODUCTION AND OPERATING RULES SOLUTIONS TO PROBLEM MATERIALS Question/ Problem Learning Objective 1 LO 1 2 LO 1 3 LO 1, 7 4 LO 1, 2 5 6 LO 1, 2 LO 1, 2 7 8 9 10 LO 1 LO 1 LO 1 LO 2 11 LO 2 12 LO 2 13 LO 2 14 LO 2 15 LO 2 16 17 LO 2 LO 2 18 LO 2 Topic Choice of entity: tax and nontax factors in entity selection Corporation versus S corporation: treatment of operating income and tax-exempt income; no distributions Corporation versus proprietorship: treatment of losses Corporation versus partnership: treatment of operating income and STCG Corporation versus LLC and S corporation Closely held corporations: shareholder transactions Double taxation LLCs: single member LLCs: multi-owner default rule Accounting periods: general rule and fiscal year limitation Accounting periods: PSC fiscal year limitation Accounting methods: limitation on cash method Accounting methods: limitation on accrual of expenses to cash basis related party Net capital gain: corporate and individual tax rates contrasted Net capital loss: corporation and individual contrasted Recapture of depreciation: § 291 adjustment Passive loss rules: closely held C corporations and PSCs contrasted Passive loss rules: closely held C corporation Status: Present Edition Q/P in Prior Edition Unchanged 1 Unchanged 2 Unchanged 3 Unchanged ...
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...bad debt is deductible for tax purposes as a(n): d. A business bad debt is deductible for tax purposes as an ordinary business deduction. A business machine valued at $800 was contributed to a charitable organization during the year. The machine cost $1,000 but was depreciated down to $600 before the donation was made. Indicate the correct income tax treatment with respect to the donation. a. An ordinary income property charitable deduction is limited to basis. There is no income recognition when making a charitable donation. A business tax deduction for business gifts is restricted to $25 per year per: d. A business tax deduction for business gifts is restricted to $25 per individual donee per year. A calendar-year corporation incurs $53,000 of start-up costs. If the corporation began business on August 1 of the current year, what is the maximum amount of the start-up costs that it can deduct against business income in the current year? d. Taxpayers are allowed $5,000 in the rst year, plus amortization of the remaining balance over 180 months. The $5,000 is reduced, however, by the amount by which start-up costs exceed $50,000. Thus, in this case, the corporation may deduct $2,000 plus ($51,000 / 180 months x 5 months) = $3,417. A contribution made to the following donee is not deductible: b. Oxford University, England Charitable contributions must be made to charities that are incorporated in the United States. A corporation paid $50,000 for qualied child care expenses...
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...pesticides. The judge found Gray guilty and imposed fines of $15 million. Gray voluntarily set up a charitable fund of $8 million with the intent of bettering the environment. Gray incurred legal expenses in its defense and in setting up the foundation. The court later reduced the fine from the initial $15 million to $7 million. Gray deducted the $8 million for the foundation along with legal expenses incurred. The IRS disallowed both deductions on the grounds that these funds were a fine and in violation of public policy. In regards to your question of the deductibility of these items, $8 million for the foundation and legal expenses, and the $7 million fine §§162 (a) and (f) Trade Business Expenses states “No deduction shall be allowed under subsection (a) for any fine or similar penalty paid to a government for the violation of any law.” Section 1.162-21(b), Treasury Regulations, further provides: (1) For purposes of this section a fine or similar penalty includes an amount —…(iii) Paid in settlements of the taxpayer's actual or potential liability for a fine or penalty (civil or criminal). The preceding Internal Revenue Code disallows the reduced $7 million fine made by the judge, a government official, in regards to the fine as a result of statutory violations. Congress specifically enacted §162(f) in order to codify prior judicial decisions disallowing business expense deductions for fines and penalties resulting from statutory violations. In regards to the $8 million and...
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...not reconciled then there is a potential for errors to arise from items being reported to the IRS incorrectly. Resulting in an overstatement of income or possibly an understatement of income, depending on the errors that are made. When the book income is reconciled to the taxable income a C-Corporation would be required to use Schedule M-1 of the Form 1120 if they have total assets of ten million or less. There are some items that Schedule M-1 lists as not deductible from taxable income and therefore will need to be added to net income. A sample of some of the items that are not deductible would be, the federal income tax expense, any charitable donations which exceed the allowed amount for a corporation, the balance of all capital losses minus any capital gains, and the balance of prepaid income. There are other items that are allowed as deductions and would be subtracted from net income such as any tax-exempt interest received by the corporation. For corporations that exceed ten millions in assets Form M-3 has to be filed. The Form M-3 requires more detailed information than Form M-1. The main difference between an S-Corporation and a C-Corporation is, that in an S-Corporation the income is passed through to the...
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...Individual Deductions SOLUTIONS MANUAL Discussion Questions 1. [LO 1] It has been suggested that tax policy favors deductions for AGI compared to itemized deductions. Describe two ways in which deductions for AGI are treated more favorably than itemized deductions. Itemized deductions must exceed the standard deduction before taxpayers receive any tax benefit from the deductions (this is equivalent to an overall floor limit). In contrast, business deductions that are deductible for AGI (above the line) reduce taxable income without being subject to an overall floor limit. Also, itemized deductions are subject to many mechanical limitations including ceilings, floors, and phase-outs whereas business deductions are generally not subject to these limits (there are limits on certain specific deductions, but this will be described in greater detail in chapter 8). 2. [LO 1] How is a business activity distinguished from an investment activity? Why is this distinction important for the purpose of calculating federal income taxes? Both business and investment activities are motivated primarily by profit intent, but they can be distinguished by the level of profit-seeking activity. A business activity is commonly described as a sustained, continuous, high level of profit-seeking activity, whereas investment activities don’t require a high level of involvement. The distinction can be important for the location of deductions, because business deductions are claimed...
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