Federal Taxation of Property Dispositions

Professor Lathrope

Fall 2017

Room 318

(415) 422-4109

FEDERAL TAXATION OF PROPERTY DISPOSITIONS

(2 Units)

Course # Law 511, § 1

Syllabus

COURSE MEETINGS

Class meets on Mondays from 6:00 p.m.-8:00 p.m. in Room 451, 101 Howard St.

COURSE DESCRIPTION :

Federal Taxation of Property Dispositions is a course which examines the concepts and principles governing the federal income taxation of property dispositions, including: amount realized and basis, the treatment of liabilities, characterization of gains and losses, loss limitations, and nonrecognition transactions.

REQUIRED COURSE MATERIALS:

References to “FLLS” are to Freeland, Lathrope, Lind & Stephens, Fundamentals of

Federal Income Taxation (18th ed., 2016). Supplementary reading items are referred to by their

item number.

Internal Revenue Code & Regulations. Sections of the Internal Revenue Code and regulations should be reviewed as they are assigned in the syllabus and discussed in the Text. The Code and regulations may be accessed online through law school data bases or other online sources.

LEARNING OUTCOMES

The learning outcomes for the course include: (1) Knowledge and understanding of doctrine, (2) Development of skills in statutory construction, (3) Ability to engage in legal analysis and reasoning, and (4) Efficacy in problem-solving.

EXAMINATION AND GRADING:

Your grade will be based on anonymously graded final examinations. Check on the law school website for the dates of the exams. For the exam, you will be allowed to use the course materials and anything prepared by you (including class notes). A simple calculator may be used. Grading will be on the law school’s scale of A, B, C, D and F with pluses and minuses. I reserve the right to raise or lower your grade one grade (e.g., from a B to a B+ or B-) based on class performance.

OFFICE HOURS:

Office hours will be one hour prior to class on Monday nights. Prof. Lathrope can be reached by email to arrange a phone conversation at other times.

HOURS OF WORK PER CLASS

The American Bar Association standards for accrediting law schools contain a formula for calculating the amount of work that constitutes one credit hour. According to ABA Standard 310(b)(1), “a ‘credit hour’ is an amount of work that reasonably approximates: (1) not less than one hour of classroom or direct faculty instruction and two hours of out-of-class student work per week for fifteen weeks, or the equivalent amount of work over a different amount of time.” This is a 2-credit hour class. All told, applying the ABA standard to the number of credits offered for this class, in a full semester course you should plan on spending, on average, a total of6 hours per week on course-related work.

ATTENDANCE POLICY

The School of Law requires students to attend classes regularly, complete

assignments in a timely manner, and be prepared for and participate in class.The law school attendance policy follows the ABA standard that students must attend at least 80% of the scheduled class sessions for any given course in order to receive credit.If a student has exceeded the allowable class absences, she/he may be administratively withdrawn and/or receive a failing grade for the course. For full policy details, please see: https://myusf.usfca.edu/sites/default/files/Academic Policies 2017.pdf(Sec.XIII)

AMERICANS WITH DISABILITIES ACT ACCOMODATIONS

USF affords all students with disabilities equal access under the law. If you are in need of accommodation under the Americans with Disabilities Act (ADA) or similar enactment, you must contact the University Student Disability Services Office at 415.422.2613 or to obtain the appropriate accommodation.

ACADEMIC DISHONESTY

Defined as engaging in any dishonest conduct in connection with any examination, written work, or other academic activity. The University of San Francisco takes academic dishonesty very seriously. You are responsible for knowing and adhering to the explicit details of our policy as listed here in the Student Honor Code: https://myusf.usfca.edu/system/files/Student%20Honor%20Code.pdf (pages 4-5)

Module 1 Welcome to the Course

Module 2 Introduction

Code §§61(a)(3); 1001(a), (b) first sentence, (c); 1011(a); 1012(a); 1016(a)(1)

Regs. §§1.61-6(a); 1.1001-1(a)

FLLS 119-120

Module 3 “Realization”: Introduction

Regs. § 1.1001-1(a) (first sentence), (c); Skim § 1.1001-3

Item 1 (LTR 200411023), Item 2 (Rev. Rul. 81-292)

Module 4 Realization: Leases

FLLS 403-406; Item 3 (Frank Lyon Co. v. United States), Item 4 (Rev. Proc. 2001-28)

Module 5 Realization: Cottage Savings

Code Skim §§ 475(a); 1256(a)(1), (b)(1)

Item 5 (Cottage Savings Ass’n. v Commissioner)

Module 6 “Property”

Code §§ 61(a)(3), 83(a), 1221(a) (introduction), 1231(b)(1) (introduction)

Regs. §§ 1.61-6(a) (second sentence), 1.83-3(e)

FLLS: 793-796 (pay close attention to the precedents cited in Watkins)

Module 7 Basis: Introduction

Code §§ 1011(a), 7701(a)(42)-(44)

Regs. §1.1001-1(a)

Module 8 “Cost” as Basis

Code: §§ 109, 263(a), 1011(a), 1012(a), 1016(a), 1019, 1234(a)

Regs. §§ 1.61-2(d)(2)(i), 1.1012-1(a)

FLLS 123-124

1. Owner purchases some land for $10,000 and later sells it for $16,000.

(a) Determine the amount of Owner’s gain on the sale.

(b) What difference in result in (a), above, if Owner purchased the land by paying $1,000 for an option to purchase the land for an additional $9,000 and subsequently exercised the option?

(c) What result to Owner in (b), above, if rather than ever actually acquiring the land Owner sold the option to Investor for $1,500?

(d) What difference in result in (a), above, if Owner purchased the land by making a $2,000 cash payment from Owner’s funds and an $8,000 payment by borrowing $8,000 from the bank in a recourse mortgage (on which Owner is personally liable)? Would it make any difference if the mortgage was a nonrecourse liability (on which only the land was security for the obligation)?

(e) What result in (a), above, if Owner purchased the land for $10,000, spent $2,000 in clearing the land prior to its sale, and sold it for $18,000?

(f) What difference in result in (e), above, if Owner had previously rented the land to Lessee for five years for $1,000 per year cash rental and permitted Lessee to expend $2,000 clearing the property? Assume that, although Owner properly reported the cash rental payments as gross income, the $2,000 expenditures were properly excluded under §109. See §1019.

(g) What difference in result in (a), above, if when the land had a value of $10,000, Owner, a real estate salesperson, received it from Employer as a bonus for putting together a major real estate development, and Owner’s income tax was increased $3,000 by reason of the receipt of the land?

Module 9 Philadelphia Park Amusement v. United States

FLLS: 120-123

Module 10 Capitalization Issues: Introduction

Code §§ 162(a), 212, 262, 263(a), 263A(a) & (b)

Regs. §§1.162-1(a); 1.212-1(a), (k) & (n); 1.263(a)-1(a)-(e); skim § 1.263(a)-1(f); 1.263(a)-3(e)(1), (2)(i), (3)(i), (6) Example 8 & 9

Module 11 Capitalization Issues: Amounts Paid to Acquire or Produce Tangible Property

Regs. §§ 1.263(a)-2

FLLS 340-343

Module 12 Capitalization Issues: Amounts Paid to Acquire or Create Intangibles

Regs. § 1.263(a)-4

FLLS 351-360

Module 13 Basis: Allocation and Identification Issues

Reg. § 1.61-6(a)

FLLS 916-917 (regarding the Inaja Land Co. case); Item 6 (Rev. Rul. 68-291)

1. Investor purchased three acres of land, each acre worth $100,000 for $300,000. Investor sold one of the acres in year one for $140,000 and a second in year two for $160,000. The total amount realized by Investor was $300,000 which is not in excess of her total purchase price. Does Investor have any gain or loss on the sales?

2. In 2005, T acquires 750 acres of land for $500,000. At the time of the purchase, the land did not have any water rights but it is part of an irrigation district formed to acquire and distribute water to all of the land in the district. At the time of the purchase, the T’s parcel was eligible to receive irrigation water from the district and in 2008 the T obtained the right to water. In 2012, the T sold 50% of the property’s water right to an adjacent landowner for $200,000. What is T’s gain or loss on the sale?

3. T bought 100 shares of X Co. stock at $50 per share on February 10 of year one and another 100 shares at $60 per share on March 10 of year one. T sold 100 of the shares on April 15 of year two for $65 per share. How much gain or loss does T have? See Reg. §1.1012–1(c)(1)-(3). What difference if T had purchased units in a mutual fund rather than shares of X Co. stock? See Reg. § 1.1012-1(e)(1).

Module 14 Basis: Property Acquired by Gift

Code §§ 102, 1015(a), 7701(a)(43). See §§ 1015(d)(1)(A), (4) and (6).

Regs. § 1.1015-1, 1.1015-5(c)

FLLS 125-132

1. Donor gave Donee property under circumstances that required no payment of gift tax. What gain or loss to Donee on the subsequent sale of the property if:

(a) The property had cost Donor $20,000, had a $30,000 fair market value at the time of the gift, and Donee sold it for:

(1) $35,000?

(2) $15,000?

(3) $25,000?

(b) The property had cost Donor $30,000, had a $20,000 fair market value at the time of the gift, and Donee sold it for:

(1) $35,000?

(2) $15,000?

(3) $24,000?

2. Father had some land that he had purchased for $100,000 but which had increased in value to $200,000. He transferred it to Daughter for $100,000 in cash in a transaction properly identified as in part a gift and in part a sale. Assume no gift tax was paid on the transfer.

(a) What gain to Father and what basis to Daughter under Reg. §§1.1001–1(e) and 1.1015–4?

(b) Suppose the transaction were viewed as a sale of one-half of the land for full consideration and an outright gift of the other one half. How would this affect Father’s gain and Daughter’s basis? Is it a more realistic view than that of the Regulations? Cf. §§170(e)(2) and 1011(b), relating to bargain sales to charities.

Module 15 Basis: Special Issues Involving Property Acquired by Gift

FLLS: 285-290

Module 16 Basis: Property Acquired Between Spouses or Incident to a Divorce

Code §§ 1041, 1015(e)

Regs. § 1.1041-1T(a)-(e)

FLLS 133-134, 222-227

1. Andre purchased some land ten years ago for $40,000 cash. The property appreciated to $70,000 at which time Andre sold it to his wife Steffi for $70,000 cash, its fair market value.

(a) What are the income tax consequences to Andre?

(b) What is Steffi’s basis in the property?

(d) What results in (a)–(c), above, if the property had declined in value to $30,000 and Andre sold it to Steffi for $30,000?

(e) What results (gains, losses, and bases) to Andre and Steffi if Steffi transfers other property with a basis of $50,000 and value of $70,000 (rather than cash) to Andre in return for his property?

2. Brad and Jen’s divorce decree becomes final on January 1 of year one. Discuss the tax consequences of the following transactions to both Brad and Jen:

(a) Pursuant to their divorce decree, Brad transfers to Jen in March of year one a parcel of unimproved land he purchased 10 years ago. The land has a basis of $100,000 and a fair market value of $500,000. Jen sells the land in April of year one for $600,000.

(b) Same as (a), above, except that the land is transferred to satisfy a debt that Brad owes Jen. The land has a basis of $500,000 and a fair market value of $400,000 at the time of the transfer. Jen sells the land for $350,000.

(d) Same as (c), above, except that the transfer is required by a written instrument incident to the divorce decree.

(e) Same as (c), above, except the transfer is made in March of year seven.

Module 17 Basis: Property Acquired From a Decedent

Code §§ 1014(a), (b)(1) and (6), (c), (e), (f); 691(a)(1)-(3)

Regs. §§ 1.1014-3(a), 20.2031-1(b)

FLLS 135-137, 939-942

In the current year, Giver holds two blocks of identical stock, both worth $1,000,000. Giver purchased the first block years ago for $50,000 and the second block more recently for $950,000. Giver plans to make an inter vivos gift of one block and retain the second until death. Which block of stock should Giver transfer inter vivos and why?

Module 18 The Amount Realized: Introduction

Code § 1001(b)

Regs. §§ 1.1001-1(b)

FLLS 138-140, 769-774

Module 19 The Amount Realized: Crane

FLLS 141-149

Module 20 Problems on Liabilities

Code § 7701(g)

Regs. 1.1001-2

FLLS 150-158

Mortgagor purchases a parcel of land from Seller for $100,000. Mortgagor borrows $80,000 from Bank and pays that amount and an additional $20,000 of cash to Seller giving Bank a nonrecourse mortgage on the land. The land is the security for the mortgage which bears an adequate interest rate.

(a) What is Mortgagor’s cost basis in the land?

(b) Two years later when the land has appreciated in value to $300,000 and Mortgagor has paid only interest on the $80,000 mortgage, Mortgagor takes out a second nonrecourse mortgage of $100,000 with adequate rates of interest from Bank again using the land as security. Does Mortgagor have income when she borrows the $100,000? See Woodsam Associates, Inc. v. Commissioner, 198 F.2d 357 (2d Cir.1952).

(d) What is Mortgagor’s basis in the land if the $100,000 of mortgage proceeds are used to purchase stocks and bonds worth $100,000?

(e) What result under the facts of (d), above, if when the principal amount of the two mortgages is still $180,000 and the land is still worth $300,000, Mortgagor sells the property subject to both mortgages to Purchaser for $120,000 of cash? What is Purchaser’s cost basis in the land?

(f) What result under the facts of (d), above, if instead Mortgagor gives the land subject to the mortgages and still worth $300,000 to her Son? What is Son’s basis in the land?

(g) What results under the facts of (f), above, if Mortgagor gives the land to her Spouse rather than to her Son? What is Spouse’s basis in the land? What is Spouse’s basis in the land after Spouse pays off the $180,000 of mortgages?