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<div>{{Infobox Text-Specific Outline<br />
|subject=Criminal Law<br />
|text=Understanding Criminal Law<br />
|authors=Joshua Dressler<br />
}}<br />
__TOC__<br />
<br />
'''Principle of Legality''': Prohibition of retroactive criminal law making. For a person to be convicted of a crime, the person must have notice that conduct was illegal at the time of the illegal conduct.<br />
{| class="wikitable"<br />
|'''Actus Reus-The Bad Act (CL)'''<br />
1. '''''Elements:'''''<br />
<br />
a. '''Voluntary Act'''= Volition MUST be Present (AKA the minimal mental element required for AR- related to MR but NOT the same)- consent of will must be present for actions to be determined capable<br />
<br />
<br />
-Habitual acts fall on the side of voluntary<br />
<br />
-Voluntary does not mean intentional<br />
<br />
<br />
Ex) shooting a gun at a target and hitting someone by accident- voluntarily shot the gun but no intention to harm person<br />
<br />
<nowiki>**</nowiki>Lacked MR, but did engage in ''the Voluntary Act'' <br />
<br />
- '''Automated Response'''- no willingness/volition<br />
<br />
<br />
If there is sufficient evidence for automated response then Q can go to the jury, but cannot be too speculative<br />
<br />
<br />
- '''Omission-''' The Neg. Act<br />
<br />
Generally, a person has no criminal law duty to act to prevent harm to another even if can assist without any risk of harm to herself/himself<br />
<br />
To act must have more than a “mere moral obligation”<br />
<br />
''Must possess a legal duty to act (5):''<br />
<br />
1)Statutes- pay taxes, parents provide food/shelter to minor children<br />
<br />
2)Contract<br />
<br />
3)Status Relationship- parents/marital/employers/invitee<br />
<br />
4) Voluntarily assuming a duty of care and secluding from help<br />
<br />
5)Failure to Act when Created the Risk of Harm<br />
<br />
<br />
<nowiki>**</nowiki> Some states have passed '''Good Samaritan Laws''' which make it a misdemeanor to not come to the aid of a stranger in peril under specified conditions.<br />
<br />
b. '''That Causes'''<br />
<br />
<br />
c. '''Social Harm'''<br />
<br />
-''Conduct Crimes''-the endangerment of social arrangement or important value<br />
<br />
Ex) Drinking & Driving<br />
<br />
<br />
-''Result Crimes''-the endangerment is the result<br />
<br />
Ex) Homicide<br />
<br />
- '''Attendant Circumstances:''' <br />
<br />
A condition that must be present in conjunction w/ the prohibited conduct, or result in order to constitute a crime<br />
<br />
<br />
<nowiki>**</nowiki>The AR does NOT occur unless conduct element occurs w/ the attendant circumstance<br />
<br />
<br />
Ex) '''Drinking & Driving'''- Intoxicated condition is the attendant circumstance whereas driving a car is the conduct (being intoxicated is not illegal, but driving while intoxicated is)<br />
<br />
Ex) '''Burglary'''- the breaking and entering of a dwelling house of another at night<br />
<br />
Aatnd. Circ.=dwelling house of another at night<br />
<br />
Conduct=breaking and entering<br />
|<br />
= Actus Reus- MPC 2.01 =<br />
<br />
== MPC 2.01 ==<br />
<br />
<br />
- '''Sec. 2''' sets out nonvoluntary acts that do not constitute AR<br />
<br />
1) Reflex/Convulsion<br />
<br />
2) Sleepwalking/Unconscious Movement<br />
<br />
3)Hypnosis<br />
<br />
4) Body Movement not conscious or habitable product of determination. <br />
<br />
- '''Sec. 4''' addresses Possession as an Act-if unknowingly had drugs planted on you then cannot be convicted for possession <br />
<br />
- '''Sec. 3''' -omission- is only basis for liability if a) omission is expressed by the law to be an offense, or b) have a legal duty to perform the omitted act<br />
|}<br />
{| class="wikitable"<br />
|'''Mens Rea- The Guilty Mind/ Bad Intent (CL)'''<br />
<br />
<br />
The specific MR must be proved in a particular crime, and not just the mal intent<br />
<br />
- Occasionally intent elements will be defined in a statute<br />
<br />
<br />
1. '''''Intent Elements''''': (Subjective)<br />
<br />
a. Desire/ Conscious Objective; '''OR'''<br />
<br />
b. Acts w/ Knowledge- that social harm is virtually certain to occur as a result of conduct <br />
<br />
<br />
- '''Transferred Intent: ''' <br />
<br />
D intended to harm A, but harmed B instead then Ds intent to harm A transferred to B, BUT this is only allowed within the same crimes!<br />
<br />
Ex) Throwing a rock intending to hit a person, but accidentally shattering a window does not mean the intention to injure property will be valid<br />
<br />
<br />
- '''Specific Intent vs. General Intent:''' <br />
<br />
'''''Specific Intent''''' is when the mental state is set out in the definition of the crime=similar to elemental definition<br />
<br />
'''''General Intent''''' is when there is no specific mental state set out in the definition of the crime, so only need to prove social harm resulted w/ a morally blameworthy state of mind <br />
<br />
- '''Willful Blindness Problem''' <br />
<br />
A deliberate ignorance-if the person believes there is a high prob. of a fact (attendant circumstance) and takes deliberate action to avoid confirming, or fails to investigate in order to avoid confirmation.<br />
<br />
<br />
Generally, most states constitute knowingly as willful blindness, but some minority states require actual knowledge so “probably knew but chose to be blinded” does not meet the requirement and must prove actual knowledge to convict<br />
<br />
- '''Exception to MR: SL Crimes''' (not SL doctrine)<br />
<br />
Generally, have smaller convictions/fines and courts will only enforce SL crimes if the legislature intended for the crime to be absent a MR, so Leg. Intent must be clear to enforce usually<br />
<br />
Ex) Public Welfare Offenses= impure drug/food sales, and traffic/motor vehicle regulations<br />
<br />
<br />
Ex) Statutory Rape- even if offender honestly and reasonably did not know the minor was underage=still guilty<br />
|<br />
=== Mens Rea- MPC 2.02 ===<br />
<br />
<br />
<nowiki>**</nowiki>Highly influential and used in many stated<br />
<br />
<br />
'''4 Culpable States''':<br />
<br />
a. Purposely- Conscious Objective- was aware the attendant circumstances existed<br />
<br />
b. Knowingly- Practically Certain-was aware the attendant circumstances existed<br />
<br />
c. Recklessly- Conscious Risk Taking-A conscious disregard of a substantial risk- gross deviation from standard of conduct<br />
<br />
d. Negligently- Should have been aware<br />
<br />
<br />
Transferred intent does not exist in the MPC<br />
<br />
'''MPC 2.02 (7)'''- agrees with the CL Majority on Willful Blindness= high probably of awareness is knowingly<br />
|}<br />
<br />
<br />
{| class="wikitable"<br />
|'''Mistake of Fact CL/MPC 2.04'''<br />
|<br />
=== Mistake of Law CL/MPC 2.04 ===<br />
|-<br />
|**Mistake Must be in good-faith<br />
<br />
<br />
'''General Intent v Specific Intent Distinction:'''<br />
<br />
'''''General Intent'''''- A reasonable objective measurement is used to compare the D against<br />
<br />
If ''unreasonable'' mistake then guilty, but if mistake is ''reasonable'' then not guilty<br />
<br />
'''''Specific Intent'''''- NO reasonable objective measurement is used to measure the D against; if the intent is required and it is lacking then not guilty<br />
<br />
=== Steps ===<br />
<nowiki>#</nowiki>1 First identify if General Intent Crime, or Specific Intent Crime<br />
<br />
<nowiki>#</nowiki>2 Is the Mistake genuine?- If so, then employ above reasoning<br />
<br />
<br />
'''MPC:''' NO General/Specific Intent Distinction- if mistake negates purpose, knowledge, reckless, or negligent culpability required to establish a material element of the crime then not guilty if the mistake was made in good-faith<br />
<br />
<nowiki>*</nowiki>No reasonable requirement<br />
|<br />
<br />
<br />
Generally, not excused for committing a crime if relying on own erroneous reading/interpretation of the law, even if reasonable person or reasonable attorney would have similarly understood the same way<br />
<br />
Exception:<br />
<br />
a. When an official assures a D that certain conduct is legally permissible and the D reasonably believes and relies on the advice<br />
<br />
b. The statute is later declared invalid<br />
<br />
c. A judicial decision later declared to be erroneous<br />
<br />
<br />
MPC: Similar to CL<br />
<br />
- For mistake of law to be a defense the D must prove acted upon reasonable reliance on an official statement that afterwards was determined invalid, or erroneous. The D is not excused of liability simply by misconstruing the statute themselves, or by advice from an attorney or other non-designated official<br />
|}<br />
{| class="wikitable"<br />
|<br />
=== Causation CL- the link between AR and MR ===<br />
|<br />
=== Causation MPC 2.03 ===<br />
|-<br />
|Both types of causation must be proven<br />
<br />
<br />
<br />
'''Factual/Actual'''- the “but-for” cause<br />
<br />
a. Direct<br />
<br />
b. '''''Concurrent Sufficient''''' (Substantial Factor)<br />
<br />
=2 Ds act, both would have killed but together they also kill<br />
<br />
=2 Ds act, neither individually would have killed but together they kill<br />
<br />
c. '''''Acceleration''''' <br />
<br />
=The result happened sooner because of Ds conduct, but must prove the result was accelerated and not that it could have possibly accelerated the result<br />
<br />
'''Proximate (legal)'''<br />
<br />
All are factual, but not all factual causes are proximate<br />
<br />
When a D can be blameworthy w/o actually being the cause of the end result<br />
<br />
a. '''''Intervening Cause'''''- ask if the chain of causation has been broken<br />
<br />
- '''Using the Objective Standard of Foreseeability''' <br />
<br />
If the intervening cause '''''was foreseeable''''' then the chain of causation is '''''NOT broken''''' and the D is criminally liable<br />
<br />
If '''''NOT foreseeable''''' then D is '''''not liable''''' because the '''''chain has been broken'''''<br />
<br />
''Responsive Intervening Cause vs Coincidental Intervening Cause-'' <br />
<br />
'''''Responsive I.C'''''. is normally seen as reasonably foreseeable and does not break the chain<br />
<br />
Ex) Medical Care, even if negligent medical care is given still considered foreseeable (ER DR has a cold)<br />
<br />
Ex) Drowning after boat being hit by a neg. driver- even if the victim drowned because was drunk and could not swim to shore properly the D is responsible<br />
<br />
'''''Coincidental I.C.''''' is not seen as foreseeable and breaks the chain because while D did put the victim in the situation, the I. C. acted on the victim independently and coincidentally<br />
<br />
Ex) Gross neg. medical care or a knife wielding maniac at the hospital BUT say the hospital was a high security penitentiary then can question if foreseeable <br />
<br />
- '''The Apparent Safety Doctrine''' <br />
<br />
When a victim is safe, but then chooses to reenter a dangerous situation= the chain of causation is broken<br />
<br />
Ex) Reentering the road to fix car after a drunk driver caused a crash. The victim was able to make it to the side of the road but chose to reenter<br />
<br />
<br />
- '''Voluntary Human Intervention''' <br />
<br />
When the victim makes a choice that leads to the result then the chain of causation is broken<br />
<br />
Ex) Choosing to sleep in the Cold after being forced out of the house from DV when could have slept at Father’s house<br />
<br />
<br />
Ex) But limitations- if Victim commits suicide after Rape then not seen as breaking the causation chain<br />
<br />
<br />
<nowiki>*</nowiki>Often assumed that D takes victim as is so if has a heart attack due to a heart condition as a result of Ds conduct then the causation chain is not broken<br />
<br />
<br />
''Questionable Ex)'' A religious person refusing to accept a blood transfusion- would the chain be broken? Some courts may disagree that D takes this religious person as D finds them because making a choice to not save life when capable of saving <br />
<br />
<br />
- '''Intended Consequences'''<br />
<br />
If D intended the result, but intervening cause(s) got in the way which still resulted in the intended result D originally wanted then D is still criminally liable<br />
|The MPC approach is not as definite as the CL approach to finding causation<br />
<br />
== Factual/Actual ==<br />
Does employ a but-for test<br />
<br />
BUT does not resort to sufficient factor test when there are multiple Ds.<br />
<br />
Will instead ask if D1/D2 were the but-for cause of victims death<br />
<br />
'''Proximate Cause'''- does NOT use a foreseeability test as the CL does- instead asks if D caused result w/ the level of culpability required for the offense (purposely, recklessly, knowingly, negligently)<br />
<br />
<br />
BUT if the crime does not require a culpability ex) felony murder then will ask if the result was a probable consequence of the crime<br />
<br />
Ex) Robbing a bank but bank teller being electrocuted by the silent alarm button<br />
|}<br />
<nowiki>***</nowiki>MR/AR/Causation must all be proven to have come together at the same time for their to be a criminal conviction of a crime<br />
{| class="wikitable"<br />
|'''Homicide Categories''' <br />
|<br />
=== CL ===<br />
|'''MPC 210.0'''<br />
|-<br />
|CL: 1st Degree Murder<br />
<br />
<br />
<br />
MPC: “Murder”<br />
|**w/ Malice Aforethought<br />
<br />
== Premeditated/ Deliberated ==<br />
- '''''Premed''''': quantity of time w/ thought<br />
<br />
- '''''Delib.''''': quality of thought<br />
<br />
Killing done after a period of time of '''''prior consideration''''' BUT no defined interval of time in Majority of Jrxs.<br />
<br />
Just the thought to kill/Act of Killing happening simultaneously does not constitute Premed./Delib.- '''''thought must be sometime before'''''<br />
<br />
<nowiki>**</nowiki>Minority Jrxs (Michigan) have defined a more meaningful standard for premed/delib<br />
<br />
<br />
Evidence must be presented to support the premed/delib.- most often circumstantial:<br />
<br />
a. want of provocation<br />
<br />
b. conduct statements before/after<br />
<br />
c. Threats/declarations before or during<br />
<br />
d. ill will between parties<br />
<br />
e. Brutal manner of killing<br />
<br />
f. Nature and # of wounds to victim<br />
<br />
<br />
<nowiki>**</nowiki>Prosecution must prove actual intent to kill not that the D should have known conduct would cause death<br />
<br />
<br />
Intent to abuse does not constitute premed/delib. For murder when death results- BUT some states have allowed 1<sup>st</sup> deg. in cases of child abuse where the intent to abuse manifests an extreme indiff. to human life<br />
|'''210.2- Lays out 3 Diff. Theories for Murder''':<br />
<br />
1. '''Purposely/ Knowingly'''<br />
<br />
= most similar to Premeditation and Deliberation found in the CL<br />
<br />
(3<sup>rd</sup> is Felony Murder)<br />
|-<br />
|CL 2<sup>nd</sup> Degree Murder<br />
<br />
MPC: “Murder”<br />
|'''CL 3 Theories:''' <br />
<br />
1. '''''Intention to cause great bodily harm''''', but death results<br />
<br />
<br />
2. '''''Default'''''- Mitigates 1<sup>st</sup> degree, or move up Voluntary Manslaughter to 2<sup>nd</sup> degree<br />
<br />
- If 1<sup>st</sup> degree fails for premed./delib.<br />
<br />
- If manslaughter fails for lack of heat of passion or adequate provocation (cooling off time was present)<br />
<br />
<br />
3. '''''Depraved Heart''''' (or malignant Heart)<br />
<br />
-Have malice aforethought w/o premed/delib.<br />
<br />
<br />
''- Test to Find Malignant Heart'':<br />
<br />
1) The Killing is caused by an act w/ a base antisocial motive,<br />
<br />
2) The natural consequences of which are dangerous to life,<br />
<br />
3) The person performing the act knows their conduct endangers the life of others but acts w/ a conscious disregard<br />
|2. '''Extreme Recklessness''' Manifesting an ''Extreme indifference'' to Human Life= A Conscious Disregard of the Risks<br />
|-<br />
|CL: Voluntary Manslaughter<br />
<br />
<br />
MPC: “Manslaughter”<br />
|**w/o malice aforethought<br />
<br />
<br />
'''2 Elements:''' <br />
<br />
1) '''''Heat of Passion'''''- absent “cooling off time”<br />
<br />
-Jury normally decides if their was a cooling off time- in the past it was the judge who determined<br />
<br />
<br />
2)'''''Provocation'''''- the provocation must be adequate to cause such a reaction- the reaction is not excused BUT is considered understandable <br />
<br />
<br />
<nowiki>*</nowiki>There must be a causal connection between the provocation, heat of passion, and the final act<br />
<br />
<br />
- '''Words Alone Rule''':<br />
<br />
Generally accepted that words alone are not adequate provocation<br />
<br />
Minority of states (PA)- says informational words can be enough depending on the circumstance BUT mere insults are still not enough<br />
<br />
If words are accompanied by conduct indicating present intention and ability to cause D severe bodily harm then can be enough<br />
<br />
<nowiki>**</nowiki>Uses an Objective Standard- but argument against making wholly objective<br />
<br />
<br />
|210.3- Lays out 2 Diff. Theories of Manslaughter <br />
<br />
1. '''Regular Recklessness''' (not extreme because extreme falls under murder)<br />
<br />
<br />
2. '''Extreme Mental Anguish or Mental/Emotional Disturbance'''<br />
<br />
- Employs a combination of an objective standard and a subjective standard.<br />
<br />
Requires that the circumstances are viewed as the D saw them but then use a reasonable person standard to ask if Ds reaction was reasonable to the events as D saw them<br />
<br />
<nowiki>**</nowiki>NO cooling-off time<br />
<br />
= recognizes that there can be a build up of emotions over time<br />
<br />
= recognizes a more broad degree of circumstances which can allow for a mitigation to manslaughter<br />
<br />
<br />
<nowiki>**</nowiki> Words Alone Rule does NOT apply!<br />
|-<br />
|CL: Involuntary Manslaughter<br />
<br />
<br />
MPC: Negligent Homicide<br />
|'''1<sup>st</sup> Degree''': Recklessness<br />
<br />
'''2<sup>nd</sup> Degree''': Gross Negligence (AKA crim. Negligence- NOT civil negligence)<br />
|'''Negligent Homicide''' is not conscious risk-taking, but should have known<br />
<br />
(regular reckless is under manslaughter)<br />
|}<br />
<br />
<br />
Limitations to the Felony Murder Rule: ''Usually convicts under 1<sup>st</sup>, but some states convict under 2<sup>nd</sup> or 3<sup>rd</sup> (Pa/Ca= 2<sup>nd</sup>)''<br />
<br />
FMR- SL for death resulting from Ds conduct when engaged in a felony. Does not matter if death was intentional, unintentional, negligent, or complete accident<br />
{| class="wikitable"<br />
|<br />
=== Inherently Dangerous Felony ===<br />
|<br />
=== Merger Theory ===<br />
|<br />
=== Agency Approach ===<br />
|-<br />
|'''In the Abstract Rule''':<br />
<br />
Court looks at Elements of the Felony and NOT the facts of the case to determine if the felony is inherently dangerous to life<br />
<br />
Will only apply FMR if the Felony is found to be inherently dangerous to life<br />
<br />
<br />
Ex) of Inherently Dangerous to Life Felonies=Kidnapping, Arson, Shooting @ an inhabited dwelling<br />
<br />
<br />
Ex) of NON-inherently Dangerous Felonies= Fraud, Grand Theft, Deceit<br />
|Applies when the Felony is not independent from the homicide<br />
<br />
<br />
Certain crimes inherently have a felony built in – if engaged in a crime that is merged w/ a felony then can’t employ the felony murder rule to convict under 1<sup>st</sup> (or 2<sup>nd</sup> degree)<br />
<br />
<br />
Ex) Assault w/ a deadly weapon is a felony, if a death results, can’t employ FMR to convict<br />
<br />
<br />
Ex) of FMR applying because the Felony was indep. of the death= Armed Robbery, Kidnapping, Furnishing Narcotics<br />
<br />
<br />
<br />
<nowiki>**</nowiki>Few States have abolished FMR= KY<br />
|Accomplice Liability allows multiple felons to be charged under the FMR when one co-felon commits a homicide during the perpetration of their crime<br />
<br />
<br />
BUT if the homicide results from a 3<sup>rd</sup> person, non-felon, then the co-felon(s) are not liable under the FMR<br />
|}<br />
<nowiki>**</nowiki>Unlawful Act Manslaughter Rule- Also V. Controversial<br />
<br />
- Allows a manslaughter conviction where a homicide resulted from criminal conduct that was not arising to a felony ( At CL has been used to extend to acts that were morally wrongful, but not criminal)<br />
<br />
<br />
DEFENSES:<br />
<br />
Justification- legal harm, but harm was outweighed by good<br />
{| class="wikitable"<br />
|'''Self Defense'''<br />
|'''Defense of Others'''<br />
|'''Defense of Habitation'''<br />
|'''Necessity'''<br />
|-<br />
|'''Elements to use SD (CL):''' <br />
<br />
1)threat actual or apparent to use deadly force against the D<br />
<br />
<br />
2)The threat must have been unlawful and '''''immediate''''' <br />
<br />
<br />
3)D must have believed was in immediate peril of death or serious bodily harm and that the '''use of deadly force was necessary to save himself'''<br />
<br />
<br />
4)Beliefs must have '''been honestly entertained''' and also '''objectively reasonable''' in the light of the circumstances(requires looking at circumstances as D believed them to be, BUT not wholly subjective!)<br />
<br />
<br />
-'''''Imperfect Justification'''''=used in some states to mitigate to manslaughter when SD was found to be unrsb, but D genuinely believed that the threat was imminent and deadly<br />
<br />
<br />
<br />
In addition:<br />
<br />
-The D must '''not''' be the aggressor/provoker (Even if the adversary made the first blow/shot/threatening gesture, the D cannot use SD defense if the original aggressor)- if D is aggressor, must communicate to advisory intent to withdraw and '''demonstrate a good-faith attempt to do so''' <br />
<br />
<br />
-Also, the '''force used must be proportional to the force seeking to protect from'''= nondeadly force must not be met w/ deadly force (if nondeadly force escalates to deadly force then can use deadly force to protect)<br />
<br />
<br />
-'''Retreat to the wall must be demonstrated''' (unless SYGLs apply), '''unless the retreat is not conducive to safety''' then Ds do not have to elect a safe retreat rather than use deadly force<br />
<br />
'''-Castle Doc.''' Allows no retreat from home or curtilage- if at fault for being the aggressor castle doc does not excuse such<br />
<br />
SYG Laws expand Castle Doc to anyplace person has right to be including public areas<br />
|If a person comes to the aid of another '''acting on a reasonable belief then the defense of another can be applicable''' '''even if the other party actually has no right to SD'''- use to not be this was. If a D acted w/o the other actually having the right to SD then D would be liable, but has since changed<br />
|'''Broad Minority Approach''' <br />
<br />
Minority allows for use of deadly force for '''any unlawful invasion''' of the home <br />
<br />
'''Middle Approach''' <br />
<br />
Allows force to prevent an intruder from entering when intending to '''commit a felony therein''' <br />
<br />
== Narrow Approach ==<br />
Allows force to prevent an intruder when intending to commit a '''violent felony''' therein <br />
<br />
<br />
<nowiki>**</nowiki> Used to protect from Entry- once enters can use SD defense<br />
<br />
<br />
<nowiki>**</nowiki>The D does not have to officially live there- residing with the permission of the owner<br />
|'''4 Elements to use Necessity (CL):''' <br />
<br />
1) The act must have been done to prevent a significant evil<br />
<br />
<br />
2)There is no adequate alternative<br />
<br />
<br />
3)The harm to be avoided must be '''immediate and dire''' and '''greater than the harm of breaking the law''' <br />
<br />
<br />
4)Reasonably anticipated '''a direct causal relationship''' between conduct and harm to be avoided<br />
<br />
<nowiki>**</nowiki>why civil disobedience generally fails in being able to use Necessity Defense<br />
<br />
<br />
In addition:<br />
<br />
-Does not include homicide situations<br />
<br />
<br />
-Looses the defense if created the harm<br />
<br />
<br />
-Usually applies in cases of Natural Forces<br />
<br />
And sometimes physical harms to person or property <br />
<br />
<br />
== MPC 3.02 ==<br />
More broad!<br />
<br />
<br />
-Rejects immanency requirement<br />
<br />
<br />
-Allowed as defense in Homicide situations= utilitarian approach<br />
<br />
<br />
-Do not necessarily<br />
<br />
loose defense if created the harm but if reckless or negligent than can be prosecuted for that recklessness or neg.<br />
|}<br />
<nowiki>**</nowiki>PA SYG law requires the aggressor be armed and the D must not have been engaged in criminal activity (unlike in FL)<br />
<br />
<nowiki>**</nowiki>BWS- not generally accepted as a justification to use SD, but some states have recognized the psychology behind abused women who have undergone the abuse cycle just once- abuse victims are always in fear of imminent harm , or a state of imminent threat. Other states require that the threat be imminent to allow SD in abused women cases<br />
<br />
== Excuses- legal harm, but the actor is not responsible because of disease or defect ==<br />
{| class="wikitable"<br />
|<br />
=== Duress (MR is still present-not negated-but just not willful) ===<br />
|<br />
=== Intoxication ===<br />
|-<br />
|'''3 Elements:''' <br />
<br />
1)Immediate threat of death or seriously body injury<br />
<br />
2)Well grounded fear that threat will be carried out<br />
<br />
3) No reasonable opportunity to escape the threatened harm<br />
<br />
<br />
In addition:<br />
<br />
-Not allowed for Homicide defense<br />
<br />
-If at fault for being in coercive situation then defense is not allowed<br />
<br />
<br />
'''MPC 2.09:'''<br />
<br />
Uses language of “person with reasonable firmness would not be able to resist”<br />
<br />
<br />
Also adheres to the person not being able to use if in the situation at their own fault<br />
<br />
<br />
Does allow as a defense to committing homicide – NY and TX has adopted<br />
|Normally Courts are NOT Receptive!!<br />
<br />
<br />
'''CL:''' '''''Allowed in specific intent crimes, but not general intent crimes''''', if too intoxicated to form the required MR of the crime. Just because can be permissible does not mean courts will accept. = A failure to prove defense<br />
<br />
<br />
Involuntary Intoxication is more receptive by courts. 1)Coercion, 2)pathological, 3)innocent mistake, 4) Prescribed medication having unintended effects<br />
<br />
==== MPC 2.08 ====<br />
-Does NOT adhere to specific intent/general intent distinction- if the intoxication negates an element of the offense then can apply<br />
<br />
<br />
-States that pathological intoxication and not self-induced intoxication can be affirmative defenses where the D can be found non-criminally responsible<br />
<br />
<br />
Will not allow intoxication to be an excuse for reckless behavior even if the D would have been aware of the risk sober but was not intoxicated. Neg. harm will be treated as recklessly caused<br />
|}<br />
<br />
== Insanity Defense ==<br />
{| class="wikitable"<br />
|'''M’Naghten Test'''- Majority (28 states apply test or version of)<br />
|'''Irresistible Impulse Test'''-Supplement (doesn’t exist in isolation from M’Naghten)<br />
|'''Durham Rule/Product Test'''- NH Still Uses<br />
|-<br />
|Focuses on Cognition and NOT Volition <br />
<br />
<br />
The Test is Absolute-Mental illness must completely overcome the mind<br />
<br />
<br />
Elements:<br />
<br />
1) At the time of the act, 2) The accused was laboring under such a mental defect of reasoning from disease of the mind that 3) (a)D did NOT know the nature and quality of the act he was doing, OR b)if did know, did NOT know what he was doing was wrong<br />
|Allows Courts to focus on Volition too<br />
<br />
<br />
Still an Absolute Overmastering of the mind though<br />
<br />
<br />
<br />
Elements:<br />
<br />
1)A mental disease that makes D unable to distinguish right from wrong OR 2) The complete overmastering of the D’s will by a mental defect under the control of which he acts<br />
|Problem- Experts became the final authority and were defining “product” case by case<br />
<br />
<br />
<br />
<br />
<br />
Elements:<br />
<br />
An accused was not criminally held responsible if unlawful act was a '''''product''''' of the mental disease or defect<br />
|} <br />
<br />
MPC 4.01(14 states adopt):<br />
<br />
<nowiki>**</nowiki>Seen as a “softer standard” than M’Naghten, but allows medical expert influence like in Durham but w/o the expert’s authority overwhelming the case <br />
<br />
<br />
Uses language of “lacks substantial capacity to appreciate the criminality [wrongfulness] of his conduct or to conform his conduct to the requirements of the law”<br />
<br />
<br />
<nowiki>*</nowiki>AT CL, and MPC, anti-social behavior is not included<br />
<br />
<br />
Attempt (1/3 Inchoate Crimes)<br />
<br />
To convict for an attempted crime, the D must have been in the zone of perpetration. There is a concern of punishing just thoughts if making the perpetration line too close to the preparation line. If officials step in to deter a crime, and the D has not crossed into perpetration yet then will not be able to convict.<br />
<br />
Punishing for Attempt is to deter the individual (Specific Deterrence), and to Generally Deter the other members of society<br />
<br />
Now can punish attempt w/ the same severity as actual completion of the crime<br />
{| class="wikitable"<br />
|Attempt (CL):<br />
|MPC 5.01:<br />
|-<br />
|Dual MR<br />
<br />
1) Actor’s conduct must be intentional (Actor intended to commit the acts that constitute the AR).<br />
<br />
2)Specific Intent of the Crime is Present (The target crime being attempted)<br />
<br />
Ex) If D intends to severely injure V, but does not actually end up killing V, then D is not guilty of attempted murder (even though if D had killed V would be guilty of murder in 2<sup>nd</sup> degree)<br />
<br />
Ex) Pulling the trigger of a gun would satisfy 1, but if not intending to shoot a person, but do, then not charged w/ attempted murder<br />
<br />
<br />
FMR<br />
<br />
-Does not Apply in Attempted murder (FL is major minoity)<br />
<br />
The idea is that FMR is a SL crime where the MR is not needing to be proven- so can’t charge for attempted FM when the specific intent of murder must be found to convict under attempt<br />
|Overview:<br />
<br />
1a and 1b deals with completed crimes whereas 1c discusses non-completed crimes and uses the language of “substantial step” Section 2 gives examples of what a substantial step would be. The substantial step is the AR of the provision.<br />
<br />
<br />
Test: The Substantial Step Test- puts the line of perpetration closest to the line of preparation when comparing to the 5 CL tests <br />
<br />
2 Elements of Attempt:<br />
<br />
1) Purpose to commit the target offense=guilty if believes the results will occur, even if not conscious objective ex) bomb on airplane intending to kill husband but the bomb does not go off- would be guilty of attempted murder for husband and the rest of the passengers (at CL uncertain whether attempt at killing other passengers constitutes an attempt)<br />
<br />
2) Conduct constituting a substantial step toward the commission of the target offense - Section 2 gives examples of substantial step<br />
<br />
Steps in using the test:<br />
<br />
1) Does this case involve a complete or incomplete attempt?<br />
<br />
2) If completed then look at 1a, conduct crime, and 1b, result crime. If not completed then look at 1c.<br />
|}<br />
The Tests (CL): Defining Perpetration of Attempt<br />
{| class="wikitable"<br />
|Res Ipsa loquitur (Unequivocality)<br />
|Probable Desistance Test<br />
|Indispensable Element<br />
|Dangerous Proximity<br />
|Physical Proximity<br />
|-<br />
|Silent Movie Test<br />
<br />
To find attempt, the action must be equivocal to the crime attempting to commit.<br />
<br />
<br />
Look at the conduct, if the conduct the actor is engaged in unambiguously manifest a criminal intent then have attempt<br />
<br />
Ex) People v Miller- guy in the field with the shot gun-but does not point it and walks toward the constable<br />
|Focuses on how far the D has already proceeded (the 3 on the left focus on how close the actor’s conduct is to the final completion of the act)-Finds attempt when it is unlikely that the actor will voluntarily desist from effort to commit the crime MUST be voluntary and not due to an interruption from an outside source<br />
<br />
Ex) Luring an underage person over for sexual relations and meeting them at the cab outside<br />
<br />
Ex) Altering a script for extra refills not entitled to= no attempt because doubt about whether D will actually return to pick up refill and then return again for the refill not entitled to<br />
|To find attempt, the actor must have acquired control of the indispensable element of the crime- must possess an instrumentality of the crime to be in perpetration<br />
<br />
Ex) Possessing a gun to kill; OR manufacturing equipment to make illegal drugs<br />
<br />
<br />
<nowiki>*</nowiki>Problem- The absence of an indispensable element says nothing of the actor’s culpability or intentions<br />
|Attempt arises when conduct is in dangerous proximity of success, or when the act is so near to the result that the danger of success is great<br />
<br />
Look at:<br />
<br />
1) nearness of danger, 2) greatness of harm and 3)degree of apprehension felt<br />
<br />
Ex) People v Rizzo- the person intending to rob was not in sight, so not within dangerous proximity<br />
<br />
Ex) Drug dealer orders cocaine, but rejects on quality of goods= found guilty of attempt<br />
<br />
Ex) Drug dealer informs carrier that will purchase the drugs, but sets up date in future for the exchange to secure the funds=no attempt<br />
|The conduct must be proximate to the completed crime.<br />
<br />
Attempt arises when the actor has it within their power to complete the crime almost immediately<br />
<br />
Ex) Weapon in hand and victim in view<br />
|}<br />
Defenses to Attempt: Impossibility (3 @ CL)<br />
{| class="wikitable"<br />
|Pure Legal Impossibility<br />
|Factual Impossibility<br />
|Hybrid Legal Impossibility<br />
|-<br />
|When D thinks committing a crime, but is actually not a crime Ex) Statutory rape where the limit is 15, but the D thinks it is 16 and then has sexual relations with a 15 year old. <br />
<br />
MPC 5.01 only allows Pure legal impossibility as a defense<br />
<br />
- 1a states: “circumstances as D believed them to be”= abolished factual and hybrid impossibility defense<br />
<br />
Ex) If D thought he was bribing a juror then for all intensive purposes he was<br />
<br />
-1c is for incomplete crimes: Requires that Ds conduct be strongly corroborative Ex) If points gun at V who is actually already dead but the officer intervenes then attempt is considered incomplete even though could never actually reach the goal of killing V<br />
|Often will read factual possibility is not a defense, but it can be-just rare for it to be accepted by courts<br />
<br />
Ex) Pulling a trigger, but the gun was not loaded, but thought the gun was loaded<br />
<br />
Ex) Pick Pocketing a pocket that was empty <br />
<br />
NO MPC DEFENSE!<br />
|Mistake about a legal status<br />
<br />
<br />
Ex) Shooting a stuffed deer thinking that it is a real deer during hunting off-season<br />
<br />
Ex) Bribing a juror that is not a juror<br />
<br />
Ex) Shoots a tree stump believing it to be human<br />
<br />
Ex) Shoots V laying there, but V is already dead <br />
<br />
Ex) Receives non-stolen property believing it to be stolen<br />
<br />
NO MPC DEFENSE!<br />
|}<br />
<br />
<br />
Solicitation (Also an Inchoate Crime) <br />
{| class="wikitable"<br />
|Solicitation @ CL- Asking Another to do the crime for them<br />
|MPC 5.02<br />
|-<br />
|Soliciting Party-Conceives the crime and then persuades other(s) to do it for them Ex) hiring a hit man to off someone<br />
<br />
AR: The Asking (AKA inviting/requesting/commanding/hiring)<br />
<br />
<nowiki>**</nowiki>Solicitation is NOT an attempt to use the other as an innocent instrumentality<br />
<br />
<br />
MR: Dual MR (Again- all inchoate crimes have dual MR)<br />
<br />
1) The intent to perform the act that constitutes the solicitation (The intent to ask/invite)<br />
<br />
2) The Specific Intent that the other person commit the solicited offense<br />
<br />
<br />
Ex) Asking someone to pickpocket knowing the pocket is empty- the other could be found guilty of attempt but the solicitor did not have the intent of the other person actually committing that crime, BUT if also was unaware the pocket was empty then found guilty of solicitation because had intent for the other to pickpocket<br />
<br />
<br />
<nowiki>**</nowiki>The actual communication MUST BE RECEIVED- the other must receive the letter or the email<br />
<br />
<nowiki>**</nowiki>If inquires, but the other says no then can still be charged with solicitation, or if the other says yes but has no intent of actually committing the crime (undercover police officer example)<br />
<br />
<br />
Merger:<br />
<br />
If the crime actually happens then solicitation merges with the crime- cannot have a solicitation charge and a charge of the substantive crime<br />
<br />
Also merges with the attempt, if the actual crime is not completed to the end goal by the perpetrator but was completed unsuccessfully- so solicitation cannot exist with attempt as sep. charges<br />
<br />
<br />
Solicitation merges with Conspiracy<br />
<br />
<br />
IS A CL Misdemeanor- regardless of the grade of the offense solicited- Even states that have adopted the MPC into their statutes still treat Solicitation as a lesser offense than the actual committing of what was asked<br />
|Section 1:<br />
<br />
More broad definition- “A person is guilty of solicitation to commit a crime if with the purpose of promoting or facilitating its commission he commands, encourages, or requests another person to engage in specific conduct that would constitute such crime or an attempt to commit such crime…”<br />
<br />
<br />
so 1) the actor’s purpose is to promote or facilitate the commission of a substantive offense, and 2) with such purpose commands, encourages, requests, etc.<br />
<br />
<br />
D can be found guilty of a solicitation of an attempt<br />
<br />
Ex) Asking someone to pickpocket knowing the pocket is empty- the other could be found guilty of attempt but the solicitor would be found guilty of soliciting an attempted larceny- unlike in the CL where the solicitor would not be liable at all<br />
<br />
<br />
D can be found guilty of solicitation even if requesting that the other furnishes him a weapon- at CL not a solicitation because did not ask the other to kill for him with that weapon<br />
<br />
<br />
<nowiki>**</nowiki>The actual communication DOES NOT have to be received-the asking is enough even if the person does not receive the letter or the email<br />
<br />
<nowiki>**</nowiki>If inquires, but the other says no then can still be charged with solicitation<br />
<br />
<br />
Merger:<br />
<br />
If the crime actually happens then solicitation merges with the crime- cannot have a solicitation charge and a charge of the substantive crime<br />
<br />
Same as CL<br />
<br />
MPC Grades solicitation at the same level of the target crime- unlike the CL which grades it as a lesser offense<br />
|}<br />
<br />
<br />
Conspiracy<br />
{| class="wikitable"<br />
|Conspiracy (CL) – Fills the gap in attempt if more than one person is involved<br />
|MPC: 5.03<br />
|-<br />
|**Known as the Prosecutor’s Darling= procedural (Joinder advantage) and evidentiary advantages (Hearsay advantage)<br />
<br />
Also, a vague crime is to the prosecutor’s advantage because easier to prove when less evidence is needed<br />
<br />
<nowiki>*</nowiki>Can be dangerous, historically speaking has been used to punished those with “unfavorable” opinions<br />
<br />
<br />
AR: The agreement<br />
<br />
Only need a tacit mutual understanding to accomplish the unlawful act between conspirators- can be nod/wink/handshake (evidence of mere association should not be enough for conspiracy—''Azim'' Case)<br />
<br />
If prove 4 criteria then can show there was an agreement: 1) Association; 2)Knowledge; 3)Presence; 4) Participation<br />
<br />
<nowiki>*</nowiki>BUT in agreeing- must be aware of the objective of the conspiracy!<br />
<br />
<br />
MR: Dual (All inchoate crimes)<br />
<br />
1) Intent to agree (intent to commit the AR)<br />
<br />
2) Intent to accomplish object of the conspiracy<br />
<br />
Ex) ''Swain'' Case- did not find the 2<sup>nd</sup> MR because was charged with 2<sup>nd</sup> degree murder for an unintentional killing- must have intent to murder to find all the required MR and if unintentional killing then no specific intent to kill<br />
<br />
<br />
MR Required for a person providing a legal service in an unlawful manner (''Lauria'' Case)<br />
<br />
1) Knowledge of the illegal use of the good or service and 2) The intent to further the illegal purpose must be present in order to make a supplier a participant in criminal conspiracy <br />
<br />
-If lacking direct evidence of intent to further then can rely on circumstantial evidence and look at 1) stake in the venture; 2) legitimate use of the good; 3) volume- is amt disproportionate to the good if sold legally?<br />
<br />
<nowiki>**</nowiki>Can only infer intent from knowledge if the crime is very severe<br />
<br />
<br />
Some jurisdictions require an overt act expanding just the agreement, but this is a very low bar and is not ever really an issue- even if statutorily designated<br />
<br />
<br />
Merger-Does Not Merge with the substantive crime- it is its own separate criminal offense whether or not the underlying crime was accomplished or not <br />
<br />
Does not merge with the attempted crime either!<br />
<br />
<br />
Under Conspiracy, can hold the co-conspirator accountable for the completed crime of the other co-conspirator, if the crimes further the conspiracy, even if the first co-conspirator did not engage in the acts at all (''Pinkerton'' Case- Daniel was in Prison at the time of the acts of Walter so ws not actually responsible for the substantive crime- Dissent stated setting dangerous precedent)<br />
<br />
<br />
''Accomplices are usually Conspirators'' BUT NOT ALWAYS- there must be an agreement to find conspiracy (''Cook'' Case- Brother was an accomplice but not a conspirator because no agreement was thought to be established before when looking at the evidence)<br />
<br />
<br />
AT CL, Bilateral Rule- Conspiracy requires an exchange: 2 or more people agree, so have to have 2 or more people charged (Common before 1961)- can still charge solicitation but not agreement<br />
<br />
Unilateral Rule has been adopted in some state statutes in light of the MPC- allowed to charge conspiracy to just one person. Important when the other “conspirator” is actually an undercover cop<br />
<br />
<br />
Most States no longer grade Conspiracy as a lesser crime or misdemeanor- now generally punish equally with the crime- will punish as a misdemeanor if the conspiracy was to commit a misdemeanor<br />
|<br />
<br />
<br />
MR: ''“W/ the purpose of promoting or facilitating”'' =object of the agreement was to bring abt the prohibited result<br />
<br />
Subsection 1- Guilty of conspiracy for 4 types of agreements:<br />
<br />
Agrees too…<br />
<br />
1) commit an offense = engages in conduct that constitutes such crime<br />
<br />
2) attempt to commit an offense<br />
<br />
3) Solicit another to commit an offense<br />
<br />
4) Aid another in the planning or commission of the offense<br />
<br />
The object of the agreement must be a criminal act- and just a legal act in an unlawful way<br />
<br />
<br />
<br />
<br />
Merges w/ the underlying crime if underlying crime takes place- does not merge at CL though<br />
<br />
But if the conspiracy involved completion of additional offenses then conspiracy will not merge with the crime committed- ONLY merges with the substantive crime<br />
<br />
Ex) If arrested before the completion of the crime then conspiracy does not merge- Ex) Plan to rob V1 and V2, but arrested after V1 is robbed but before V2 is robbed then the robbery will NOT merge with conspiracy <br />
<br />
Subsection 7(c): defendant must either (1) advise his co-conspirators that he abandons the criminal purpose of the conspiracy or (2) inform law enforcement of the existence of the conspiracy and his participation in it.<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
MPC- does not follow Pinkerton Rule- not accountable for conduct of others sole because of the conspiracy between them<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
MPC Follows the Unilateral Rule! Do NOT need 2+ conspirators to charge conspiracy to D<br />
|}<br />
<br />
<br />
Accomplice Liability <br />
{| class="wikitable"<br />
|Accomplice Liability (CL)-Derivative Liability<br />
|MPC 2.06<br />
|-<br />
|AR: The act is the assistance- so under CL must actually assist not just try to assist<br />
<br />
<nowiki>*</nowiki>Mere presence is not enough- even if accompanying the perp. And then also flee- must aid/abet/ assist in some way <br />
<br />
<br />
– Can’t be an Accomplice by Omission- must have requisite intent<br />
<br />
If have a duty and failed to act then could be considered an accomplice (Police man not acting when a robbery happens)<br />
<br />
<br />
MR: (Dual MR Again):<br />
<br />
1) Must have intent to assist the P1<br />
<br />
2) Mus have intent that the crime also succeeds<br />
<br />
<nowiki>*</nowiki>P2 must share same intent at P1 to be found guilty under accomplice liability.<br />
<br />
<nowiki>*</nowiki> Knowing is enough if actually assisting- makes up for the lack of purposely<br />
<br />
P2 does not have to be directly present though- can be considered constructively present (On street or outside of door)<br />
<br />
<br />
''Accessory Before the Fact''- Falls under accomplice liability<br />
<br />
Ex) One who furnishes the fake license plate<br />
<br />
<br />
''Accessory After the Fact'' is no longer considered under accomplice liability''- instead charged a separate offense as obstruction of justice or hindering apprehension''- not derivative liability any longer at CL or the MPC<br />
<br />
<br />
Foreseeable Consequence Rule Exits under CL: Allows accomplice liability even if the P2 does not have the culpable mental state<br />
<br />
If a person encouraged/aided/abetted the commission of a crime then held liable for not just that crime but also the foreseeable consequences of that crime aided and abetted<br />
<br />
''Liscott'' Case- Found to be liable for murder under an accomplice theory because murder was natural consequence of such a robbery – even though did not have the intent to have such a result <br />
<br />
Corroboration Rule- where the testimony of accomplices is treated with caution and there must be other evidence which connects the D to the crime outside of the accomplice testimony<br />
<br />
<nowiki>**</nowiki>Many States Have <br />
<br />
<br />
Under the CL, the accomplice does not have to be the but-for cause- derivative liability= the P1 just has to be the but-for cause<br />
<br />
<nowiki>*</nowiki>It is enough that the accomplice just made it easier <br />
<br />
|MPC- just requires the attempt to assist- does not actually need to assist <br />
<br />
<br />
Section 4-<br />
<br />
Under the MPC, for a result crime the P2 must have the “''kind of culpability, if any, with respect to the result that is sufficient for the commission of the offense''” Foreseeable Consequence Rule Does NOT exist <br />
<br />
Section 3-<br />
<br />
“W/ the purpose of promoting or facilitating the offense” <br />
<br />
A(2)- says attempt to aid=does not have to actually aid<br />
<br />
Section 2- Liability for Conduct of Another<br />
<br />
Deals with the issue of using another to commit an offense (''Bailey'' case- acted as the puppet master)<br />
<br />
Uses an unwitting agent to do bidding= directly liable opposed to accomplice liability<br />
|}<br />
[[Category:Text-Specific Outlines]]</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=Criminal_Law_Dressler/Outline&diff=42476Criminal Law Dressler/Outline2022-06-01T01:02:21Z<p>Rezsue: </p>
<hr />
<div>__TOC__<br />
<br />
'''Principle of Legality''': Prohibition of retroactive criminal law making. For a person to be convicted of a crime, the person must have notice that conduct was illegal at the time of the illegal conduct.<br />
{| class="wikitable"<br />
|'''Actus Reus-The Bad Act (CL)'''<br />
1. '''''Elements:'''''<br />
<br />
a. '''Voluntary Act'''= Volition MUST be Present (AKA the minimal mental element required for AR- related to MR but NOT the same)- consent of will must be present for actions to be determined capable<br />
<br />
<br />
-Habitual acts fall on the side of voluntary<br />
<br />
-Voluntary does not mean intentional<br />
<br />
<br />
Ex) shooting a gun at a target and hitting someone by accident- voluntarily shot the gun but no intention to harm person<br />
<br />
<nowiki>**</nowiki>Lacked MR, but did engage in ''the Voluntary Act'' <br />
<br />
- '''Automated Response'''- no willingness/volition<br />
<br />
<br />
If there is sufficient evidence for automated response then Q can go to the jury, but cannot be too speculative<br />
<br />
<br />
- '''Omission-''' The Neg. Act<br />
<br />
Generally, a person has no criminal law duty to act to prevent harm to another even if can assist without any risk of harm to herself/himself<br />
<br />
To act must have more than a “mere moral obligation”<br />
<br />
''Must possess a legal duty to act (5):''<br />
<br />
1)Statutes- pay taxes, parents provide food/shelter to minor children<br />
<br />
2)Contract<br />
<br />
3)Status Relationship- parents/marital/employers/invitee<br />
<br />
4) Voluntarily assuming a duty of care and secluding from help<br />
<br />
5)Failure to Act when Created the Risk of Harm<br />
<br />
<br />
<nowiki>**</nowiki> Some states have passed '''Good Samaritan Laws''' which make it a misdemeanor to not come to the aid of a stranger in peril under specified conditions.<br />
<br />
b. '''That Causes'''<br />
<br />
<br />
c. '''Social Harm'''<br />
<br />
-''Conduct Crimes''-the endangerment of social arrangement or important value<br />
<br />
Ex) Drinking & Driving<br />
<br />
<br />
-''Result Crimes''-the endangerment is the result<br />
<br />
Ex) Homicide<br />
<br />
- '''Attendant Circumstances:''' <br />
<br />
A condition that must be present in conjunction w/ the prohibited conduct, or result in order to constitute a crime<br />
<br />
<br />
<nowiki>**</nowiki>The AR does NOT occur unless conduct element occurs w/ the attendant circumstance<br />
<br />
<br />
Ex) '''Drinking & Driving'''- Intoxicated condition is the attendant circumstance whereas driving a car is the conduct (being intoxicated is not illegal, but driving while intoxicated is)<br />
<br />
Ex) '''Burglary'''- the breaking and entering of a dwelling house of another at night<br />
<br />
Aatnd. Circ.=dwelling house of another at night<br />
<br />
Conduct=breaking and entering<br />
|<br />
= Actus Reus- MPC 2.01 =<br />
<br />
== MPC 2.01 ==<br />
<br />
<br />
- '''Sec. 2''' sets out nonvoluntary acts that do not constitute AR<br />
<br />
1) Reflex/Convulsion<br />
<br />
2) Sleepwalking/Unconscious Movement<br />
<br />
3)Hypnosis<br />
<br />
4) Body Movement not conscious or habitable product of determination. <br />
<br />
- '''Sec. 4''' addresses Possession as an Act-if unknowingly had drugs planted on you then cannot be convicted for possession <br />
<br />
- '''Sec. 3''' -omission- is only basis for liability if a) omission is expressed by the law to be an offense, or b) have a legal duty to perform the omitted act<br />
|}<br />
{| class="wikitable"<br />
|'''Mens Rea- The Guilty Mind/ Bad Intent (CL)'''<br />
<br />
<br />
The specific MR must be proved in a particular crime, and not just the mal intent<br />
<br />
- Occasionally intent elements will be defined in a statute<br />
<br />
<br />
1. '''''Intent Elements''''': (Subjective)<br />
<br />
a. Desire/ Conscious Objective; '''OR'''<br />
<br />
b. Acts w/ Knowledge- that social harm is virtually certain to occur as a result of conduct <br />
<br />
<br />
- '''Transferred Intent: ''' <br />
<br />
D intended to harm A, but harmed B instead then Ds intent to harm A transferred to B, BUT this is only allowed within the same crimes!<br />
<br />
Ex) Throwing a rock intending to hit a person, but accidentally shattering a window does not mean the intention to injure property will be valid<br />
<br />
<br />
- '''Specific Intent vs. General Intent:''' <br />
<br />
'''''Specific Intent''''' is when the mental state is set out in the definition of the crime=similar to elemental definition<br />
<br />
'''''General Intent''''' is when there is no specific mental state set out in the definition of the crime, so only need to prove social harm resulted w/ a morally blameworthy state of mind <br />
<br />
- '''Willful Blindness Problem''' <br />
<br />
A deliberate ignorance-if the person believes there is a high prob. of a fact (attendant circumstance) and takes deliberate action to avoid confirming, or fails to investigate in order to avoid confirmation.<br />
<br />
<br />
Generally, most states constitute knowingly as willful blindness, but some minority states require actual knowledge so “probably knew but chose to be blinded” does not meet the requirement and must prove actual knowledge to convict<br />
<br />
- '''Exception to MR: SL Crimes''' (not SL doctrine)<br />
<br />
Generally, have smaller convictions/fines and courts will only enforce SL crimes if the legislature intended for the crime to be absent a MR, so Leg. Intent must be clear to enforce usually<br />
<br />
Ex) Public Welfare Offenses= impure drug/food sales, and traffic/motor vehicle regulations<br />
<br />
<br />
Ex) Statutory Rape- even if offender honestly and reasonably did not know the minor was underage=still guilty<br />
|<br />
=== Mens Rea- MPC 2.02 ===<br />
<br />
<br />
<nowiki>**</nowiki>Highly influential and used in many stated<br />
<br />
<br />
'''4 Culpable States''':<br />
<br />
a. Purposely- Conscious Objective- was aware the attendant circumstances existed<br />
<br />
b. Knowingly- Practically Certain-was aware the attendant circumstances existed<br />
<br />
c. Recklessly- Conscious Risk Taking-A conscious disregard of a substantial risk- gross deviation from standard of conduct<br />
<br />
d. Negligently- Should have been aware<br />
<br />
<br />
Transferred intent does not exist in the MPC<br />
<br />
'''MPC 2.02 (7)'''- agrees with the CL Majority on Willful Blindness= high probably of awareness is knowingly<br />
|}<br />
<br />
<br />
{| class="wikitable"<br />
|'''Mistake of Fact CL/MPC 2.04'''<br />
|<br />
=== Mistake of Law CL/MPC 2.04 ===<br />
|-<br />
|**Mistake Must be in good-faith<br />
<br />
<br />
'''General Intent v Specific Intent Distinction:'''<br />
<br />
'''''General Intent'''''- A reasonable objective measurement is used to compare the D against<br />
<br />
If ''unreasonable'' mistake then guilty, but if mistake is ''reasonable'' then not guilty<br />
<br />
'''''Specific Intent'''''- NO reasonable objective measurement is used to measure the D against; if the intent is required and it is lacking then not guilty<br />
<br />
=== Steps ===<br />
<nowiki>#</nowiki>1 First identify if General Intent Crime, or Specific Intent Crime<br />
<br />
<nowiki>#</nowiki>2 Is the Mistake genuine?- If so, then employ above reasoning<br />
<br />
<br />
'''MPC:''' NO General/Specific Intent Distinction- if mistake negates purpose, knowledge, reckless, or negligent culpability required to establish a material element of the crime then not guilty if the mistake was made in good-faith<br />
<br />
<nowiki>*</nowiki>No reasonable requirement<br />
|<br />
<br />
<br />
Generally, not excused for committing a crime if relying on own erroneous reading/interpretation of the law, even if reasonable person or reasonable attorney would have similarly understood the same way<br />
<br />
Exception:<br />
<br />
a. When an official assures a D that certain conduct is legally permissible and the D reasonably believes and relies on the advice<br />
<br />
b. The statute is later declared invalid<br />
<br />
c. A judicial decision later declared to be erroneous<br />
<br />
<br />
MPC: Similar to CL<br />
<br />
- For mistake of law to be a defense the D must prove acted upon reasonable reliance on an official statement that afterwards was determined invalid, or erroneous. The D is not excused of liability simply by misconstruing the statute themselves, or by advice from an attorney or other non-designated official<br />
|}<br />
{| class="wikitable"<br />
|<br />
=== Causation CL- the link between AR and MR ===<br />
|<br />
=== Causation MPC 2.03 ===<br />
|-<br />
|Both types of causation must be proven<br />
<br />
<br />
<br />
'''Factual/Actual'''- the “but-for” cause<br />
<br />
a. Direct<br />
<br />
b. '''''Concurrent Sufficient''''' (Substantial Factor)<br />
<br />
=2 Ds act, both would have killed but together they also kill<br />
<br />
=2 Ds act, neither individually would have killed but together they kill<br />
<br />
c. '''''Acceleration''''' <br />
<br />
=The result happened sooner because of Ds conduct, but must prove the result was accelerated and not that it could have possibly accelerated the result<br />
<br />
'''Proximate (legal)'''<br />
<br />
All are factual, but not all factual causes are proximate<br />
<br />
When a D can be blameworthy w/o actually being the cause of the end result<br />
<br />
a. '''''Intervening Cause'''''- ask if the chain of causation has been broken<br />
<br />
- '''Using the Objective Standard of Foreseeability''' <br />
<br />
If the intervening cause '''''was foreseeable''''' then the chain of causation is '''''NOT broken''''' and the D is criminally liable<br />
<br />
If '''''NOT foreseeable''''' then D is '''''not liable''''' because the '''''chain has been broken'''''<br />
<br />
''Responsive Intervening Cause vs Coincidental Intervening Cause-'' <br />
<br />
'''''Responsive I.C'''''. is normally seen as reasonably foreseeable and does not break the chain<br />
<br />
Ex) Medical Care, even if negligent medical care is given still considered foreseeable (ER DR has a cold)<br />
<br />
Ex) Drowning after boat being hit by a neg. driver- even if the victim drowned because was drunk and could not swim to shore properly the D is responsible<br />
<br />
'''''Coincidental I.C.''''' is not seen as foreseeable and breaks the chain because while D did put the victim in the situation, the I. C. acted on the victim independently and coincidentally<br />
<br />
Ex) Gross neg. medical care or a knife wielding maniac at the hospital BUT say the hospital was a high security penitentiary then can question if foreseeable <br />
<br />
- '''The Apparent Safety Doctrine''' <br />
<br />
When a victim is safe, but then chooses to reenter a dangerous situation= the chain of causation is broken<br />
<br />
Ex) Reentering the road to fix car after a drunk driver caused a crash. The victim was able to make it to the side of the road but chose to reenter<br />
<br />
<br />
- '''Voluntary Human Intervention''' <br />
<br />
When the victim makes a choice that leads to the result then the chain of causation is broken<br />
<br />
Ex) Choosing to sleep in the Cold after being forced out of the house from DV when could have slept at Father’s house<br />
<br />
<br />
Ex) But limitations- if Victim commits suicide after Rape then not seen as breaking the causation chain<br />
<br />
<br />
<nowiki>*</nowiki>Often assumed that D takes victim as is so if has a heart attack due to a heart condition as a result of Ds conduct then the causation chain is not broken<br />
<br />
<br />
''Questionable Ex)'' A religious person refusing to accept a blood transfusion- would the chain be broken? Some courts may disagree that D takes this religious person as D finds them because making a choice to not save life when capable of saving <br />
<br />
<br />
- '''Intended Consequences'''<br />
<br />
If D intended the result, but intervening cause(s) got in the way which still resulted in the intended result D originally wanted then D is still criminally liable<br />
|The MPC approach is not as definite as the CL approach to finding causation<br />
<br />
== Factual/Actual ==<br />
Does employ a but-for test<br />
<br />
BUT does not resort to sufficient factor test when there are multiple Ds.<br />
<br />
Will instead ask if D1/D2 were the but-for cause of victims death<br />
<br />
'''Proximate Cause'''- does NOT use a foreseeability test as the CL does- instead asks if D caused result w/ the level of culpability required for the offense (purposely, recklessly, knowingly, negligently)<br />
<br />
<br />
BUT if the crime does not require a culpability ex) felony murder then will ask if the result was a probable consequence of the crime<br />
<br />
Ex) Robbing a bank but bank teller being electrocuted by the silent alarm button<br />
|}<br />
<nowiki>***</nowiki>MR/AR/Causation must all be proven to have come together at the same time for their to be a criminal conviction of a crime<br />
{| class="wikitable"<br />
|'''Homicide Categories''' <br />
|<br />
=== CL ===<br />
|'''MPC 210.0'''<br />
|-<br />
|CL: 1st Degree Murder<br />
<br />
<br />
<br />
MPC: “Murder”<br />
|**w/ Malice Aforethought<br />
<br />
== Premeditated/ Deliberated ==<br />
- '''''Premed''''': quantity of time w/ thought<br />
<br />
- '''''Delib.''''': quality of thought<br />
<br />
Killing done after a period of time of '''''prior consideration''''' BUT no defined interval of time in Majority of Jrxs.<br />
<br />
Just the thought to kill/Act of Killing happening simultaneously does not constitute Premed./Delib.- '''''thought must be sometime before'''''<br />
<br />
<nowiki>**</nowiki>Minority Jrxs (Michigan) have defined a more meaningful standard for premed/delib<br />
<br />
<br />
Evidence must be presented to support the premed/delib.- most often circumstantial:<br />
<br />
a. want of provocation<br />
<br />
b. conduct statements before/after<br />
<br />
c. Threats/declarations before or during<br />
<br />
d. ill will between parties<br />
<br />
e. Brutal manner of killing<br />
<br />
f. Nature and # of wounds to victim<br />
<br />
<br />
<nowiki>**</nowiki>Prosecution must prove actual intent to kill not that the D should have known conduct would cause death<br />
<br />
<br />
Intent to abuse does not constitute premed/delib. For murder when death results- BUT some states have allowed 1<sup>st</sup> deg. in cases of child abuse where the intent to abuse manifests an extreme indiff. to human life<br />
|'''210.2- Lays out 3 Diff. Theories for Murder''':<br />
<br />
1. '''Purposely/ Knowingly'''<br />
<br />
= most similar to Premeditation and Deliberation found in the CL<br />
<br />
(3<sup>rd</sup> is Felony Murder)<br />
|-<br />
|CL 2<sup>nd</sup> Degree Murder<br />
<br />
MPC: “Murder”<br />
|'''CL 3 Theories:''' <br />
<br />
1. '''''Intention to cause great bodily harm''''', but death results<br />
<br />
<br />
2. '''''Default'''''- Mitigates 1<sup>st</sup> degree, or move up Voluntary Manslaughter to 2<sup>nd</sup> degree<br />
<br />
- If 1<sup>st</sup> degree fails for premed./delib.<br />
<br />
- If manslaughter fails for lack of heat of passion or adequate provocation (cooling off time was present)<br />
<br />
<br />
3. '''''Depraved Heart''''' (or malignant Heart)<br />
<br />
-Have malice aforethought w/o premed/delib.<br />
<br />
<br />
''- Test to Find Malignant Heart'':<br />
<br />
1) The Killing is caused by an act w/ a base antisocial motive,<br />
<br />
2) The natural consequences of which are dangerous to life,<br />
<br />
3) The person performing the act knows their conduct endangers the life of others but acts w/ a conscious disregard<br />
|2. '''Extreme Recklessness''' Manifesting an ''Extreme indifference'' to Human Life= A Conscious Disregard of the Risks<br />
|-<br />
|CL: Voluntary Manslaughter<br />
<br />
<br />
MPC: “Manslaughter”<br />
|**w/o malice aforethought<br />
<br />
<br />
'''2 Elements:''' <br />
<br />
1) '''''Heat of Passion'''''- absent “cooling off time”<br />
<br />
-Jury normally decides if their was a cooling off time- in the past it was the judge who determined<br />
<br />
<br />
2)'''''Provocation'''''- the provocation must be adequate to cause such a reaction- the reaction is not excused BUT is considered understandable <br />
<br />
<br />
<nowiki>*</nowiki>There must be a causal connection between the provocation, heat of passion, and the final act<br />
<br />
<br />
- '''Words Alone Rule''':<br />
<br />
Generally accepted that words alone are not adequate provocation<br />
<br />
Minority of states (PA)- says informational words can be enough depending on the circumstance BUT mere insults are still not enough<br />
<br />
If words are accompanied by conduct indicating present intention and ability to cause D severe bodily harm then can be enough<br />
<br />
<nowiki>**</nowiki>Uses an Objective Standard- but argument against making wholly objective<br />
<br />
<br />
|210.3- Lays out 2 Diff. Theories of Manslaughter <br />
<br />
1. '''Regular Recklessness''' (not extreme because extreme falls under murder)<br />
<br />
<br />
2. '''Extreme Mental Anguish or Mental/Emotional Disturbance'''<br />
<br />
- Employs a combination of an objective standard and a subjective standard.<br />
<br />
Requires that the circumstances are viewed as the D saw them but then use a reasonable person standard to ask if Ds reaction was reasonable to the events as D saw them<br />
<br />
<nowiki>**</nowiki>NO cooling-off time<br />
<br />
= recognizes that there can be a build up of emotions over time<br />
<br />
= recognizes a more broad degree of circumstances which can allow for a mitigation to manslaughter<br />
<br />
<br />
<nowiki>**</nowiki> Words Alone Rule does NOT apply!<br />
|-<br />
|CL: Involuntary Manslaughter<br />
<br />
<br />
MPC: Negligent Homicide<br />
|'''1<sup>st</sup> Degree''': Recklessness<br />
<br />
'''2<sup>nd</sup> Degree''': Gross Negligence (AKA crim. Negligence- NOT civil negligence)<br />
|'''Negligent Homicide''' is not conscious risk-taking, but should have known<br />
<br />
(regular reckless is under manslaughter)<br />
|}<br />
<br />
<br />
Limitations to the Felony Murder Rule: ''Usually convicts under 1<sup>st</sup>, but some states convict under 2<sup>nd</sup> or 3<sup>rd</sup> (Pa/Ca= 2<sup>nd</sup>)''<br />
<br />
FMR- SL for death resulting from Ds conduct when engaged in a felony. Does not matter if death was intentional, unintentional, negligent, or complete accident<br />
{| class="wikitable"<br />
|<br />
=== Inherently Dangerous Felony ===<br />
|<br />
=== Merger Theory ===<br />
|<br />
=== Agency Approach ===<br />
|-<br />
|'''In the Abstract Rule''':<br />
<br />
Court looks at Elements of the Felony and NOT the facts of the case to determine if the felony is inherently dangerous to life<br />
<br />
Will only apply FMR if the Felony is found to be inherently dangerous to life<br />
<br />
<br />
Ex) of Inherently Dangerous to Life Felonies=Kidnapping, Arson, Shooting @ an inhabited dwelling<br />
<br />
<br />
Ex) of NON-inherently Dangerous Felonies= Fraud, Grand Theft, Deceit<br />
|Applies when the Felony is not independent from the homicide<br />
<br />
<br />
Certain crimes inherently have a felony built in – if engaged in a crime that is merged w/ a felony then can’t employ the felony murder rule to convict under 1<sup>st</sup> (or 2<sup>nd</sup> degree)<br />
<br />
<br />
Ex) Assault w/ a deadly weapon is a felony, if a death results, can’t employ FMR to convict<br />
<br />
<br />
Ex) of FMR applying because the Felony was indep. of the death= Armed Robbery, Kidnapping, Furnishing Narcotics<br />
<br />
<br />
<br />
<nowiki>**</nowiki>Few States have abolished FMR= KY<br />
|Accomplice Liability allows multiple felons to be charged under the FMR when one co-felon commits a homicide during the perpetration of their crime<br />
<br />
<br />
BUT if the homicide results from a 3<sup>rd</sup> person, non-felon, then the co-felon(s) are not liable under the FMR<br />
|}<br />
<nowiki>**</nowiki>Unlawful Act Manslaughter Rule- Also V. Controversial<br />
<br />
- Allows a manslaughter conviction where a homicide resulted from criminal conduct that was not arising to a felony ( At CL has been used to extend to acts that were morally wrongful, but not criminal)<br />
<br />
<br />
DEFENSES:<br />
<br />
Justification- legal harm, but harm was outweighed by good<br />
{| class="wikitable"<br />
|'''Self Defense'''<br />
|'''Defense of Others'''<br />
|'''Defense of Habitation'''<br />
|'''Necessity'''<br />
|-<br />
|'''Elements to use SD (CL):''' <br />
<br />
1)threat actual or apparent to use deadly force against the D<br />
<br />
<br />
2)The threat must have been unlawful and '''''immediate''''' <br />
<br />
<br />
3)D must have believed was in immediate peril of death or serious bodily harm and that the '''use of deadly force was necessary to save himself'''<br />
<br />
<br />
4)Beliefs must have '''been honestly entertained''' and also '''objectively reasonable''' in the light of the circumstances(requires looking at circumstances as D believed them to be, BUT not wholly subjective!)<br />
<br />
<br />
-'''''Imperfect Justification'''''=used in some states to mitigate to manslaughter when SD was found to be unrsb, but D genuinely believed that the threat was imminent and deadly<br />
<br />
<br />
<br />
In addition:<br />
<br />
-The D must '''not''' be the aggressor/provoker (Even if the adversary made the first blow/shot/threatening gesture, the D cannot use SD defense if the original aggressor)- if D is aggressor, must communicate to advisory intent to withdraw and '''demonstrate a good-faith attempt to do so''' <br />
<br />
<br />
-Also, the '''force used must be proportional to the force seeking to protect from'''= nondeadly force must not be met w/ deadly force (if nondeadly force escalates to deadly force then can use deadly force to protect)<br />
<br />
<br />
-'''Retreat to the wall must be demonstrated''' (unless SYGLs apply), '''unless the retreat is not conducive to safety''' then Ds do not have to elect a safe retreat rather than use deadly force<br />
<br />
'''-Castle Doc.''' Allows no retreat from home or curtilage- if at fault for being the aggressor castle doc does not excuse such<br />
<br />
SYG Laws expand Castle Doc to anyplace person has right to be including public areas<br />
|If a person comes to the aid of another '''acting on a reasonable belief then the defense of another can be applicable''' '''even if the other party actually has no right to SD'''- use to not be this was. If a D acted w/o the other actually having the right to SD then D would be liable, but has since changed<br />
|'''Broad Minority Approach''' <br />
<br />
Minority allows for use of deadly force for '''any unlawful invasion''' of the home <br />
<br />
'''Middle Approach''' <br />
<br />
Allows force to prevent an intruder from entering when intending to '''commit a felony therein''' <br />
<br />
== Narrow Approach ==<br />
Allows force to prevent an intruder when intending to commit a '''violent felony''' therein <br />
<br />
<br />
<nowiki>**</nowiki> Used to protect from Entry- once enters can use SD defense<br />
<br />
<br />
<nowiki>**</nowiki>The D does not have to officially live there- residing with the permission of the owner<br />
|'''4 Elements to use Necessity (CL):''' <br />
<br />
1) The act must have been done to prevent a significant evil<br />
<br />
<br />
2)There is no adequate alternative<br />
<br />
<br />
3)The harm to be avoided must be '''immediate and dire''' and '''greater than the harm of breaking the law''' <br />
<br />
<br />
4)Reasonably anticipated '''a direct causal relationship''' between conduct and harm to be avoided<br />
<br />
<nowiki>**</nowiki>why civil disobedience generally fails in being able to use Necessity Defense<br />
<br />
<br />
In addition:<br />
<br />
-Does not include homicide situations<br />
<br />
<br />
-Looses the defense if created the harm<br />
<br />
<br />
-Usually applies in cases of Natural Forces<br />
<br />
And sometimes physical harms to person or property <br />
<br />
<br />
== MPC 3.02 ==<br />
More broad!<br />
<br />
<br />
-Rejects immanency requirement<br />
<br />
<br />
-Allowed as defense in Homicide situations= utilitarian approach<br />
<br />
<br />
-Do not necessarily<br />
<br />
loose defense if created the harm but if reckless or negligent than can be prosecuted for that recklessness or neg.<br />
|}<br />
<nowiki>**</nowiki>PA SYG law requires the aggressor be armed and the D must not have been engaged in criminal activity (unlike in FL)<br />
<br />
<nowiki>**</nowiki>BWS- not generally accepted as a justification to use SD, but some states have recognized the psychology behind abused women who have undergone the abuse cycle just once- abuse victims are always in fear of imminent harm , or a state of imminent threat. Other states require that the threat be imminent to allow SD in abused women cases<br />
<br />
== Excuses- legal harm, but the actor is not responsible because of disease or defect ==<br />
{| class="wikitable"<br />
|<br />
=== Duress (MR is still present-not negated-but just not willful) ===<br />
|<br />
=== Intoxication ===<br />
|-<br />
|'''3 Elements:''' <br />
<br />
1)Immediate threat of death or seriously body injury<br />
<br />
2)Well grounded fear that threat will be carried out<br />
<br />
3) No reasonable opportunity to escape the threatened harm<br />
<br />
<br />
In addition:<br />
<br />
-Not allowed for Homicide defense<br />
<br />
-If at fault for being in coercive situation then defense is not allowed<br />
<br />
<br />
'''MPC 2.09:'''<br />
<br />
Uses language of “person with reasonable firmness would not be able to resist”<br />
<br />
<br />
Also adheres to the person not being able to use if in the situation at their own fault<br />
<br />
<br />
Does allow as a defense to committing homicide – NY and TX has adopted<br />
|Normally Courts are NOT Receptive!!<br />
<br />
<br />
'''CL:''' '''''Allowed in specific intent crimes, but not general intent crimes''''', if too intoxicated to form the required MR of the crime. Just because can be permissible does not mean courts will accept. = A failure to prove defense<br />
<br />
<br />
Involuntary Intoxication is more receptive by courts. 1)Coercion, 2)pathological, 3)innocent mistake, 4) Prescribed medication having unintended effects<br />
<br />
==== MPC 2.08 ====<br />
-Does NOT adhere to specific intent/general intent distinction- if the intoxication negates an element of the offense then can apply<br />
<br />
<br />
-States that pathological intoxication and not self-induced intoxication can be affirmative defenses where the D can be found non-criminally responsible<br />
<br />
<br />
Will not allow intoxication to be an excuse for reckless behavior even if the D would have been aware of the risk sober but was not intoxicated. Neg. harm will be treated as recklessly caused<br />
|}<br />
<br />
== Insanity Defense ==<br />
{| class="wikitable"<br />
|'''M’Naghten Test'''- Majority (28 states apply test or version of)<br />
|'''Irresistible Impulse Test'''-Supplement (doesn’t exist in isolation from M’Naghten)<br />
|'''Durham Rule/Product Test'''- NH Still Uses<br />
|-<br />
|Focuses on Cognition and NOT Volition <br />
<br />
<br />
The Test is Absolute-Mental illness must completely overcome the mind<br />
<br />
<br />
Elements:<br />
<br />
1) At the time of the act, 2) The accused was laboring under such a mental defect of reasoning from disease of the mind that 3) (a)D did NOT know the nature and quality of the act he was doing, OR b)if did know, did NOT know what he was doing was wrong<br />
|Allows Courts to focus on Volition too<br />
<br />
<br />
Still an Absolute Overmastering of the mind though<br />
<br />
<br />
<br />
Elements:<br />
<br />
1)A mental disease that makes D unable to distinguish right from wrong OR 2) The complete overmastering of the D’s will by a mental defect under the control of which he acts<br />
|Problem- Experts became the final authority and were defining “product” case by case<br />
<br />
<br />
<br />
<br />
<br />
Elements:<br />
<br />
An accused was not criminally held responsible if unlawful act was a '''''product''''' of the mental disease or defect<br />
|} <br />
<br />
MPC 4.01(14 states adopt):<br />
<br />
<nowiki>**</nowiki>Seen as a “softer standard” than M’Naghten, but allows medical expert influence like in Durham but w/o the expert’s authority overwhelming the case <br />
<br />
<br />
Uses language of “lacks substantial capacity to appreciate the criminality [wrongfulness] of his conduct or to conform his conduct to the requirements of the law”<br />
<br />
<br />
<nowiki>*</nowiki>AT CL, and MPC, anti-social behavior is not included<br />
<br />
<br />
Attempt (1/3 Inchoate Crimes)<br />
<br />
To convict for an attempted crime, the D must have been in the zone of perpetration. There is a concern of punishing just thoughts if making the perpetration line too close to the preparation line. If officials step in to deter a crime, and the D has not crossed into perpetration yet then will not be able to convict.<br />
<br />
Punishing for Attempt is to deter the individual (Specific Deterrence), and to Generally Deter the other members of society<br />
<br />
Now can punish attempt w/ the same severity as actual completion of the crime<br />
{| class="wikitable"<br />
|Attempt (CL):<br />
|MPC 5.01:<br />
|-<br />
|Dual MR<br />
<br />
1) Actor’s conduct must be intentional (Actor intended to commit the acts that constitute the AR).<br />
<br />
2)Specific Intent of the Crime is Present (The target crime being attempted)<br />
<br />
Ex) If D intends to severely injure V, but does not actually end up killing V, then D is not guilty of attempted murder (even though if D had killed V would be guilty of murder in 2<sup>nd</sup> degree)<br />
<br />
Ex) Pulling the trigger of a gun would satisfy 1, but if not intending to shoot a person, but do, then not charged w/ attempted murder<br />
<br />
<br />
FMR<br />
<br />
-Does not Apply in Attempted murder (FL is major minoity)<br />
<br />
The idea is that FMR is a SL crime where the MR is not needing to be proven- so can’t charge for attempted FM when the specific intent of murder must be found to convict under attempt<br />
|Overview:<br />
<br />
1a and 1b deals with completed crimes whereas 1c discusses non-completed crimes and uses the language of “substantial step” Section 2 gives examples of what a substantial step would be. The substantial step is the AR of the provision.<br />
<br />
<br />
Test: The Substantial Step Test- puts the line of perpetration closest to the line of preparation when comparing to the 5 CL tests <br />
<br />
2 Elements of Attempt:<br />
<br />
1) Purpose to commit the target offense=guilty if believes the results will occur, even if not conscious objective ex) bomb on airplane intending to kill husband but the bomb does not go off- would be guilty of attempted murder for husband and the rest of the passengers (at CL uncertain whether attempt at killing other passengers constitutes an attempt)<br />
<br />
2) Conduct constituting a substantial step toward the commission of the target offense - Section 2 gives examples of substantial step<br />
<br />
Steps in using the test:<br />
<br />
1) Does this case involve a complete or incomplete attempt?<br />
<br />
2) If completed then look at 1a, conduct crime, and 1b, result crime. If not completed then look at 1c.<br />
|}<br />
The Tests (CL): Defining Perpetration of Attempt<br />
{| class="wikitable"<br />
|Res Ipsa loquitur (Unequivocality)<br />
|Probable Desistance Test<br />
|Indispensable Element<br />
|Dangerous Proximity<br />
|Physical Proximity<br />
|-<br />
|Silent Movie Test<br />
<br />
To find attempt, the action must be equivocal to the crime attempting to commit.<br />
<br />
<br />
Look at the conduct, if the conduct the actor is engaged in unambiguously manifest a criminal intent then have attempt<br />
<br />
Ex) People v Miller- guy in the field with the shot gun-but does not point it and walks toward the constable<br />
|Focuses on how far the D has already proceeded (the 3 on the left focus on how close the actor’s conduct is to the final completion of the act)-Finds attempt when it is unlikely that the actor will voluntarily desist from effort to commit the crime MUST be voluntary and not due to an interruption from an outside source<br />
<br />
Ex) Luring an underage person over for sexual relations and meeting them at the cab outside<br />
<br />
Ex) Altering a script for extra refills not entitled to= no attempt because doubt about whether D will actually return to pick up refill and then return again for the refill not entitled to<br />
|To find attempt, the actor must have acquired control of the indispensable element of the crime- must possess an instrumentality of the crime to be in perpetration<br />
<br />
Ex) Possessing a gun to kill; OR manufacturing equipment to make illegal drugs<br />
<br />
<br />
<nowiki>*</nowiki>Problem- The absence of an indispensable element says nothing of the actor’s culpability or intentions<br />
|Attempt arises when conduct is in dangerous proximity of success, or when the act is so near to the result that the danger of success is great<br />
<br />
Look at:<br />
<br />
1) nearness of danger, 2) greatness of harm and 3)degree of apprehension felt<br />
<br />
Ex) People v Rizzo- the person intending to rob was not in sight, so not within dangerous proximity<br />
<br />
Ex) Drug dealer orders cocaine, but rejects on quality of goods= found guilty of attempt<br />
<br />
Ex) Drug dealer informs carrier that will purchase the drugs, but sets up date in future for the exchange to secure the funds=no attempt<br />
|The conduct must be proximate to the completed crime.<br />
<br />
Attempt arises when the actor has it within their power to complete the crime almost immediately<br />
<br />
Ex) Weapon in hand and victim in view<br />
|}<br />
Defenses to Attempt: Impossibility (3 @ CL)<br />
{| class="wikitable"<br />
|Pure Legal Impossibility<br />
|Factual Impossibility<br />
|Hybrid Legal Impossibility<br />
|-<br />
|When D thinks committing a crime, but is actually not a crime Ex) Statutory rape where the limit is 15, but the D thinks it is 16 and then has sexual relations with a 15 year old. <br />
<br />
MPC 5.01 only allows Pure legal impossibility as a defense<br />
<br />
- 1a states: “circumstances as D believed them to be”= abolished factual and hybrid impossibility defense<br />
<br />
Ex) If D thought he was bribing a juror then for all intensive purposes he was<br />
<br />
-1c is for incomplete crimes: Requires that Ds conduct be strongly corroborative Ex) If points gun at V who is actually already dead but the officer intervenes then attempt is considered incomplete even though could never actually reach the goal of killing V<br />
|Often will read factual possibility is not a defense, but it can be-just rare for it to be accepted by courts<br />
<br />
Ex) Pulling a trigger, but the gun was not loaded, but thought the gun was loaded<br />
<br />
Ex) Pick Pocketing a pocket that was empty <br />
<br />
NO MPC DEFENSE!<br />
|Mistake about a legal status<br />
<br />
<br />
Ex) Shooting a stuffed deer thinking that it is a real deer during hunting off-season<br />
<br />
Ex) Bribing a juror that is not a juror<br />
<br />
Ex) Shoots a tree stump believing it to be human<br />
<br />
Ex) Shoots V laying there, but V is already dead <br />
<br />
Ex) Receives non-stolen property believing it to be stolen<br />
<br />
NO MPC DEFENSE!<br />
|}<br />
<br />
<br />
Solicitation (Also an Inchoate Crime) <br />
{| class="wikitable"<br />
|Solicitation @ CL- Asking Another to do the crime for them<br />
|MPC 5.02<br />
|-<br />
|Soliciting Party-Conceives the crime and then persuades other(s) to do it for them Ex) hiring a hit man to off someone<br />
<br />
AR: The Asking (AKA inviting/requesting/commanding/hiring)<br />
<br />
<nowiki>**</nowiki>Solicitation is NOT an attempt to use the other as an innocent instrumentality<br />
<br />
<br />
MR: Dual MR (Again- all inchoate crimes have dual MR)<br />
<br />
1) The intent to perform the act that constitutes the solicitation (The intent to ask/invite)<br />
<br />
2) The Specific Intent that the other person commit the solicited offense<br />
<br />
<br />
Ex) Asking someone to pickpocket knowing the pocket is empty- the other could be found guilty of attempt but the solicitor did not have the intent of the other person actually committing that crime, BUT if also was unaware the pocket was empty then found guilty of solicitation because had intent for the other to pickpocket<br />
<br />
<br />
<nowiki>**</nowiki>The actual communication MUST BE RECEIVED- the other must receive the letter or the email<br />
<br />
<nowiki>**</nowiki>If inquires, but the other says no then can still be charged with solicitation, or if the other says yes but has no intent of actually committing the crime (undercover police officer example)<br />
<br />
<br />
Merger:<br />
<br />
If the crime actually happens then solicitation merges with the crime- cannot have a solicitation charge and a charge of the substantive crime<br />
<br />
Also merges with the attempt, if the actual crime is not completed to the end goal by the perpetrator but was completed unsuccessfully- so solicitation cannot exist with attempt as sep. charges<br />
<br />
<br />
Solicitation merges with Conspiracy<br />
<br />
<br />
IS A CL Misdemeanor- regardless of the grade of the offense solicited- Even states that have adopted the MPC into their statutes still treat Solicitation as a lesser offense than the actual committing of what was asked<br />
|Section 1:<br />
<br />
More broad definition- “A person is guilty of solicitation to commit a crime if with the purpose of promoting or facilitating its commission he commands, encourages, or requests another person to engage in specific conduct that would constitute such crime or an attempt to commit such crime…”<br />
<br />
<br />
so 1) the actor’s purpose is to promote or facilitate the commission of a substantive offense, and 2) with such purpose commands, encourages, requests, etc.<br />
<br />
<br />
D can be found guilty of a solicitation of an attempt<br />
<br />
Ex) Asking someone to pickpocket knowing the pocket is empty- the other could be found guilty of attempt but the solicitor would be found guilty of soliciting an attempted larceny- unlike in the CL where the solicitor would not be liable at all<br />
<br />
<br />
D can be found guilty of solicitation even if requesting that the other furnishes him a weapon- at CL not a solicitation because did not ask the other to kill for him with that weapon<br />
<br />
<br />
<nowiki>**</nowiki>The actual communication DOES NOT have to be received-the asking is enough even if the person does not receive the letter or the email<br />
<br />
<nowiki>**</nowiki>If inquires, but the other says no then can still be charged with solicitation<br />
<br />
<br />
Merger:<br />
<br />
If the crime actually happens then solicitation merges with the crime- cannot have a solicitation charge and a charge of the substantive crime<br />
<br />
Same as CL<br />
<br />
MPC Grades solicitation at the same level of the target crime- unlike the CL which grades it as a lesser offense<br />
|}<br />
<br />
<br />
Conspiracy<br />
{| class="wikitable"<br />
|Conspiracy (CL) – Fills the gap in attempt if more than one person is involved<br />
|MPC: 5.03<br />
|-<br />
|**Known as the Prosecutor’s Darling= procedural (Joinder advantage) and evidentiary advantages (Hearsay advantage)<br />
<br />
Also, a vague crime is to the prosecutor’s advantage because easier to prove when less evidence is needed<br />
<br />
<nowiki>*</nowiki>Can be dangerous, historically speaking has been used to punished those with “unfavorable” opinions<br />
<br />
<br />
AR: The agreement<br />
<br />
Only need a tacit mutual understanding to accomplish the unlawful act between conspirators- can be nod/wink/handshake (evidence of mere association should not be enough for conspiracy—''Azim'' Case)<br />
<br />
If prove 4 criteria then can show there was an agreement: 1) Association; 2)Knowledge; 3)Presence; 4) Participation<br />
<br />
<nowiki>*</nowiki>BUT in agreeing- must be aware of the objective of the conspiracy!<br />
<br />
<br />
MR: Dual (All inchoate crimes)<br />
<br />
1) Intent to agree (intent to commit the AR)<br />
<br />
2) Intent to accomplish object of the conspiracy<br />
<br />
Ex) ''Swain'' Case- did not find the 2<sup>nd</sup> MR because was charged with 2<sup>nd</sup> degree murder for an unintentional killing- must have intent to murder to find all the required MR and if unintentional killing then no specific intent to kill<br />
<br />
<br />
MR Required for a person providing a legal service in an unlawful manner (''Lauria'' Case)<br />
<br />
1) Knowledge of the illegal use of the good or service and 2) The intent to further the illegal purpose must be present in order to make a supplier a participant in criminal conspiracy <br />
<br />
-If lacking direct evidence of intent to further then can rely on circumstantial evidence and look at 1) stake in the venture; 2) legitimate use of the good; 3) volume- is amt disproportionate to the good if sold legally?<br />
<br />
<nowiki>**</nowiki>Can only infer intent from knowledge if the crime is very severe<br />
<br />
<br />
Some jurisdictions require an overt act expanding just the agreement, but this is a very low bar and is not ever really an issue- even if statutorily designated<br />
<br />
<br />
Merger-Does Not Merge with the substantive crime- it is its own separate criminal offense whether or not the underlying crime was accomplished or not <br />
<br />
Does not merge with the attempted crime either!<br />
<br />
<br />
Under Conspiracy, can hold the co-conspirator accountable for the completed crime of the other co-conspirator, if the crimes further the conspiracy, even if the first co-conspirator did not engage in the acts at all (''Pinkerton'' Case- Daniel was in Prison at the time of the acts of Walter so ws not actually responsible for the substantive crime- Dissent stated setting dangerous precedent)<br />
<br />
<br />
''Accomplices are usually Conspirators'' BUT NOT ALWAYS- there must be an agreement to find conspiracy (''Cook'' Case- Brother was an accomplice but not a conspirator because no agreement was thought to be established before when looking at the evidence)<br />
<br />
<br />
AT CL, Bilateral Rule- Conspiracy requires an exchange: 2 or more people agree, so have to have 2 or more people charged (Common before 1961)- can still charge solicitation but not agreement<br />
<br />
Unilateral Rule has been adopted in some state statutes in light of the MPC- allowed to charge conspiracy to just one person. Important when the other “conspirator” is actually an undercover cop<br />
<br />
<br />
Most States no longer grade Conspiracy as a lesser crime or misdemeanor- now generally punish equally with the crime- will punish as a misdemeanor if the conspiracy was to commit a misdemeanor<br />
|<br />
<br />
<br />
MR: ''“W/ the purpose of promoting or facilitating”'' =object of the agreement was to bring abt the prohibited result<br />
<br />
Subsection 1- Guilty of conspiracy for 4 types of agreements:<br />
<br />
Agrees too…<br />
<br />
1) commit an offense = engages in conduct that constitutes such crime<br />
<br />
2) attempt to commit an offense<br />
<br />
3) Solicit another to commit an offense<br />
<br />
4) Aid another in the planning or commission of the offense<br />
<br />
The object of the agreement must be a criminal act- and just a legal act in an unlawful way<br />
<br />
<br />
<br />
<br />
Merges w/ the underlying crime if underlying crime takes place- does not merge at CL though<br />
<br />
But if the conspiracy involved completion of additional offenses then conspiracy will not merge with the crime committed- ONLY merges with the substantive crime<br />
<br />
Ex) If arrested before the completion of the crime then conspiracy does not merge- Ex) Plan to rob V1 and V2, but arrested after V1 is robbed but before V2 is robbed then the robbery will NOT merge with conspiracy <br />
<br />
Subsection 7(c): defendant must either (1) advise his co-conspirators that he abandons the criminal purpose of the conspiracy or (2) inform law enforcement of the existence of the conspiracy and his participation in it.<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
MPC- does not follow Pinkerton Rule- not accountable for conduct of others sole because of the conspiracy between them<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
MPC Follows the Unilateral Rule! Do NOT need 2+ conspirators to charge conspiracy to D<br />
|}<br />
<br />
<br />
Accomplice Liability <br />
{| class="wikitable"<br />
|Accomplice Liability (CL)-Derivative Liability<br />
|MPC 2.06<br />
|-<br />
|AR: The act is the assistance- so under CL must actually assist not just try to assist<br />
<br />
<nowiki>*</nowiki>Mere presence is not enough- even if accompanying the perp. And then also flee- must aid/abet/ assist in some way <br />
<br />
<br />
– Can’t be an Accomplice by Omission- must have requisite intent<br />
<br />
If have a duty and failed to act then could be considered an accomplice (Police man not acting when a robbery happens)<br />
<br />
<br />
MR: (Dual MR Again):<br />
<br />
1) Must have intent to assist the P1<br />
<br />
2) Mus have intent that the crime also succeeds<br />
<br />
<nowiki>*</nowiki>P2 must share same intent at P1 to be found guilty under accomplice liability.<br />
<br />
<nowiki>*</nowiki> Knowing is enough if actually assisting- makes up for the lack of purposely<br />
<br />
P2 does not have to be directly present though- can be considered constructively present (On street or outside of door)<br />
<br />
<br />
''Accessory Before the Fact''- Falls under accomplice liability<br />
<br />
Ex) One who furnishes the fake license plate<br />
<br />
<br />
''Accessory After the Fact'' is no longer considered under accomplice liability''- instead charged a separate offense as obstruction of justice or hindering apprehension''- not derivative liability any longer at CL or the MPC<br />
<br />
<br />
Foreseeable Consequence Rule Exits under CL: Allows accomplice liability even if the P2 does not have the culpable mental state<br />
<br />
If a person encouraged/aided/abetted the commission of a crime then held liable for not just that crime but also the foreseeable consequences of that crime aided and abetted<br />
<br />
''Liscott'' Case- Found to be liable for murder under an accomplice theory because murder was natural consequence of such a robbery – even though did not have the intent to have such a result <br />
<br />
Corroboration Rule- where the testimony of accomplices is treated with caution and there must be other evidence which connects the D to the crime outside of the accomplice testimony<br />
<br />
<nowiki>**</nowiki>Many States Have <br />
<br />
<br />
Under the CL, the accomplice does not have to be the but-for cause- derivative liability= the P1 just has to be the but-for cause<br />
<br />
<nowiki>*</nowiki>It is enough that the accomplice just made it easier <br />
<br />
|MPC- just requires the attempt to assist- does not actually need to assist <br />
<br />
<br />
Section 4-<br />
<br />
Under the MPC, for a result crime the P2 must have the “''kind of culpability, if any, with respect to the result that is sufficient for the commission of the offense''” Foreseeable Consequence Rule Does NOT exist <br />
<br />
Section 3-<br />
<br />
“W/ the purpose of promoting or facilitating the offense” <br />
<br />
A(2)- says attempt to aid=does not have to actually aid<br />
<br />
Section 2- Liability for Conduct of Another<br />
<br />
Deals with the issue of using another to commit an offense (''Bailey'' case- acted as the puppet master)<br />
<br />
Uses an unwitting agent to do bidding= directly liable opposed to accomplice liability<br />
|}<br />
[[Category:General Outlines]]</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=Criminal_Law_Dressler/Outline&diff=42475Criminal Law Dressler/Outline2022-06-01T01:00:28Z<p>Rezsue: Created outline</p>
<hr />
<div>'''Principle of Legality''': Prohibition of retroactive criminal law making. For a person to be convicted of a crime, the person must have notice that conduct was illegal at the time of the illegal conduct.<br />
{| class="wikitable"<br />
|'''Actus Reus-The Bad Act (CL)'''<br />
<br />
1. '''''Elements:'''''<br />
<br />
a. '''Voluntary Act'''= Volition MUST be Present (AKA the minimal mental element required for AR- related to MR but NOT the same)- consent of will must be present for actions to be determined capable<br />
<br />
<br />
-Habitual acts fall on the side of voluntary<br />
<br />
-Voluntary does not mean intentional<br />
<br />
<br />
Ex) shooting a gun at a target and hitting someone by accident- voluntarily shot the gun but no intention to harm person<br />
<br />
<nowiki>**</nowiki>Lacked MR, but did engage in ''the Voluntary Act'' <br />
<br />
- '''Automated Response'''- no willingness/volition<br />
<br />
<br />
If there is sufficient evidence for automated response then Q can go to the jury, but cannot be too speculative<br />
<br />
<br />
- '''Omission-''' The Neg. Act<br />
<br />
Generally, a person has no criminal law duty to act to prevent harm to another even if can assist without any risk of harm to herself/himself<br />
<br />
To act must have more than a “mere moral obligation”<br />
<br />
''Must possess a legal duty to act (5):''<br />
<br />
1)Statutes- pay taxes, parents provide food/shelter to minor children<br />
<br />
2)Contract<br />
<br />
3)Status Relationship- parents/marital/employers/invitee<br />
<br />
4) Voluntarily assuming a duty of care and secluding from help<br />
<br />
5)Failure to Act when Created the Risk of Harm<br />
<br />
<br />
<nowiki>**</nowiki> Some states have passed '''Good Samaritan Laws''' which make it a misdemeanor to not come to the aid of a stranger in peril under specified conditions.<br />
<br />
b. '''That Causes'''<br />
<br />
<br />
c. '''Social Harm'''<br />
<br />
-''Conduct Crimes''-the endangerment of social arrangement or important value<br />
<br />
Ex) Drinking & Driving<br />
<br />
<br />
-''Result Crimes''-the endangerment is the result<br />
<br />
Ex) Homicide<br />
<br />
- '''Attendant Circumstances:''' <br />
<br />
A condition that must be present in conjunction w/ the prohibited conduct, or result in order to constitute a crime<br />
<br />
<br />
<nowiki>**</nowiki>The AR does NOT occur unless conduct element occurs w/ the attendant circumstance<br />
<br />
<br />
Ex) '''Drinking & Driving'''- Intoxicated condition is the attendant circumstance whereas driving a car is the conduct (being intoxicated is not illegal, but driving while intoxicated is)<br />
<br />
Ex) '''Burglary'''- the breaking and entering of a dwelling house of another at night<br />
<br />
Aatnd. Circ.=dwelling house of another at night<br />
<br />
Conduct=breaking and entering<br />
<br />
<br />
|<br />
= Actus Reus- MPC 2.01 =<br />
<br />
== MPC 2.01 ==<br />
<br />
<br />
- '''Sec. 2''' sets out nonvoluntary acts that do not constitute AR<br />
<br />
1) Reflex/Convulsion<br />
<br />
2) Sleepwalking/Unconscious Movement<br />
<br />
3)Hypnosis<br />
<br />
4) Body Movement not conscious or habitable product of determination. <br />
<br />
<br />
<br />
- '''Sec. 4''' addresses Possession as an Act-if unknowingly had drugs planted on you then cannot be convicted for possession <br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
- '''Sec. 3''' -omission- is only basis for liability if a) omission is expressed by the law to be an offense, or b) have a legal duty to perform the omitted act<br />
|}<br />
{| class="wikitable"<br />
|'''Mens Rea- The Guilty Mind/ Bad Intent (CL)'''<br />
<br />
<br />
The specific MR must be proved in a particular crime, and not just the mal intent<br />
<br />
- Occasionally intent elements will be defined in a statute<br />
<br />
<br />
1. '''''Intent Elements''''': (Subjective)<br />
<br />
a. Desire/ Conscious Objective; '''OR'''<br />
<br />
b. Acts w/ Knowledge- that social harm is virtually certain to occur as a result of conduct <br />
<br />
<br />
- '''Transferred Intent: ''' <br />
<br />
D intended to harm A, but harmed B instead then Ds intent to harm A transferred to B, BUT this is only allowed within the same crimes!<br />
<br />
Ex) Throwing a rock intending to hit a person, but accidentally shattering a window does not mean the intention to injure property will be valid<br />
<br />
<br />
- '''Specific Intent vs. General Intent:''' <br />
<br />
'''''Specific Intent''''' is when the mental state is set out in the definition of the crime=similar to elemental definition<br />
<br />
'''''General Intent''''' is when there is no specific mental state set out in the definition of the crime, so only need to prove social harm resulted w/ a morally blameworthy state of mind <br />
<br />
- '''Willful Blindness Problem''' <br />
<br />
A deliberate ignorance-if the person believes there is a high prob. of a fact (attendant circumstance) and takes deliberate action to avoid confirming, or fails to investigate in order to avoid confirmation.<br />
<br />
<br />
Generally, most states constitute knowingly as willful blindness, but some minority states require actual knowledge so “probably knew but chose to be blinded” does not meet the requirement and must prove actual knowledge to convict<br />
<br />
<br />
<br />
<br />
- '''Exception to MR: SL Crimes''' (not SL doctrine)<br />
<br />
Generally, have smaller convictions/fines and courts will only enforce SL crimes if the legislature intended for the crime to be absent a MR, so Leg. Intent must be clear to enforce usually<br />
<br />
Ex) Public Welfare Offenses= impure drug/food sales, and traffic/motor vehicle regulations<br />
<br />
<br />
Ex) Statutory Rape- even if offender honestly and reasonably did not know the minor was underage=still guilty<br />
|<br />
=== Mens Rea- MPC 2.02 ===<br />
<br />
<br />
<nowiki>**</nowiki>Highly influential and used in many stated<br />
<br />
<br />
'''4 Culpable States''':<br />
<br />
a. Purposely- Conscious Objective- was aware the attendant circumstances existed<br />
<br />
b. Knowingly- Practically Certain-was aware the attendant circumstances existed<br />
<br />
c. Recklessly- Conscious Risk Taking-A conscious disregard of a substantial risk- gross deviation from standard of conduct<br />
<br />
d. Negligently- Should have been aware<br />
<br />
<br />
Transferred intent does not exist in the MPC<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
'''MPC 2.02 (7)'''- agrees with the CL Majority on Willful Blindness= high probably of awareness is knowingly<br />
|}<br />
<br />
<br />
{| class="wikitable"<br />
|'''Mistake of Fact CL/MPC 2.04'''<br />
|<br />
=== Mistake of Law CL/MPC 2.04 ===<br />
|-<br />
|**Mistake Must be in good-faith<br />
<br />
<br />
'''General Intent v Specific Intent Distinction:'''<br />
<br />
'''''General Intent'''''- A reasonable objective measurement is used to compare the D against<br />
<br />
If ''unreasonable'' mistake then guilty, but if mistake is ''reasonable'' then not guilty<br />
<br />
'''''Specific Intent'''''- NO reasonable objective measurement is used to measure the D against; if the intent is required and it is lacking then not guilty<br />
<br />
=== Steps ===<br />
<nowiki>#</nowiki>1 First identify if General Intent Crime, or Specific Intent Crime<br />
<br />
<nowiki>#</nowiki>2 Is the Mistake genuine?- If so, then employ above reasoning<br />
<br />
<br />
'''MPC:''' NO General/Specific Intent Distinction- if mistake negates purpose, knowledge, reckless, or negligent culpability required to establish a material element of the crime then not guilty if the mistake was made in good-faith<br />
<br />
<nowiki>*</nowiki>No reasonable requirement<br />
|<br />
<br />
<br />
Generally, not excused for committing a crime if relying on own erroneous reading/interpretation of the law, even if reasonable person or reasonable attorney would have similarly understood the same way<br />
<br />
Exception:<br />
<br />
a. When an official assures a D that certain conduct is legally permissible and the D reasonably believes and relies on the advice<br />
<br />
b. The statute is later declared invalid<br />
<br />
c. A judicial decision later declared to be erroneous<br />
<br />
<br />
MPC: Similar to CL<br />
<br />
- For mistake of law to be a defense the D must prove acted upon reasonable reliance on an official statement that afterwards was determined invalid, or erroneous. The D is not excused of liability simply by misconstruing the statute themselves, or by advice from an attorney or other non-designated official<br />
|}<br />
{| class="wikitable"<br />
|<br />
=== Causation CL- the link between AR and MR ===<br />
|<br />
=== Causation MPC 2.03 ===<br />
|-<br />
|Both types of causation must be proven<br />
<br />
<br />
<br />
'''Factual/Actual'''- the “but-for” cause<br />
<br />
a. Direct<br />
<br />
b. '''''Concurrent Sufficient''''' (Substantial Factor)<br />
<br />
=2 Ds act, both would have killed but together they also kill<br />
<br />
=2 Ds act, neither individually would have killed but together they kill<br />
<br />
c. '''''Acceleration''''' <br />
<br />
=The result happened sooner because of Ds conduct, but must prove the result was accelerated and not that it could have possibly accelerated the result<br />
<br />
<br />
<br />
'''Proximate (legal)'''<br />
<br />
All are factual, but not all factual causes are proximate<br />
<br />
When a D can be blameworthy w/o actually being the cause of the end result<br />
<br />
a. '''''Intervening Cause'''''- ask if the chain of causation has been broken<br />
<br />
- '''Using the Objective Standard of Foreseeability''' <br />
<br />
If the intervening cause '''''was foreseeable''''' then the chain of causation is '''''NOT broken''''' and the D is criminally liable<br />
<br />
If '''''NOT foreseeable''''' then D is '''''not liable''''' because the '''''chain has been broken'''''<br />
<br />
''Responsive Intervening Cause vs Coincidental Intervening Cause-'' <br />
<br />
'''''Responsive I.C'''''. is normally seen as reasonably foreseeable and does not break the chain<br />
<br />
Ex) Medical Care, even if negligent medical care is given still considered foreseeable (ER DR has a cold)<br />
<br />
Ex) Drowning after boat being hit by a neg. driver- even if the victim drowned because was drunk and could not swim to shore properly the D is responsible<br />
<br />
'''''Coincidental I.C.''''' is not seen as foreseeable and breaks the chain because while D did put the victim in the situation, the I. C. acted on the victim independently and coincidentally<br />
<br />
Ex) Gross neg. medical care or a knife wielding maniac at the hospital BUT say the hospital was a high security penitentiary then can question if foreseeable <br />
<br />
<br />
<br />
- '''The Apparent Safety Doctrine''' <br />
<br />
When a victim is safe, but then chooses to reenter a dangerous situation= the chain of causation is broken<br />
<br />
Ex) Reentering the road to fix car after a drunk driver caused a crash. The victim was able to make it to the side of the road but chose to reenter<br />
<br />
<br />
- '''Voluntary Human Intervention''' <br />
<br />
When the victim makes a choice that leads to the result then the chain of causation is broken<br />
<br />
Ex) Choosing to sleep in the Cold after being forced out of the house from DV when could have slept at Father’s house<br />
<br />
<br />
Ex) But limitations- if Victim commits suicide after Rape then not seen as breaking the causation chain<br />
<br />
<br />
<nowiki>*</nowiki>Often assumed that D takes victim as is so if has a heart attack due to a heart condition as a result of Ds conduct then the causation chain is not broken<br />
<br />
<br />
''Questionable Ex)'' A religious person refusing to accept a blood transfusion- would the chain be broken? Some courts may disagree that D takes this religious person as D finds them because making a choice to not save life when capable of saving <br />
<br />
<br />
- '''Intended Consequences'''<br />
<br />
If D intended the result, but intervening cause(s) got in the way which still resulted in the intended result D originally wanted then D is still criminally liable<br />
|The MPC approach is not as definite as the CL approach to finding causation<br />
<br />
== Factual/Actual ==<br />
Does employ a but-for test<br />
<br />
BUT does not resort to sufficient factor test when there are multiple Ds.<br />
<br />
Will instead ask if D1/D2 were the but-for cause of victims death<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
'''Proximate Cause'''- does NOT use a foreseeability test as the CL does- instead asks if D caused result w/ the level of culpability required for the offense (purposely, recklessly, knowingly, negligently)<br />
<br />
<br />
BUT if the crime does not require a culpability ex) felony murder then will ask if the result was a probable consequence of the crime<br />
<br />
Ex) Robbing a bank but bank teller being electrocuted by the silent alarm button<br />
|}<br />
<nowiki>***</nowiki>MR/AR/Causation must all be proven to have come together at the same time for their to be a criminal conviction of a crime<br />
{| class="wikitable"<br />
|'''Homicide Categories''' <br />
|<br />
=== CL ===<br />
|'''MPC 210.0'''<br />
|-<br />
|CL: 1st Degree Murder<br />
<br />
<br />
<br />
MPC: “Murder”<br />
|**w/ Malice Aforethought<br />
<br />
== Premeditated/ Deliberated ==<br />
- '''''Premed''''': quantity of time w/ thought<br />
<br />
- '''''Delib.''''': quality of thought<br />
<br />
Killing done after a period of time of '''''prior consideration''''' BUT no defined interval of time in Majority of Jrxs.<br />
<br />
Just the thought to kill/Act of Killing happening simultaneously does not constitute Premed./Delib.- '''''thought must be sometime before'''''<br />
<br />
<nowiki>**</nowiki>Minority Jrxs (Michigan) have defined a more meaningful standard for premed/delib<br />
<br />
<br />
Evidence must be presented to support the premed/delib.- most often circumstantial:<br />
<br />
a. want of provocation<br />
<br />
b. conduct statements before/after<br />
<br />
c. Threats/declarations before or during<br />
<br />
d. ill will between parties<br />
<br />
e. Brutal manner of killing<br />
<br />
f. Nature and # of wounds to victim<br />
<br />
<br />
<nowiki>**</nowiki>Prosecution must prove actual intent to kill not that the D should have known conduct would cause death<br />
<br />
<br />
Intent to abuse does not constitute premed/delib. For murder when death results- BUT some states have allowed 1<sup>st</sup> deg. in cases of child abuse where the intent to abuse manifests an extreme indiff. to human life<br />
|'''210.2- Lays out 3 Diff. Theories for Murder''':<br />
<br />
1. '''Purposely/ Knowingly'''<br />
<br />
= most similar to Premeditation and Deliberation found in the CL<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
(3<sup>rd</sup> is Felony Murder)<br />
|-<br />
|CL 2<sup>nd</sup> Degree Murder<br />
<br />
<br />
<br />
MPC: “Murder”<br />
|'''CL 3 Theories:''' <br />
<br />
1. '''''Intention to cause great bodily harm''''', but death results<br />
<br />
<br />
2. '''''Default'''''- Mitigates 1<sup>st</sup> degree, or move up Voluntary Manslaughter to 2<sup>nd</sup> degree<br />
<br />
- If 1<sup>st</sup> degree fails for premed./delib.<br />
<br />
- If manslaughter fails for lack of heat of passion or adequate provocation (cooling off time was present)<br />
<br />
<br />
3. '''''Depraved Heart''''' (or malignant Heart)<br />
<br />
-Have malice aforethought w/o premed/delib.<br />
<br />
<br />
''- Test to Find Malignant Heart'':<br />
<br />
1) The Killing is caused by an act w/ a base antisocial motive,<br />
<br />
2) The natural consequences of which are dangerous to life,<br />
<br />
3) The person performing the act knows their conduct endangers the life of others but acts w/ a conscious disregard<br />
|2. '''Extreme Recklessness''' Manifesting an ''Extreme indifference'' to Human Life= A Conscious Disregard of the Risks<br />
|-<br />
|CL: Voluntary Manslaughter<br />
<br />
<br />
<br />
MPC: “Manslaughter”<br />
|**w/o malice aforethought<br />
<br />
<br />
'''2 Elements:''' <br />
<br />
1) '''''Heat of Passion'''''- absent “cooling off time”<br />
<br />
-Jury normally decides if their was a cooling off time- in the past it was the judge who determined<br />
<br />
<br />
2)'''''Provocation'''''- the provocation must be adequate to cause such a reaction- the reaction is not excused BUT is considered understandable <br />
<br />
<br />
<nowiki>*</nowiki>There must be a causal connection between the provocation, heat of passion, and the final act<br />
<br />
<br />
- '''Words Alone Rule''':<br />
<br />
Generally accepted that words alone are not adequate provocation<br />
<br />
Minority of states (PA)- says informational words can be enough depending on the circumstance BUT mere insults are still not enough<br />
<br />
If words are accompanied by conduct indicating present intention and ability to cause D severe bodily harm then can be enough<br />
<br />
<nowiki>**</nowiki>Uses an Objective Standard- but argument against making wholly objective<br />
<br />
<br />
|210.3- Lays out 2 Diff. Theories of Manslaughter <br />
<br />
1. '''Regular Recklessness''' (not extreme because extreme falls under murder)<br />
<br />
<br />
2. '''Extreme Mental Anguish or Mental/Emotional Disturbance'''<br />
<br />
- Employs a combination of an objective standard and a subjective standard.<br />
<br />
Requires that the circumstances are viewed as the D saw them but then use a reasonable person standard to ask if Ds reaction was reasonable to the events as D saw them<br />
<br />
<nowiki>**</nowiki>NO cooling-off time<br />
<br />
= recognizes that there can be a build up of emotions over time<br />
<br />
= recognizes a more broad degree of circumstances which can allow for a mitigation to manslaughter<br />
<br />
<br />
<nowiki>**</nowiki> Words Alone Rule does NOT apply!<br />
|-<br />
|CL: Involuntary Manslaughter<br />
<br />
<br />
<br />
MPC: Negligent Homicide<br />
|'''1<sup>st</sup> Degree''': Recklessness<br />
<br />
'''2<sup>nd</sup> Degree''': Gross Negligence (AKA crim. Negligence- NOT civil negligence)<br />
|'''Negligent Homicide''' is not conscious risk-taking, but should have known<br />
<br />
(regular reckless is under manslaughter)<br />
|}<br />
<br />
<br />
Limitations to the Felony Murder Rule: ''Usually convicts under 1<sup>st</sup>, but some states convict under 2<sup>nd</sup> or 3<sup>rd</sup> (Pa/Ca= 2<sup>nd</sup>)''<br />
<br />
FMR- SL for death resulting from Ds conduct when engaged in a felony. Does not matter if death was intentional, unintentional, negligent, or complete accident<br />
{| class="wikitable"<br />
|<br />
=== Inherently Dangerous Felony ===<br />
|<br />
=== Merger Theory ===<br />
|<br />
=== Agency Approach ===<br />
|-<br />
|'''In the Abstract Rule''':<br />
<br />
Court looks at Elements of the Felony and NOT the facts of the case to determine if the felony is inherently dangerous to life<br />
<br />
Will only apply FMR if the Felony is found to be inherently dangerous to life<br />
<br />
<br />
Ex) of Inherently Dangerous to Life Felonies=Kidnapping, Arson, Shooting @ an inhabited dwelling<br />
<br />
<br />
Ex) of NON-inherently Dangerous Felonies= Fraud, Grand Theft, Deceit<br />
|Applies when the Felony is not independent from the homicide<br />
<br />
<br />
Certain crimes inherently have a felony built in – if engaged in a crime that is merged w/ a felony then can’t employ the felony murder rule to convict under 1<sup>st</sup> (or 2<sup>nd</sup> degree)<br />
<br />
<br />
Ex) Assault w/ a deadly weapon is a felony, if a death results, can’t employ FMR to convict<br />
<br />
<br />
Ex) of FMR applying because the Felony was indep. of the death= Armed Robbery, Kidnapping, Furnishing Narcotics<br />
<br />
<br />
<br />
<nowiki>**</nowiki>Few States have abolished FMR= KY<br />
|Accomplice Liability allows multiple felons to be charged under the FMR when one co-felon commits a homicide during the perpetration of their crime<br />
<br />
<br />
BUT if the homicide results from a 3<sup>rd</sup> person, non-felon, then the co-felon(s) are not liable under the FMR<br />
|}<br />
<nowiki>**</nowiki>Unlawful Act Manslaughter Rule- Also V. Controversial<br />
<br />
- Allows a manslaughter conviction where a homicide resulted from criminal conduct that was not arising to a felony ( At CL has been used to extend to acts that were morally wrongful, but not criminal)<br />
<br />
<br />
DEFENSES:<br />
<br />
Justification- legal harm, but harm was outweighed by good<br />
{| class="wikitable"<br />
|'''Self Defense'''<br />
|'''Defense of Others'''<br />
|'''Defense of Habitation'''<br />
|'''Necessity'''<br />
|-<br />
|'''Elements to use SD (CL):''' <br />
<br />
1)threat actual or apparent to use deadly force against the D<br />
<br />
<br />
2)The threat must have been unlawful and '''''immediate''''' <br />
<br />
<br />
3)D must have believed was in immediate peril of death or serious bodily harm and that the '''use of deadly force was necessary to save himself'''<br />
<br />
<br />
4)Beliefs must have '''been honestly entertained''' and also '''objectively reasonable''' in the light of the circumstances(requires looking at circumstances as D believed them to be, BUT not wholly subjective!)<br />
<br />
<br />
-'''''Imperfect Justification'''''=used in some states to mitigate to manslaughter when SD was found to be unrsb, but D genuinely believed that the threat was imminent and deadly<br />
<br />
<br />
<br />
In addition:<br />
<br />
-The D must '''not''' be the aggressor/provoker (Even if the adversary made the first blow/shot/threatening gesture, the D cannot use SD defense if the original aggressor)- if D is aggressor, must communicate to advisory intent to withdraw and '''demonstrate a good-faith attempt to do so''' <br />
<br />
<br />
-Also, the '''force used must be proportional to the force seeking to protect from'''= nondeadly force must not be met w/ deadly force (if nondeadly force escalates to deadly force then can use deadly force to protect)<br />
<br />
<br />
-'''Retreat to the wall must be demonstrated''' (unless SYGLs apply), '''unless the retreat is not conducive to safety''' then Ds do not have to elect a safe retreat rather than use deadly force<br />
<br />
'''-Castle Doc.''' Allows no retreat from home or curtilage- if at fault for being the aggressor castle doc does not excuse such<br />
<br />
SYG Laws expand Castle Doc to anyplace person has right to be including public areas<br />
|If a person comes to the aid of another '''acting on a reasonable belief then the defense of another can be applicable''' '''even if the other party actually has no right to SD'''- use to not be this was. If a D acted w/o the other actually having the right to SD then D would be liable, but has since changed<br />
|'''Broad Minority Approach''' <br />
<br />
Minority allows for use of deadly force for '''any unlawful invasion''' of the home <br />
<br />
'''Middle Approach''' <br />
<br />
Allows force to prevent an intruder from entering when intending to '''commit a felony therein''' <br />
<br />
== Narrow Approach ==<br />
Allows force to prevent an intruder when intending to commit a '''violent felony''' therein <br />
<br />
<br />
<nowiki>**</nowiki> Used to protect from Entry- once enters can use SD defense<br />
<br />
<br />
<nowiki>**</nowiki>The D does not have to officially live there- residing with the permission of the owner<br />
|'''4 Elements to use Necessity (CL):''' <br />
<br />
1) The act must have been done to prevent a significant evil<br />
<br />
<br />
2)There is no adequate alternative<br />
<br />
<br />
3)The harm to be avoided must be '''immediate and dire''' and '''greater than the harm of breaking the law''' <br />
<br />
<br />
4)Reasonably anticipated '''a direct causal relationship''' between conduct and harm to be avoided<br />
<br />
<nowiki>**</nowiki>why civil disobedience generally fails in being able to use Necessity Defense<br />
<br />
<br />
In addition:<br />
<br />
-Does not include homicide situations<br />
<br />
<br />
-Looses the defense if created the harm<br />
<br />
<br />
-Usually applies in cases of Natural Forces<br />
<br />
And sometimes physical harms to person or property <br />
<br />
<br />
== MPC 3.02 ==<br />
More broad!<br />
<br />
<br />
-Rejects immanency requirement<br />
<br />
<br />
-Allowed as defense in Homicide situations= utilitarian approach<br />
<br />
<br />
-Do not necessarily<br />
<br />
loose defense if created the harm but if reckless or negligent than can be prosecuted for that recklessness or neg.<br />
|}<br />
<nowiki>**</nowiki>PA SYG law requires the aggressor be armed and the D must not have been engaged in criminal activity (unlike in FL)<br />
<br />
<nowiki>**</nowiki>BWS- not generally accepted as a justification to use SD, but some states have recognized the psychology behind abused women who have undergone the abuse cycle just once- abuse victims are always in fear of imminent harm , or a state of imminent threat. Other states require that the threat be imminent to allow SD in abused women cases<br />
<br />
== Excuses- legal harm, but the actor is not responsible because of disease or defect ==<br />
{| class="wikitable"<br />
|<br />
=== Duress (MR is still present-not negated-but just not willful) ===<br />
|<br />
=== Intoxication ===<br />
|-<br />
|'''3 Elements:''' <br />
<br />
1)Immediate threat of death or seriously body injury<br />
<br />
2)Well grounded fear that threat will be carried out<br />
<br />
3) No reasonable opportunity to escape the threatened harm<br />
<br />
<br />
In addition:<br />
<br />
-Not allowed for Homicide defense<br />
<br />
-If at fault for being in coercive situation then defense is not allowed<br />
<br />
<br />
'''MPC 2.09:'''<br />
<br />
Uses language of “person with reasonable firmness would not be able to resist”<br />
<br />
<br />
Also adheres to the person not being able to use if in the situation at their own fault<br />
<br />
<br />
Does allow as a defense to committing homicide – NY and TX has adopted<br />
|Normally Courts are NOT Receptive!!<br />
<br />
<br />
'''CL:''' '''''Allowed in specific intent crimes, but not general intent crimes''''', if too intoxicated to form the required MR of the crime. Just because can be permissible does not mean courts will accept. = A failure to prove defense<br />
<br />
<br />
Involuntary Intoxication is more receptive by courts. 1)Coercion, 2)pathological, 3)innocent mistake, 4) Prescribed medication having unintended effects<br />
<br />
==== MPC 2.08 ====<br />
-Does NOT adhere to specific intent/general intent distinction- if the intoxication negates an element of the offense then can apply<br />
<br />
<br />
-States that pathological intoxication and not self-induced intoxication can be affirmative defenses where the D can be found non-criminally responsible<br />
<br />
<br />
Will not allow intoxication to be an excuse for reckless behavior even if the D would have been aware of the risk sober but was not intoxicated. Neg. harm will be treated as recklessly caused<br />
|}<br />
<br />
== Insanity Defense ==<br />
{| class="wikitable"<br />
|'''M’Naghten Test'''- Majority (28 states apply test or version of)<br />
|'''Irresistible Impulse Test'''-Supplement (doesn’t exist in isolation from M’Naghten)<br />
|'''Durham Rule/Product Test'''- NH Still Uses<br />
|-<br />
|Focuses on Cognition and NOT Volition <br />
<br />
<br />
The Test is Absolute-Mental illness must completely overcome the mind<br />
<br />
<br />
Elements:<br />
<br />
1) At the time of the act, 2) The accused was laboring under such a mental defect of reasoning from disease of the mind that 3) (a)D did NOT know the nature and quality of the act he was doing, OR b)if did know, did NOT know what he was doing was wrong<br />
|Allows Courts to focus on Volition too<br />
<br />
<br />
Still an Absolute Overmastering of the mind though<br />
<br />
<br />
<br />
Elements:<br />
<br />
1)A mental disease that makes D unable to distinguish right from wrong OR 2) The complete overmastering of the D’s will by a mental defect under the control of which he acts<br />
|Problem- Experts became the final authority and were defining “product” case by case<br />
<br />
<br />
<br />
<br />
<br />
Elements:<br />
<br />
An accused was not criminally held responsible if unlawful act was a '''''product''''' of the mental disease or defect<br />
|} <br />
<br />
MPC 4.01(14 states adopt):<br />
<br />
<nowiki>**</nowiki>Seen as a “softer standard” than M’Naghten, but allows medical expert influence like in Durham but w/o the expert’s authority overwhelming the case <br />
<br />
<br />
Uses language of “lacks substantial capacity to appreciate the criminality [wrongfulness] of his conduct or to conform his conduct to the requirements of the law”<br />
<br />
<br />
<nowiki>*</nowiki>AT CL, and MPC, anti-social behavior is not included<br />
<br />
<br />
Attempt (1/3 Inchoate Crimes)<br />
<br />
To convict for an attempted crime, the D must have been in the zone of perpetration. There is a concern of punishing just thoughts if making the perpetration line too close to the preparation line. If officials step in to deter a crime, and the D has not crossed into perpetration yet then will not be able to convict.<br />
<br />
Punishing for Attempt is to deter the individual (Specific Deterrence), and to Generally Deter the other members of society<br />
<br />
Now can punish attempt w/ the same severity as actual completion of the crime<br />
{| class="wikitable"<br />
|Attempt (CL):<br />
|MPC 5.01:<br />
|-<br />
|Dual MR<br />
<br />
1) Actor’s conduct must be intentional (Actor intended to commit the acts that constitute the AR).<br />
<br />
2)Specific Intent of the Crime is Present (The target crime being attempted)<br />
<br />
Ex) If D intends to severely injure V, but does not actually end up killing V, then D is not guilty of attempted murder (even though if D had killed V would be guilty of murder in 2<sup>nd</sup> degree)<br />
<br />
Ex) Pulling the trigger of a gun would satisfy 1, but if not intending to shoot a person, but do, then not charged w/ attempted murder<br />
<br />
<br />
FMR<br />
<br />
-Does not Apply in Attempted murder (FL is major minoity)<br />
<br />
The idea is that FMR is a SL crime where the MR is not needing to be proven- so can’t charge for attempted FM when the specific intent of murder must be found to convict under attempt<br />
|Overview:<br />
<br />
1a and 1b deals with completed crimes whereas 1c discusses non-completed crimes and uses the language of “substantial step” Section 2 gives examples of what a substantial step would be. The substantial step is the AR of the provision.<br />
<br />
<br />
Test: The Substantial Step Test- puts the line of perpetration closest to the line of preparation when comparing to the 5 CL tests <br />
<br />
2 Elements of Attempt:<br />
<br />
1) Purpose to commit the target offense=guilty if believes the results will occur, even if not conscious objective ex) bomb on airplane intending to kill husband but the bomb does not go off- would be guilty of attempted murder for husband and the rest of the passengers (at CL uncertain whether attempt at killing other passengers constitutes an attempt)<br />
<br />
2) Conduct constituting a substantial step toward the commission of the target offense - Section 2 gives examples of substantial step<br />
<br />
Steps in using the test:<br />
<br />
1) Does this case involve a complete or incomplete attempt?<br />
<br />
2) If completed then look at 1a, conduct crime, and 1b, result crime. If not completed then look at 1c.<br />
|}<br />
The Tests (CL): Defining Perpetration of Attempt<br />
{| class="wikitable"<br />
|Res Ipsa loquitur (Unequivocality)<br />
|Probable Desistance Test<br />
|Indispensable Element<br />
|Dangerous Proximity<br />
|Physical Proximity<br />
|-<br />
|Silent Movie Test<br />
<br />
To find attempt, the action must be equivocal to the crime attempting to commit.<br />
<br />
<br />
Look at the conduct, if the conduct the actor is engaged in unambiguously manifest a criminal intent then have attempt<br />
<br />
Ex) People v Miller- guy in the field with the shot gun-but does not point it and walks toward the constable<br />
|Focuses on how far the D has already proceeded (the 3 on the left focus on how close the actor’s conduct is to the final completion of the act)-Finds attempt when it is unlikely that the actor will voluntarily desist from effort to commit the crime MUST be voluntary and not due to an interruption from an outside source<br />
<br />
Ex) Luring an underage person over for sexual relations and meeting them at the cab outside<br />
<br />
Ex) Altering a script for extra refills not entitled to= no attempt because doubt about whether D will actually return to pick up refill and then return again for the refill not entitled to<br />
|To find attempt, the actor must have acquired control of the indispensable element of the crime- must possess an instrumentality of the crime to be in perpetration<br />
<br />
Ex) Possessing a gun to kill; OR manufacturing equipment to make illegal drugs<br />
<br />
<br />
<nowiki>*</nowiki>Problem- The absence of an indispensable element says nothing of the actor’s culpability or intentions<br />
|Attempt arises when conduct is in dangerous proximity of success, or when the act is so near to the result that the danger of success is great<br />
<br />
Look at:<br />
<br />
1) nearness of danger, 2) greatness of harm and 3)degree of apprehension felt<br />
<br />
Ex) People v Rizzo- the person intending to rob was not in sight, so not within dangerous proximity<br />
<br />
Ex) Drug dealer orders cocaine, but rejects on quality of goods= found guilty of attempt<br />
<br />
Ex) Drug dealer informs carrier that will purchase the drugs, but sets up date in future for the exchange to secure the funds=no attempt<br />
|The conduct must be proximate to the completed crime.<br />
<br />
Attempt arises when the actor has it within their power to complete the crime almost immediately<br />
<br />
Ex) Weapon in hand and victim in view<br />
|}<br />
Defenses to Attempt: Impossibility (3 @ CL)<br />
{| class="wikitable"<br />
|Pure Legal Impossibility<br />
|Factual Impossibility<br />
|Hybrid Legal Impossibility<br />
|-<br />
|When D thinks committing a crime, but is actually not a crime Ex) Statutory rape where the limit is 15, but the D thinks it is 16 and then has sexual relations with a 15 year old. <br />
<br />
MPC 5.01 only allows Pure legal impossibility as a defense<br />
<br />
- 1a states: “circumstances as D believed them to be”= abolished factual and hybrid impossibility defense<br />
<br />
Ex) If D thought he was bribing a juror then for all intensive purposes he was<br />
<br />
-1c is for incomplete crimes: Requires that Ds conduct be strongly corroborative Ex) If points gun at V who is actually already dead but the officer intervenes then attempt is considered incomplete even though could never actually reach the goal of killing V<br />
|Often will read factual possibility is not a defense, but it can be-just rare for it to be accepted by courts<br />
<br />
Ex) Pulling a trigger, but the gun was not loaded, but thought the gun was loaded<br />
<br />
Ex) Pick Pocketing a pocket that was empty <br />
<br />
NO MPC DEFENSE!<br />
|Mistake about a legal status<br />
<br />
<br />
Ex) Shooting a stuffed deer thinking that it is a real deer during hunting off-season<br />
<br />
Ex) Bribing a juror that is not a juror<br />
<br />
Ex) Shoots a tree stump believing it to be human<br />
<br />
Ex) Shoots V laying there, but V is already dead <br />
<br />
Ex) Receives non-stolen property believing it to be stolen<br />
<br />
NO MPC DEFENSE!<br />
|}<br />
<br />
<br />
Solicitation (Also an Inchoate Crime) <br />
{| class="wikitable"<br />
|Solicitation @ CL- Asking Another to do the crime for them<br />
|MPC 5.02<br />
|-<br />
|Soliciting Party-Conceives the crime and then persuades other(s) to do it for them Ex) hiring a hit man to off someone<br />
<br />
AR: The Asking (AKA inviting/requesting/commanding/hiring)<br />
<br />
<nowiki>**</nowiki>Solicitation is NOT an attempt to use the other as an innocent instrumentality<br />
<br />
<br />
MR: Dual MR (Again- all inchoate crimes have dual MR)<br />
<br />
1) The intent to perform the act that constitutes the solicitation (The intent to ask/invite)<br />
<br />
2) The Specific Intent that the other person commit the solicited offense<br />
<br />
<br />
Ex) Asking someone to pickpocket knowing the pocket is empty- the other could be found guilty of attempt but the solicitor did not have the intent of the other person actually committing that crime, BUT if also was unaware the pocket was empty then found guilty of solicitation because had intent for the other to pickpocket<br />
<br />
<br />
<nowiki>**</nowiki>The actual communication MUST BE RECEIVED- the other must receive the letter or the email<br />
<br />
<nowiki>**</nowiki>If inquires, but the other says no then can still be charged with solicitation, or if the other says yes but has no intent of actually committing the crime (undercover police officer example)<br />
<br />
<br />
Merger:<br />
<br />
If the crime actually happens then solicitation merges with the crime- cannot have a solicitation charge and a charge of the substantive crime<br />
<br />
Also merges with the attempt, if the actual crime is not completed to the end goal by the perpetrator but was completed unsuccessfully- so solicitation cannot exist with attempt as sep. charges<br />
<br />
<br />
Solicitation merges with Conspiracy<br />
<br />
<br />
IS A CL Misdemeanor- regardless of the grade of the offense solicited- Even states that have adopted the MPC into their statutes still treat Solicitation as a lesser offense than the actual committing of what was asked<br />
|Section 1:<br />
<br />
More broad definition- “A person is guilty of solicitation to commit a crime if with the purpose of promoting or facilitating its commission he commands, encourages, or requests another person to engage in specific conduct that would constitute such crime or an attempt to commit such crime…”<br />
<br />
<br />
so 1) the actor’s purpose is to promote or facilitate the commission of a substantive offense, and 2) with such purpose commands, encourages, requests, etc.<br />
<br />
<br />
D can be found guilty of a solicitation of an attempt<br />
<br />
Ex) Asking someone to pickpocket knowing the pocket is empty- the other could be found guilty of attempt but the solicitor would be found guilty of soliciting an attempted larceny- unlike in the CL where the solicitor would not be liable at all<br />
<br />
<br />
D can be found guilty of solicitation even if requesting that the other furnishes him a weapon- at CL not a solicitation because did not ask the other to kill for him with that weapon<br />
<br />
<br />
<nowiki>**</nowiki>The actual communication DOES NOT have to be received-the asking is enough even if the person does not receive the letter or the email<br />
<br />
<nowiki>**</nowiki>If inquires, but the other says no then can still be charged with solicitation<br />
<br />
<br />
Merger:<br />
<br />
If the crime actually happens then solicitation merges with the crime- cannot have a solicitation charge and a charge of the substantive crime<br />
<br />
Same as CL<br />
<br />
MPC Grades solicitation at the same level of the target crime- unlike the CL which grades it as a lesser offense<br />
|}<br />
<br />
<br />
Conspiracy<br />
{| class="wikitable"<br />
|Conspiracy (CL) – Fills the gap in attempt if more than one person is involved<br />
|MPC: 5.03<br />
|-<br />
|**Known as the Prosecutor’s Darling= procedural (Joinder advantage) and evidentiary advantages (Hearsay advantage)<br />
<br />
Also, a vague crime is to the prosecutor’s advantage because easier to prove when less evidence is needed<br />
<br />
<nowiki>*</nowiki>Can be dangerous, historically speaking has been used to punished those with “unfavorable” opinions<br />
<br />
<br />
AR: The agreement<br />
<br />
Only need a tacit mutual understanding to accomplish the unlawful act between conspirators- can be nod/wink/handshake (evidence of mere association should not be enough for conspiracy—''Azim'' Case)<br />
<br />
If prove 4 criteria then can show there was an agreement: 1) Association; 2)Knowledge; 3)Presence; 4) Participation<br />
<br />
<nowiki>*</nowiki>BUT in agreeing- must be aware of the objective of the conspiracy!<br />
<br />
<br />
MR: Dual (All inchoate crimes)<br />
<br />
1) Intent to agree (intent to commit the AR)<br />
<br />
2) Intent to accomplish object of the conspiracy<br />
<br />
Ex) ''Swain'' Case- did not find the 2<sup>nd</sup> MR because was charged with 2<sup>nd</sup> degree murder for an unintentional killing- must have intent to murder to find all the required MR and if unintentional killing then no specific intent to kill<br />
<br />
<br />
MR Required for a person providing a legal service in an unlawful manner (''Lauria'' Case)<br />
<br />
1) Knowledge of the illegal use of the good or service and 2) The intent to further the illegal purpose must be present in order to make a supplier a participant in criminal conspiracy <br />
<br />
-If lacking direct evidence of intent to further then can rely on circumstantial evidence and look at 1) stake in the venture; 2) legitimate use of the good; 3) volume- is amt disproportionate to the good if sold legally?<br />
<br />
<nowiki>**</nowiki>Can only infer intent from knowledge if the crime is very severe<br />
<br />
<br />
Some jurisdictions require an overt act expanding just the agreement, but this is a very low bar and is not ever really an issue- even if statutorily designated<br />
<br />
<br />
Merger-Does Not Merge with the substantive crime- it is its own separate criminal offense whether or not the underlying crime was accomplished or not <br />
<br />
Does not merge with the attempted crime either!<br />
<br />
<br />
Under Conspiracy, can hold the co-conspirator accountable for the completed crime of the other co-conspirator, if the crimes further the conspiracy, even if the first co-conspirator did not engage in the acts at all (''Pinkerton'' Case- Daniel was in Prison at the time of the acts of Walter so ws not actually responsible for the substantive crime- Dissent stated setting dangerous precedent)<br />
<br />
<br />
''Accomplices are usually Conspirators'' BUT NOT ALWAYS- there must be an agreement to find conspiracy (''Cook'' Case- Brother was an accomplice but not a conspirator because no agreement was thought to be established before when looking at the evidence)<br />
<br />
<br />
AT CL, Bilateral Rule- Conspiracy requires an exchange: 2 or more people agree, so have to have 2 or more people charged (Common before 1961)- can still charge solicitation but not agreement<br />
<br />
Unilateral Rule has been adopted in some state statutes in light of the MPC- allowed to charge conspiracy to just one person. Important when the other “conspirator” is actually an undercover cop<br />
<br />
<br />
Most States no longer grade Conspiracy as a lesser crime or misdemeanor- now generally punish equally with the crime- will punish as a misdemeanor if the conspiracy was to commit a misdemeanor<br />
|<br />
<br />
<br />
MR: ''“W/ the purpose of promoting or facilitating”'' =object of the agreement was to bring abt the prohibited result<br />
<br />
Subsection 1- Guilty of conspiracy for 4 types of agreements:<br />
<br />
Agrees too…<br />
<br />
1) commit an offense = engages in conduct that constitutes such crime<br />
<br />
2) attempt to commit an offense<br />
<br />
3) Solicit another to commit an offense<br />
<br />
4) Aid another in the planning or commission of the offense<br />
<br />
The object of the agreement must be a criminal act- and just a legal act in an unlawful way<br />
<br />
<br />
<br />
<br />
Merges w/ the underlying crime if underlying crime takes place- does not merge at CL though<br />
<br />
But if the conspiracy involved completion of additional offenses then conspiracy will not merge with the crime committed- ONLY merges with the substantive crime<br />
<br />
Ex) If arrested before the completion of the crime then conspiracy does not merge- Ex) Plan to rob V1 and V2, but arrested after V1 is robbed but before V2 is robbed then the robbery will NOT merge with conspiracy <br />
<br />
Subsection 7(c): defendant must either (1) advise his co-conspirators that he abandons the criminal purpose of the conspiracy or (2) inform law enforcement of the existence of the conspiracy and his participation in it.<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
MPC- does not follow Pinkerton Rule- not accountable for conduct of others sole because of the conspiracy between them<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
MPC Follows the Unilateral Rule! Do NOT need 2+ conspirators to charge conspiracy to D<br />
|}<br />
<br />
<br />
Accomplice Liability <br />
{| class="wikitable"<br />
|Accomplice Liability (CL)-Derivative Liability<br />
|MPC 2.06<br />
|-<br />
|AR: The act is the assistance- so under CL must actually assist not just try to assist<br />
<br />
<nowiki>*</nowiki>Mere presence is not enough- even if accompanying the perp. And then also flee- must aid/abet/ assist in some way <br />
<br />
<br />
– Can’t be an Accomplice by Omission- must have requisite intent<br />
<br />
If have a duty and failed to act then could be considered an accomplice (Police man not acting when a robbery happens)<br />
<br />
<br />
MR: (Dual MR Again):<br />
<br />
1) Must have intent to assist the P1<br />
<br />
2) Mus have intent that the crime also succeeds<br />
<br />
<nowiki>*</nowiki>P2 must share same intent at P1 to be found guilty under accomplice liability.<br />
<br />
<nowiki>*</nowiki> Knowing is enough if actually assisting- makes up for the lack of purposely<br />
<br />
P2 does not have to be directly present though- can be considered constructively present (On street or outside of door)<br />
<br />
<br />
''Accessory Before the Fact''- Falls under accomplice liability<br />
<br />
Ex) One who furnishes the fake license plate<br />
<br />
<br />
''Accessory After the Fact'' is no longer considered under accomplice liability''- instead charged a separate offense as obstruction of justice or hindering apprehension''- not derivative liability any longer at CL or the MPC<br />
<br />
<br />
Foreseeable Consequence Rule Exits under CL: Allows accomplice liability even if the P2 does not have the culpable mental state<br />
<br />
If a person encouraged/aided/abetted the commission of a crime then held liable for not just that crime but also the foreseeable consequences of that crime aided and abetted<br />
<br />
''Liscott'' Case- Found to be liable for murder under an accomplice theory because murder was natural consequence of such a robbery – even though did not have the intent to have such a result <br />
<br />
Corroboration Rule- where the testimony of accomplices is treated with caution and there must be other evidence which connects the D to the crime outside of the accomplice testimony<br />
<br />
<nowiki>**</nowiki>Many States Have <br />
<br />
<br />
Under the CL, the accomplice does not have to be the but-for cause- derivative liability= the P1 just has to be the but-for cause<br />
<br />
<nowiki>*</nowiki>It is enough that the accomplice just made it easier <br />
<br />
<br />
|MPC- just requires the attempt to assist- does not actually need to assist <br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
<br />
Section 4-<br />
<br />
Under the MPC, for a result crime the P2 must have the “''kind of culpability, if any, with respect to the result that is sufficient for the commission of the offense''” Foreseeable Consequence Rule Does NOT exist <br />
<br />
<br />
Section 3-<br />
<br />
“W/ the purpose of promoting or facilitating the offense” <br />
<br />
A(2)- says attempt to aid=does not have to actually aid<br />
<br />
<br />
Section 2- Liability for Conduct of Another<br />
<br />
Deals with the issue of using another to commit an offense (''Bailey'' case- acted as the puppet master)<br />
<br />
<br />
Uses an unwitting agent to do bidding= directly liable opposed to accomplice liability<br />
<br />
<br />
|}<br />
[[Category:General Outlines]]</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=Constitutional_Liberties&diff=42474Constitutional Liberties2022-06-01T00:41:29Z<p>Rezsue: Created page with " = What is Speech? = People often communicate through symbols other than words. Marches, picketing, armbands are just a few examples of expressive conduct. To deny 1st Amendme..."</p>
<hr />
<div><br />
= What is Speech? =<br />
People often communicate through symbols other than words. Marches, picketing, armbands are just a few examples of expressive conduct. To deny 1st Amendment protection for such forms of communication would mean a loss of some of the most effective means of communicating messages.<br />
<br />
Thus, the Supreme Court long has protected conduct that communicates under the first amendment. For example, the Supreme Court invalidated a law that required students to salute the flag. The Court explained that symbolism is a primitive but effective way of expression, the use of a flag to symbolize some system, idea, or institution is a shortcut form mind to mind. <br />
<br />
Conduct of all sorts can convey a message. Yet if taken to the extreme, it would mean virtually every criminal law would have to meet strict scrutiny.<br />
<br />
= What Conduct is Communicative =<br />
The Court observed that it is possible to find some kernel of expression in almost every activity a person does. But such kernel is not sufficient to bring the activity within the protection of the first amendment. In other words, under this approach, conduct is analyzed as speech under the first amendment if, there is the intent to convey a specific message and second, there is substantial likelihood that the message would be understood by viewers. <br />
<br />
= Levels of Scrutiny =<br />
<br />
* What is the end that the government is trying to achieve? What is the government trying to accomplish?<br />
* What are the means the government is using? How is the government trying to accomplish those ends?<br />
<br />
== Strict Scrutiny ==<br />
<br />
* Applies when the statute or policy at issue infringes a fundamental right<br />
* Burden of proof is on the government seeking to uphold the law<br />
* End test – does the statute further a compelling governmental purpose? If not, then it fails.<br />
* Means test – are the means necessary to achieve the compelling purpose?<br />
*# Do the means actually achieve the compelling purpose?<br />
*# Are the means no-less-rights-restrictive than necessary to achieve the purpose?<br />
<br />
== Rational Basis review ==<br />
<br />
* If no fundamental right is being infringed<br />
*# Burden of proof is on the party challenging the policy or statute<br />
*# End test – government interests only needs to be legitimate and not compelling<br />
*# Means test- means chosen only need to rationally relate to the government’s purpose<br />
*## Really easy test to pass<br />
*## Rationally related is interpreted as a “non-crazy way”<br />
*## Purpose does not even have to be the real purpose – it can be anything the Court thinks up<br />
<br />
== Intermediate Scrutiny ==<br />
<br />
* Burden of proof is still on the government <br />
* Ends test- government’s end only needs to be important (easier than compelling, harder than legitimate)<br />
* Means test – government’s means need to be substantially related to achieving the government’s ends (easier than necessary, harder than rationally related)<br />
* When the Court says “apply a heightened level of scrutiny” it can mean this or strict.<br />
<br />
== Analytical Framework to use scrutiny ==<br />
<br />
=== Step 1 ===<br />
<br />
* Is speech being regulated?<br />
*# If no then not protected by the first amendment<br />
*# If yes<br />
*## Does this fall under government speech? If yes, use that separate analytical approach<br />
*## If this does not fall into government speech, go to step 2<br />
<br />
=== Step 2 ===<br />
<br />
* Is the speech being restricted or compelled in a serious way? (infringement = a direct ban or compulsion of expression, or a direct and substantial interference with expression)<br />
*# If no, ten rational basis review applies<br />
*# If yes, then step 3<br />
<br />
=== Step 3 ===<br />
<br />
* Is the regulation unconstitutionally vague and/or substantially overbroad?<br />
*# If the answer is Yes, then it is unconstitutional, but keep doing the analysis in case the Court disagrees with you<br />
*# If no, go to next step<br />
*# Note, all laws are somewhat vague or overbroad. The question is whether the law or policy is too vague or too overbroad. This is not a strict scrutiny issue, it is automatically unconstitutional if it is too vague and too overbroad<br />
<br />
=== Step 4 ===<br />
<br />
* Is the regulation content based?<br />
*# If no, it is content-neutral, which means it gets intermediate scrutiny<br />
*## Under IS, to be upheld, the government must have an important interest in regulating the speech and means chosen must be substantially related to that interest<br />
*## Time/Place/Manner version: Is the law narrowly tailored or closely related to serving a significant or substantial government interest? Also examine the availability of alternative channels of communication<br />
*# If yes, it is content-based, go to next step<br />
<br />
=== Step 5 ===<br />
<br />
* Is speech in one of the not-fully-protected content-based categories? (incitement of fighting words, obscenity, child porn, some student speech, libel)<br />
*# If yes, then it gets a rational basis review<br />
*## But it may be the subject to its own particular set of tests established by the Court<br />
*## But if government regulates SOME speech in the category and not the other speech, based on content, the regulation gets strict scrutiny<br />
*# If No, it gets strict scrutiny<br />
*## Unconstitutional unless government has compelling interest in regulating speech and the means chosen are necessary to achieve that purpose <br />
*## Important: If the law is both content based and viewpoint based, it will fail strict scrutiny because the government interest is illegitimate – as there is no compelling interest for government censorship based on viewpoint<br />
<br />
= State Action =<br />
Generally, the Congress may not regulate the actions of private entities. Often for cases involving the Constitution, the first question to answer is whether there is a state actor involved. State actors can be State government officials, judges, and Congress itself. However, it can also extend to people the State has given authority to such as public school teachers. <br />
<br />
Another factor to consider is whether an entity is truly a private one. In Marsh v Alabama, the Court held that a company-owned town is considered a public entity if it is open to the public. Another consideration is to see whether the action of the private entity is in a close enough nexus between the state and the private action. <br />
<br />
== Private entities as public/state actors ==<br />
<br />
=== MANHATTAN COMMUNITY ACCESS CORPORATION v. HALLECK ===<br />
Facts: The plaintiffs made a film which they broadcasted on MNN (a public access network) and it led to their suspension due to its controversial nature. They alleged that this was a violation of their first amendment rights.<br />
<br />
Rules: The public-function exception to the state-action doctrine considers a private entity a governmental actor only if it is performing a traditionally and exclusively public function.<br />
<br />
Reasoning: To preserve robust protection of individual liberty, private entities are treated as governmental actors only in limited circumstances. Private entities may be considered governmental actors if they are compelled by the government to perform a particular action, if the act jointly with the government, and if publication function exception to state-action doctrine applies. Merely hosting a platform for speech doesn’t transform a private entity into a governmental actor subject to the first amendment. Very few meet this category.<br />
<br />
=== Marsh v. Alabama ===<br />
Facts: A JHV’s witness was charged with trespassing for spreading pamphlets in the company-town of Chickasaw. She was told she needed a permit and was told to leave. When she asked for a permit, she was kicked out. She tried again to spread her pamphlets, but was arrested. <br />
<br />
Rules: The first and fourteenth amendment protections of speech and religion still apply to individuals when operating in a privately-owned town if the town is open to the public.<br />
<br />
Reasoning: Chickasaw acted like a regular municipality and permitted non-employees to enter its facilities. Thus, Marsh had the right to distribute her religious pamphlets there. <br />
<br />
Had the title to Chickasaw belonged not to a private but to a municipal corporation and had appellant been arrested for violating a municipal ordinance rather than a ruling by those appointed by the corporation to manage a company-town it would have been clear that appellant’s conviction must be reversed.<br />
<br />
=== Jackson v. Metropolitan Edison Co. ===<br />
Facts: A guy named Dobson placed the electric bill under his name and never paid. Jackson’s electricity was cut because of this, she requested that the new account is to be made under her son’s name, which the company did not do so since he’s only 12. The electricity was cut off. Jackson sued Metropolitan, alleging that this was an unconstitutional taking of property since Metropolitan had a monopoly, was state regulated, and had a public interest and is thus a state actor.<br />
<br />
Rules: For the purposes of the fourteenth amendment, an action of a private entity will only be treated as a state action if there is a sufficiently close nexus between the state and the challenged action of the private entity so that the action of the latter may be fairly treated as the state itself. <br />
<br />
Reasoning: Even if a business has a public-interest, has a monopoly, or state-regulated, it still would not be considered state action. A business is only considered a state actor if its actions are so connected with the state that it is essentially the actions of the state. The state is not required to provide electricity, so Metropolitan’s actions was not subject to state regulation.<br />
<br />
Perhaps in recognition of the fact that the supplying of utility service is not traditionally the exclusive prerogative of the State, petitioner invites the expansion of the doctrine of this limited line of cases into a broad principle that all businesses “affected with the public interest” are state actors in all their actions. We decline the invitation.<br />
<br />
Marsh and Jackson use very different tests for public function. Marsh uses a balancing test and looks to whether the private property is used for a public purpose. Jackson focuses on whether it is an activity traditionally, exclusively done by the government. <br />
<br />
== Application of the Close Nexus rule ==<br />
<br />
=== Terry v Adams ===<br />
Facts: Fort Bend County was using the guise of a political party, through the Jaybird Party, to influence elections and to discriminate against black voters and candidates. <br />
<br />
Rules: The Fifteenth Amendment does not permit the exclusion of African-American voters from primary elections run by private parties when those elections ultimately influences later publicly-run elections.<br />
<br />
Reasoning: The county was using the Jaybird Party as a device to produce the equivalent of a prohibited election by circumventing the fifteenth amendment. It acted unconstitutionally by doing so. The fifteenth amendment bans all racial discrimination in voting, affects all level of government, and applies to private political clubs.<br />
<br />
* Here the Jaybird club influenced the election heavily in order to discriminate against the black community. The actor is the club and the challenged act is their discrimination. A close nexus that bridges them is the results of the election.<br />
<br />
=== Smith v Allwright ===<br />
Facts: Texas mandated that its political parties hold primary elections. Moreover, Texas delegated the primary election process to the parties themselves. Only party members could vote in a primary election.<br />
<br />
Rule: States may not permit parties to restrict primary voting on a racial basis.<br />
<br />
Reasoning: According to the Fifteenth Amendment, such political parties perform a state function, and the state holds responsibility for the decision. Direct action by states to restrict primary voting access on a racial basis violates equal protection.<br />
<br />
=== Evans v. Newton ===<br />
Facts: In 1911, United States Senator Augustus Bacon executed a will devising a tract of land to the Mayor and City Council of the City of Macon, Georgia. The will specifically provided that the land was to be used as a public park open exclusively to white people and managed by white people. The City of Macon managed the park through its Board of Managers according to these terms for a while, but then opened it up to African Americans when it believed it could no longer constitutionally exclude them.<br />
<br />
Rules: If a gift or trust from a private individual to a public entity contains a requirement that property be segregated by race or color, the public entity may not enforce the segregation.<br />
<br />
Reasoning: The city remained entwined in the park’s management and control. The park thus remained subject to the restraints of the Fourteenth Amendment. Merely changing the trustee from a public entity to a private entity will not change the “public” character of the park. This conclusion is supported by the nature of the service, as parks are traditionally thought of as public areas that are open to and used by the public.<br />
<br />
One is the right of the individual to pick his own associates so as to express his preferences and dislikes, and to fashion his private life by joining such clubs and groups as he chooses. The other is the constitutional ban in the Equal Protection Clause of the Fourteenth Amendment against state-sponsored racial inequality, which of course bars a city from acting as trustee under a private will that serves the racial segregation cause.<br />
<br />
What is “private” action and what is “state” action is not always easy to determine. “Only by sifting facts and weighing circumstances” can we determine whether the reach of the Fourteenth Amendment extends to a particular case. The range of government activities is broad and varied, and the fact that government has engaged in a particular activity does not necessarily mean that an individual entrepreneur or manager of the same kind of undertaking suffers the same constitutional inhibitions.<br />
<br />
=== Hudgens v National Labor Relations Board ===<br />
Facts: Hudgens’ shopping center had a Butler Shoe branch. Employees of Butler Shoe all protested via a strike. The employees picketed in front of the Hudgens Branch of Butler Shoe and were asked to leave. <br />
<br />
Rules: A private shopping mall may constitutionally exclude picketing on its premises even if that picketing relates to the actual activities of the tenant stores.<br />
<br />
Reasoning: The Constitution’s free-speech guarantee guards against only government regulation of speech. Private parties are typically free to control speech on their property. Some exceptions to exists if a private property acts like public property like in Marsh<br />
<br />
Logan Valley Holding - Where a privately-owned shopping center serves as the community business block and is open to the general public, the state may not use its “no trespassing” laws to prevent citizens from exercising their First Amendment rights to peacefully picket on its premises.<br />
<br />
Lloyd Holding – A private business may constitutionally exclude the distribution of handbills on its property when those handbills are completely unrelated to the business’ functions, and there are alternative means for distributors to relay their message.<br />
<br />
Both are overruled by this case.<br />
<br />
== Entanglement Exception ==<br />
Under this exception, the Constitution applies if the government affirmatively authorizes, encourages, or facilitates private conduct that violates the Constitution. Either the government must cease its involvement with the private actor or the private entity must comply with the Constitution.<br />
<br />
The key question, then, is what degree of government involvement is sufficient to make the Constitution applicable? What type of government encouragement are sufficient for state action? Unfortunately, the entanglement exception cases are even more inconsistent than those concerning the public function exception.<br />
<br />
=== Judicial and Law Enforcement actions ===<br />
<br />
==== Shelley v Kraemer ====<br />
Facts: The Shelleys bought a house in a racist area that had an anti-black anti-asian covenant, which the homeowners sought to enforce.<br />
<br />
Rules: State court enforcement of a racially restrictive covenant constitutes state action that violates the Equal protection clause of the 14th amendment.<br />
<br />
Reasoning: The covenant denied the Shelleys rights guaranteed by the 14th amendment when it didn’t give them an equal protection as other races would, a due process on the takings of their property, nor privileges and immunities from the enforcement of the covenant. The private nature of the covenant was not unconstitutional. However, the judicial enforcement of it is considered a state action, and that state action is unconstitutional.<br />
<br />
The short of the matter is that from the time of the adoption of the Fourteenth Amendment until the present, it has been the consistent ruling of this Court that the action of the States to which the Amendment has reference, includes action of state courts and state judicial officials.<br />
<br />
=== Fair Attribution ===<br />
<br />
==== Lugar v. Edmondson Oil Co. ====<br />
Facts: Lugar (defendant) owned and operated a truck stop. He became indebted to its supplier, Edmondson Oil Co. (plaintiff). Edmonson sued for the debt in Virginia state court, and sought a prejudgment attachment of Lugar's property. This required Edmonson to allege a reasonable belief that Lugar was disposing of property to keep it from creditors.<br />
<br />
Rules: Due-process requirements must be satisfied in prejudgment attachment proceedings if state officials jointly participate with private creditors in securing the property in dispute.<br />
<br />
Reasoning: Is the depravation of a federal right fairly attributable to the state?<br />
<br />
* The claimed deprivation must result from the exercise of some right or privilege having its source in state authority<br />
* The party accused of the depravation must be someone who can fairly be treated as a state actor.<br />
** This includes state officials or anyone who act as or gets reasonable aid from the state to finish the deprivation.<br />
<br />
Here, the claimed deprivation resulted from the exercise of some right, which is the filing of the prejudgment attachment through the clerk. The use of the clerk and sheriff also satisfies the second element of being fairly treated as a state actor.<br />
<br />
The Court of Appeals erred in holding that in this context “joint participation” required something more than invoking the aid of state officials to take advantage of state-created attachment procedures.<br />
<br />
==== Edmonson v. Leesville Concrete Co. ====<br />
<br />
# any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought. Any such declaration shall have the force and effect of a final judgment or decree and shall be reviewable as such.<br />
<br />
Issues: Does a private civil litigant violate the constitutional principle of equal protection by using preemptory challenges to remove prospective jurors based on their race?<br />
<br />
Rules: A private litigant in a civil case may not use preemptory challenges to exclude jurors on account of their race because the exercise or preemptory challenges invokes state action. Race-based preemptory challenges by private litigants violate equal protection.<br />
<br />
Holding: Yes<br />
<br />
Reasoning: Although a private civil litigant’s conduct doesn’t implicate constitutional protections. <br />
<br />
Can the private party charged with the deprivation be described in all fairness as a state actor? Look at:<br />
<br />
* Extent to which the actor relies on governmental assistance and benefits<br />
* Whether the actor is performing a traditional government function<br />
* Whether the injury caused is aggravated in a unique way by the incidents of <br />
<br />
governmental authority<br />
<br />
Thanks to Lugar we ask first whether the claimed constitutional deprivation resulted from the exercise of a right or privilege having its source in state authority and second, whether the private party charged with deprivation could be described in all fairness as a state actor. <br />
<br />
The first factor is satisfied because the challenges were from an exercise of a right having it source in state authority. Second, Leesvile in this case functioned as a government actor, and because the court allowed for this race-based action by a government actor, the constitutional harm was aggravated because it permitted such action in the halls of justice.<br />
<br />
The Supreme Court ruled that under the equal protection component of the due process clause of the Fifth Amendment, a private civil litigant that originated its case in a federal district court could not use preemptory challenges to exclude prospective jurors on the account of race. These challenges were only permitted when a statute or law allowed them. <br />
<br />
=== Government Regulation ===<br />
The court also has considered the entanglement exception in instances when the government licenses or regulates an activity. In general, government licensing or regulating is insufficient for finding of a state action, unless there is other government encouraging or facilitating of unconstitutional conduct. <br />
<br />
==== Burton v Wilmington Parking Authority ====<br />
Facts: The authority owned land which it leased to Eagle Coffee. Burton tried to buy a drink from the shop, but was told to leave because he wasn’t white. Burton sued.<br />
<br />
Rules: If government action is sufficiently intertwined with private commerce, the private actors’ behavior may be governed by the Equal Protection clause.<br />
<br />
Reasoning: If a state or local government participates in private enterprise, then the interplay may constitute enough state action for the 14th amendment to govern the party’s action. The Parking authority owned the property and it is used for their public function of creating parking spaces. The leased areas for the coffee shop was a commercial activity to make the structure economically self-sustaining. The parking authority and the coffee shop were intertwined, and therefore, the coffee shop can be governed by the Equal Protection Clause.<br />
<br />
It is impossible to create a precise formula or rule. Only after sifting facts and circumstances can the extent of state involvement in private conduct can be evaluated.<br />
<br />
==== Moose Lodge No. 107 v. Irvis ====<br />
Facts: Moose Lodge was a whites only club and Irvis was invited to come in, but was refused service by staff. <br />
<br />
Rules: The issuance of a state license to a private organization did not turn it into a state actor.<br />
<br />
Reasoning: The lodge was a private actor that received no state funding and Irvis was not invited to be nor was he ever a member of the lodge, so he lacked standing to sue about membership discrimination and can only do so relating to guest discriminations. In that regard, nothing that the lodge did can be fairly attributed to a state actor.<br />
<br />
There was a lack of a more active involvement by the government in the entity’s affairs nor was there a relationship between the private entity and the government.<br />
<br />
=== Entwinement ===<br />
The Supreme Court has recognized two narrow exceptions to the state action requirement: the public functions exception, which provides that private conduct must comply with the constitution when it is performing a task that has traditionally, exclusively, been done by the government; and entanglement, in which the government affirmatively authorizes, encourages, or facilitates unconstitutional conduct. <br />
<br />
==== BRENTWOOD ACADEMY v. TENNESSEE SECONDARY SCHOOL ATHLETIC ASSOCIATION ====<br />
Rules: A private statewide regulatory association with a majority of its membership as public entities engages in state action if it enforces rules against a member.<br />
<br />
Holding: Yes.<br />
<br />
Reasoning: State action occurs if there’s a close nexus between the state and the action in question. In this case, the Court looked at the facts on whether there was pervasive public entwinement in an athletic association’s management or control and whether the association’s member public schools are from a single state. Pervasive government entwinement occurred because 84% of the members were public school and all the schools are from one state. Therefore, the association engaged in state action.<br />
<br />
Brentwood Rule<br />
<br />
A private actor’s challenged activity can be state action if:<br />
<br />
* The activity results from the state’s exercise of coercive power<br />
* The state overtly or covertly provides significant encouragement<br />
* The private actor willfully participates in joint activity with the state or its agents.<br />
<br />
= First Amendment – Freedom of Expression =<br />
<br />
== Types of Protected Speech ==<br />
The Supreme Court has identified some categories of unprotected speech that the government can prohibit and punish. Incitement of illegal activity, fighting words, and obscenity are such examples. Additionally, there are categories of less-protected speech where the government has more latitude of regulate than usual under the First Amendment. For instance, government generally can regulate commercial speech if intermediate scrutiny is met. Also, the Court has indicated that some types of sexually oriented speech, although protected by the first Amendment, are deemed law value and thus susceptible to government regulation.<br />
<br />
These categories are defined based on the subject matter of the speech and thus represent an exception to the usual rule that content-based regulation must meet strict scrutiny. It was traditionally thought that the government had broad latitude to prohibit ad regulate speech within these categories of unprotected expression. The conventional view was that laws in these areas would be upheld as long as they met the rational basis test that all government actions must satisfy. However, the Court indicated that generally, content-based distinctions within categories of unprotected speech must meet strict scrutiny.<br />
<br />
=== Incitement of Illegal Activities ===<br />
The issue of incitement also is important because it poses a basic value question: How should society balance its need for social order against its desire to protect freedom of speech? When, if at all, may speech that advocates criminal activity or the overthrow of the government be stopped to promote order and security?<br />
<br />
Some commentators have argued that all such advocacy of illegal conduct should be deemed unprotected by the first amendment. The supreme court has never taken this view. <br />
<br />
Thus, the court has been confronted with the task of defining when advocacy of illegality constitutes unprotected incitement and when it is safeguarded by the First Amendment. Over the court of this century, the Supreme Court has used at least four major approaches in this area.<br />
<br />
=== The clear and present danger test ===<br />
<br />
==== Schenk v United States ====<br />
Facts: Schenk was distributing leaflets which encouraged people to oppose the draft during World War I. They were charged with the violation of the Espionage Act of 1917 which outlawed the obstruction of military recruiting and enlisting.<br />
<br />
Rules: During wartime, the distribution of written material urging peaceful resistance by making statements against the draft’s legality poses a clear and present danger no protected by the first amendment.<br />
<br />
Reasoning: The distribution of leaflets wasn’t speech or expressive conducted protected by the first amendment. If the country hadn’t been at war, the defendant’s expression would’ve been protected by the First Amendment, however, duh, it was at war. In a world war. Also, they specifically targeted their words at draft-eligible men with the intent to obstruct the draft. The first amendment doesn’t protect speech or expressive conduct that creates a clear and present danger of: (1) causing others to violate the law and (2) causing harm to others.<br />
<br />
==== FROHWERK v. UNITED STATES ====<br />
Facts: Two months after the United States’ entry into World War I, Congress enacted the Espionage Act of 1917 (EA). The law made it a crime for any person during time of war, to “willfully cause or attempt to cause insubordination, disloyalty, mutiny, or refusal of duty in the military or the naval forces of the United States.” In 1915, the Missouri Staats Zeiung, a newspaper published in Kansas City, Missouri, issued a series of twelve articles written by Jacob Frohwerk (defendant) denouncing the United States’ involvement in World War I<br />
<br />
Rules: The First Amendment’s protection for freedom of speech doesn’t render all types of speech immune from legislative constraints.<br />
<br />
Reasoning: In Schenk, the court held that the First Amendment doesn’t protect a person’s words if there is a clear and present danger that they will bring about the substantive evils that Congress has the right to prevent. Here, the clear and present danger rule requires that the speech be reviewed in the context when and where it was made and if it is likely to incite unlawful conduct.<br />
<br />
==== Debs v. United States ====<br />
Facts: The Espionage Act of 1917 (EA) made it a crime to “convey information with intent to interfere with the operation or success of the United States or to promote the success of its enemies.” The EA had the effect of constraining sedition and political speech during World War I. In 1918, Eugene Debs (defendant), leader of the Socialist Party of America, gave a speech protesting the United States’ involvement in World War I<br />
<br />
Rules: Speech critical of the United States government’s war effort may be punished as interference with a war effort in time of war<br />
<br />
Reasoning: While the main theme of Debs’ speech was to promote the socialist movement, it also encouraged the resistance of the draft. <br />
<br />
==== Abrams v. United States ====<br />
Facts: Abrams and four others (plaintiffs) were convicted of conspiring to violate the Espionage Act of 1917 (EA), as amended in 1918. Abrams printed many copies of leaflets, written both in English and Yiddish, denouncing the United States’ decision to send troops to Russia as part of World War I. Other leaflets denounced the United States’ general involvement in World War I and United States’ efforts to curtail the Russian Revolution.<br />
<br />
Rules: Speech that would ordinarily be protected by the First Amendment, may nevertheless be prohibited when it is used in such circumstances and is of such a nature that as to create a clear and present danger of substantive evils that Congress has a right to prevent<br />
<br />
Reasoning: The leaflets are inciting sedition at the height of war.<br />
<br />
Holmes Dissent: Only speech that poses a present danger of immediate evil can be restricted. These leaflets do not pose any immediate danger to the United States. “The ultimate good desired is better reached by free trade in ideas”<br />
<br />
=== The Reasonableness Approach ===<br />
<br />
==== Gitlow v New York ====<br />
Facts: Gitlow, a socialist, was arrested in 1919 for distributing a “Left Wing Manifesto" that called for the establishment of socialism through strikes and class action of any form. Gitlow was convicted under New York’s Criminal Anarchy Law, which punished advocating the overthrow of the government by force.<br />
<br />
Rules: Producing and distributing written materials advocating for the government’s overthrow is a clear and present danger that a state could criminally punish.<br />
<br />
Reasoning: The state didn’t violate the First Amendment by punishing Gitlow for producing and distributing the manifesto because he posed a clear and present danger. The court assumes that Freedom of Speech and the press apply to both state governments and federal governments via the Due Process Clause. The New York criminal anarchy statute didn’t violate Gitlow’s right to free speech. The manifesto posed a clear and present danger, an exception to the first amendment. The manifesto wasn’t an abstract statement of political belief. It advocated and urged action to overthrow and destroy democracy and capitalism. The natural tendency and probable effect of the manifesto was to bring about the evil that the state was entitled to prevent.<br />
<br />
==== Whitney v. California ====<br />
Facts: California’s Criminal Syndicalism Act (CCSA) prohibited “advocating, teaching, or aiding and abetting the commission of crime, sabotage, or unlawful acts of force and violence or unlawful methods of terrorism as a means of accomplishing a change in the industrial ownership or control or effecting any political change.”<br />
<br />
Rules: The first amendment allows states to criminalize membership to an organization that advocates the illegal overthrow of government.<br />
<br />
Reasoning: The first amendment didn’t protect the type of advocacy in which Whitney and her fellow communist party members engaged at the state convention. Her organization makes statements that endangers the foundations of organized government.<br />
<br />
=== The Brandenburg Test ===<br />
<br />
==== Brandenburg v. Ohio ====<br />
Facts: Brandenburg (defendant) was a leader of the Ku Klux Klan in the State of Ohio (plaintiff). Brandenburg was convicted under the Ohio Criminal Syndicalism Act (OCSA) for “advocating the duty, necessity, or propriety of crime, sabotage, violence, or unlawful methods of terrorism as a means of accomplishing industrial or political reform,” and for “voluntarily assembling with any society, group, or assemblage of persons formed to teach or advocate the doctrines of criminal syndicalism.”<br />
<br />
Rules: Under the first amendment, a state may not outlaw speech unless the speech is directed to inciting violence and imminently likely to do so.<br />
<br />
Reasoning: The court here distinguished the difference between abstract advocacy unlikely to produce concrete action with actual advocacy, which is likely to produce concrete action.<br />
<br />
Brandenburg is the Supreme Court’s most speech-protective formulation of an incitement test. A conviction for incitement under Brandenburg is constitutional only if several requirements are met: imminent harm, a likelihood of producing illegal action, and an intent to cause imminent illegality. None of the earlier tests had contained an intent requirement. Also, none ever had so clearly stated a requirement for a likelihood of imminent harm. Brandenburg does not answer, however, how imminence and likelihood are to be appraised.<br />
<br />
=== Brandenburgh Applications ===<br />
<br />
==== In NAACP v. Claiborne Hardware Co., 458 U.S. 886 (1982), ====<br />
the Court overturned a judgment against the NAACP for a boycott of white-owned businesses that it alleged engaged in racial discrimination. In part, the trial court had based the liability of the NAACP for damages from the boycott on a speech by an NAACP official that included the statement, “If we catch any of you going in any of them racist stores, we’re gonna break your damn neck.”<br />
<br />
The Court explained, “In the passionate atmosphere in which the speeches were delivered, they might have been understood as inviting an unlawful form of discipline or, at least, intending to create a fear of violence whether or not improper discipline was specifically intended. . . . This Court has made clear, however, that mere advocacy of the use of force or violence does not remove speech from the protection of the First Amendment. .<br />
<br />
==== Holder v. Humanitarian Law Project ====<br />
Facts: The Humanitarian Law Project (HLP), five other organizations, and two individuals (collectively Plaintiffs) filed suit in district court against U.S. Attorney General Eric Holder, Jr., and others (collectively Defendants) challenging the constitutionality of a federal law that prohibited the giving of “material support or resources” to certain foreign organizations designated by the Secretary of State as engaging in terrorist activities. 18 U.S.C. § 2339B(a)(1). Specifically, Plaintiffs sought to provide training, education, and other resources to two designated terrorist groups: the Kurdistan Workers’ Party, also referred to as the Partiya Karkeran Kurdistan (PKK) and the Libertarian Tigers of Tamil Eelam (LTTE).<br />
<br />
Rules:<br />
<br />
* A material-support statute isn’t unconstitutionally vague.<br />
* A federal law barring material support to certain foreign organizations doesn’t infringe upon free speech or freedom of association.<br />
<br />
Reasoning:<br />
<br />
* The ninth circuit failed to apply the rule that a person who engages in illegal conduct may not challenge the vagueness of the law as applied to others’ conduct. The statutory definitions of material support and related terms provide a person of ordinary intelligence with fair notice of what’s prohibited. Although the statute was not clear in every application, it is clear in their application to the proposed conduct. Likewise, the advocacy entirely independent of a foreign terrorist organization wouldn’t be unlawful.<br />
* The government’s interest in combatting terrorism is an urgent objective of the highest order. Therefore, congress was justified in concluding that material support to promote humanitarian or peaceful ends may be diverted by a terrorist group to illegal ends.<br />
<br />
== Fighting Words ==<br />
The proceeding section focuses on when speech can be punished because it advocates illegal acts or the throwing of government. When may speech be punished because of the risk that it may provoke an audience into using illegal force against the speaker?<br />
<br />
=== Chaplinsky v. New Hampshire ===<br />
Facts: Appelant is a member of the Jahova’s Witness and was convicted in the municipal court for violation of public law of NH saying “No person shall address any offensive, derisive, or annoying word to any other person who is lawfully in any street or public space” The complaint charged the appellant with “force and arms in a certain public place in Rochester on the public sidewalk on the easterly side of Wakefield street, did unlawfully repeat the words, addressed to the complainant, “you are a goddamned racketeer and a fascist” <br />
<br />
Rules: “Fighting words” that incite others to violence are not protected by the First Amendment from governmental regulation<br />
<br />
Reasoning: Even under the broadest meaning of the first amendment, the freedom of speech cannot be absolute. Punishment of certain narrow categories of speech has never been questioned under the Constitution. These categories included lewd, and obscene, profane, and libelous speech, as well as fighting words. Their very utterance, inflict injury or tend to incite an immediate breach of peace. This type of speech has very little social value and thus make no contribution to the marketplace of ideas protected by the first amendment.<br />
<br />
Chaplinsky appears to recognize two situations where speech constitutes fighting words: <br />
<br />
* Where it is likely to cause a violent response against the speaker and<br />
*# As to the former, the danger that the listener will be provoked to fight, the issue is whether the appropriate response is to punish the speaker or rather to punish the person who actually resorts to violence.<br />
* where it is an insult likely to inflict immediate emotional harm. <br />
*# As to the latter, speech that inflicts an emotional injury, the question—which is key in the discussion of hate speech considered below—is whether speech should be punished because it is upsetting or deeply offensive to an audience.<br />
<br />
Each aspect raises questions about whether such speech should be outside the protection of the First Amendment. <br />
<br />
=== Fighting Words law invalidated as vague and overbroad ===<br />
<br />
==== Gooding v. Wilson ====<br />
Facts: The defendant was convicted in Georgia on two counts of using opprobrious words and abusive language to insult two Georgian cops. <br />
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Rules: While the First Amendment does generally not protect “fighting words”, a state statute prohibiting them may still be unconstitutional if it is over-inclusive.<br />
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Reasoning: The statute can only be upheld as constitutional if it prohibits words that fall under a narrow category of speech no protected by the 1st and 14th Amendments. Under Chaplinsky, states may punish the use of words that is blatantly insulting or meant to incite conflict. However, even in such a limited class, states must still be careful to narrowly draw their statutes so that they do not infringe upon protected speech. No state statute that purportedly criminalizes fighting words have been upheld because of the tendency to be overbroad. in criminalizing “opprobrious” and “abusive” speech, is over-inclusive because it encompasses more speech than just “fighting words.”<br />
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=== Narrow Fighting Word laws as Content-Based restriction ===<br />
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==== R.A.V v City of St Paul MN ====<br />
Facts: The defendant, a juvenile, and several teens burned a wooden cross on the lawn owned by a clack family. They were arrested for violating the St Paul Bias Motivated Crime ordinance. The ordinance prohibited the placement of hateful symbols, which one knows or has reasonable grounds to know arouse anger, alarm or resentment in others on the basis of race, color, creed, religion, or gender.<br />
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Rules: Under the First Amendment, states may not regulate categories of unprotected speech, such as “fighting words,” on the basis of content.<br />
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Reasoning: A statute that regulates the content of speech on its face will only survive a constitutional challenge if it necessary to serve a compelling state interest. This means the statute will be struck down if there is a content-neutral alternative that satisfies the state’s objective.<br />
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The government is generally barred from regulating ideas expressed by speech or conduct. There are a number of traditional exceptions to this rule that allow the government to regulate speech with only ‘slight social value” such as fighting words. Nevertheless, the government may not use these exceptions to create content-based regulations. In this case, the Court is bound by Minnesota interpretation of the statute that regulates on fighting words within the meaning of Chaplinsky. Chaplinsky defines “fighting words” as “conduct that itself inflicts injury or tends to incite immediate violence.” Such language is not entirely without value but is not essential to the exposition of ideas. This implies that a state may not be permitted to regulate fighting words in all contexts. The constitutionality of such regulation ultimately depends on various elements of content expressed in speech and the secondary effect stemming from that content. The ordinance is unconstitutional despite its narrow construction. The statute specifically applies to fighting words that provoke violence “on the basis of race, color, creed, religion, or gender.” Under these terms, fighting words are permissible as long as they do not address one of the disfavored topics.<br />
<br />
==== R.A.V can be appraised on many levels. ====<br />
1. It can be analyzed in terms of what it means for the fighting words doctrine. Here, fighting words laws will be upheld only if it does not draw content-based distinctions among types of speech, such as by prohibiting fighting words based on race, but no based on political affiliation. The problem, is that it will be very difficult for legislation to meet this requirement without being overbroad and vague.<br />
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2. It can analyzed in terms of the Court’s holding that there is a strong presumption against content-based discrimination within categories of unprotected speech. This was the most divisive issue for the justices. On one hand, Scalia makes a powerful argument that the government should not be able to prohibit only obscenity or fighting words, but on the other, the concurring justices make a persuasive point that inevitably, in regulating categories of unprotected speech, the government will not forbid all such speech but draw lines. Such lines are vulnerable.<br />
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3. There is the question of whether the case should have been found to meet the exceptions that Scalia recognized where content-based distinctions within categories of unprotected speech should be allow. One instance is where the distinction advances the reason why the category is unprotected. <br />
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==== Hostile Audience ====<br />
In some cases, especially in the 40s and 50s, the Supreme Court applied the clear and present danger test in dealing with the issue of when the government may punish individuals for speech that provokes a hostile audience. For example, in Terminiello v Chicago, the Court overturned a conviction for disturbing the peace because it was not shown that the speech posed a clear and present danger of lawlessness.<br />
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The court overturned the conviction and found that the jury instruction was not sufficiently protective of speech. The Court declared that a function of free speech under our system is invite dispute.<br />
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* Cantwell v Connecticut – The Court overturned a conviction for disturbing the peace because of the absence of proof of a clear and present danger. Cantwell was JW and was prosecuted for playing music on a street corner that attacked the Roman Catholic religion. The Court found that there was no such clear and present menace to public peace and order.<br />
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* In Feiner a guy was convicted for speech that he gave that sharply criticized the president and a local official for their inadequate records on civil rights. he Court quoted Cantwell to state that the government may prevent or punish speech that poses a clear and present danger. The Court concluded: “It is one thing to say that the police cannot be used as an instrument for the suppression of unpopular views .<br />
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The problem with the clear and present danger test in this context is that it allows an audience reaction, if hostile enough, to be a basis for suppressing a speaker. A speaker who is acting completely lawfully can be silenced because of illegal behavior—threats of violence and use of force—by members of the audience<br />
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* Cox v Louisiana – Some members of the audience found the speech inflammatory and the speaker was arrested a day after the demonstration. The Court overturned the conviction and again emphasized the ability of the police to control the crowd. The Court stated that “it is virtually undisputed, however, that the students themselves were not violent and threatened no violence. The fear of violence seems to have been based on the reactions of the groups of white citizens looking from across the street<br />
* Gregory v City of Chicago – The Court unanimously overturned convictions for disturbing the peace for a group of demonstrators who had been arrested when an angry group threatened them. The demonstrators were marching to the mayor’s house when some members of the opposing group reacted angrily and threw rocks at them.<br />
<br />
== Problem of Racist Speech ==<br />
Over the past few decades, there has been an important debate among scholars as to whether and when the government may punish racist speech. Those who favor the restrictions emphasize how hate speech undermines the constitutional value of equality. It is also argued that hate speech is form of verbal assault that should be punishable by law. But those who oppose such hate speech restrictions maintain that it is wrong to stop speech because it is distasteful and offensive. It is also argued that it is impossible to formulate a definition of racist speech that is not constitutionally vague and overbroad. It may also be used against minorities. <br />
<br />
=== Virginia v. Black ===<br />
Facts: In 1998, Barry Black (defendant) led a Ku Klux Klan rally in Virginia. At the close of the rally, the participants burned a cross. Black was charged with violating a Virginia statute that made it illegal to burn a cross if the burning was done with intent to intimidate someone. The statute also stated that the burning of a cross in itself is prima facie evidence of intent to intimidate. At Black's trial, the court instructed the jury that the burning of the cross itself was sufficient evidence from which to infer the required intent to intimidate.<br />
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Rules: A statute is unconstitutional if it both bans cross burning done with the intent to intimidate and states that the act of burning a cross is itself is a prima facie evidence of the intent to intimidate.<br />
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Holding: No, but the provision distinguishing cross burning as a prima facie evidence of intent to intimidate is unconstitutional<br />
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Reasoning: The first amendment protects not just speech, but also expressive conduct. Thus, cross burning perpetrated with the intent to convey a political or ideological message is expressive conduct. Nevertheless, there are some limits; such as constitutional limits on true threats.<br />
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== True threats ==<br />
This encompass those statements where the speaker means to communicate a serious expression of an intent to commit an act of unlawful violence to a particular individual or group of individuals.<br />
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According to the Court, intimidation is a type of true threat; therefore, cross burning perpetrated as an intimidation tactic may be prohibited. The prima facie requirement fails to distinguish between cross burning as an intimidating hate crime or a political speech.<br />
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the hallmark of the protection of free speech is to allow “free trade in ideas”—even ideas that the overwhelming majority of people might find distasteful or discomforting. Thus, the First Amendment “ordinarily” denies a State “the power to prohibit dissemination of social, economic and political doctrine which a vast majority of its citizens believes to be false and fraught with evil consequence.”<br />
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The fact that cross burnings are a symbolic expression does not resolve the constitutional question. In RAV, the court held it unconstitutional for a local ordinance banning certain symbolic conduct with the intent to arouse anger or violence because it was too vague and overbroad. The Court specifically stated that some types of content discrimination did not violate the first amendment, Indeed, we noted that it would be constitutional to ban only a particular type of threat; speech threatening the president.<br />
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== Porn ==<br />
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=== Osborne v. Ohio ===<br />
Facts: the state of Ohio criminalized the possession of child porn in order to prevent child exploitation. The relevant statute defined child porn as material that showed a child in a state of nudity and was possessed by a person who was not the child’s parent or guardian or who did not have permission from the child’s parent or guardian to possess the material for proper purpose. Osborne was convicted of the statute after being found in possession of explicit pictures of a child in his house.<br />
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Rules: The government may criminalize the private possession of child pornography.<br />
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Reasoning: In the case of child pornography, the government has an interest in protecting children from exploitation or from being further victimized through the resharing of explicit images. The government’s interest in protecting children is strong enough to allow the criminalization of the private possession of child pornography. The statute is well written to criminalize only the material that is harmful to children, providing exceptions for material that has a proper purpose. Therefore, the statute is not unconstitutionally overbroad.<br />
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== Profanity and Indecent Speech ==<br />
<br />
=== Cohen v. California ===<br />
Facts: The LA Municipal Court convicted Rob Cohen for violating the state penal code prohibiting “maliciously and willfully disturbing the peace or quiet of any neighborhood or person by offensive conduct.” He was convicted after wearing a jacket bearing the words “Fuck the draft.”<br />
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Rules: Absent a particularized and compelling purpose, a state may not criminalize a public display of a single four-letter expletive without violating the First and Fourteenth Amendments.<br />
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Reasoning: The Conviction rested solely on the fact that women and children can freely see the message. Although the protection of women and children from such vulgarity was such a big public interest, protection of sensitive people alone is not enough to outweigh free speech. Offended viewers can simply avert their eyes. There are two exceptions for First Amendment protection, obscenity and fighting words, and fuck on a jacket did not belong to either one. The state can’t justify the conviction based on the state’s duty to protect public morals.<br />
<br />
additionally, we cannot overlook the fact, because it is well illustrated by the episode involved here, that much linguistic expression serves a dual communicative function: it conveys not only ideas capable of relatively precise, detached explication, but otherwise inexpressible emotions as well. In fact, words are often chosen as much for their emotive as their cognitive force. We cannot sanction the view that the Constitution, while solicitous of the cognitive content of individual speech has little or no regard for that emotive function which practically speaking, may often be the more important element of the overall message sought to be communicated.<br />
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Finally, and in the same vein, we cannot indulge the facile assumption that one can forbid particular words without also running a substantial risk of suppressing ideas in the process. Indeed, governments might soon seize upon the censorship of particular words as a convenient guise for banning the expression of unpopular views. We have been able, as noted above, to discern little social benefit that might result from running the risk of opening the door to such grave results.<br />
<br />
== The O’Brien Test ==<br />
Finding that Conduct communicates does not mean that it is immune from government regulation. The question then arises as to whether the government has sufficient justification for regulating the conduct.<br />
<br />
=== United States v O’Brien ===<br />
Facts: On March 31, 1966, O’Brien and three others burned their Selective Service registration certificates on the steps of the Boston Courthouse. A sizeable crowd, including several agents of the FBI witnessed the event. For this act, O’Brien was tried and convicted and sentenced by the US District Court for District of Massachusetts.<br />
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Rules: Congress can Constitutionally prohibit the destruction or mutilation of draft cards.<br />
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If Conduct contains both speech and nonspeech elements, an important or substantial government interest in regulating the nonspeech element may justify incidental limitations on the protected speech if<br />
<br />
# The regulation is within the Constitutional power of the government<br />
# The Regulation furthers an important or substantial government interest<br />
# The governmental interest is unrelated to the suppression of free expression<br />
# The incidental restriction on alleged first amendment freedoms is no greater than is essential t the furtherance of the interest. <br />
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Reasoning:<br />
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We cannot accept the view that an apparently limitless variety of conduct can be labeled “speech” whenever the person engaging in the conduct intends thereby to express an idea. However, even on the assumption that the alleged communicative element in O’Brien’s conduct is sufficient to bring into play the First Amendment, it does not necessarily follow that the destruction of a registration certificate is constitutionally protected activity<br />
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The first amendment protects both speech and expressive conduct. The law prohibits destruction of draft cards dealt exclusively with conduct. The conduct at issue is not entirely expressive, because a person could burn a draft card with no intent to express an idea. Burning draft cards are no different from burning other government issued documents like driver’s licenses or tax forms. Additionally, the law targeted both public and private conduct. Because the law didn’t target conduct carried out for the sole purpose of expression, the statute was no facially unconstitutional. O’Brien engaged in the conduct at issue in order to express an idea, thus combining the speech and nonspeech elements. If Conduct contains both speech and nonspeech elements, an important or substantial government interest in regulating the nonspeech element may justify incidental limitations on the protected speech elements. The government’s interest was sufficiently important to justify the regulation, despite any incidental limits on free speech.<br />
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# The draft is within the Congress’s constitutional war powers<br />
# Interests was in classifying citizens for the draft and prevent destruction of draft cards<br />
# Purpose for the statute was not to suppress expression<br />
# Legislation narrowly constructed to preserve that interest. <br />
<br />
== Flag Desecration ==<br />
A major area where the Supreme Court has applied the O’Brien test is with regard to flag burning and flag desecration laws. After initial cases that protect flag desecration on narrow grounds, but without resolving the issue, the Court in 1989 and again in 1900 made it clear that flag burning is a constitutionally protected speech.<br />
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=== Texas v. Johnson ===<br />
Facts: Gregory Lee Johnson (defendant) burned an American flag during a political demonstration at the 1984 Republican National Convention in Dallas. The State of Texas (plaintiff) charged Johnson with desecration of a venerated object in violation of a state statute. Johnson was convicted, sentenced to one year in prison, and fined $2,000. Johnson appealed his conviction.<br />
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Rules: Flag burning is expressive conduct protected by the first amendment and a statute that criminalizes the burning of an American flag as a means of political protest violates the first Amendment. <br />
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Reasoning: The First Amendment protects flag burning because it contains a sufficient level of communication. By burning the flag, Johnson tried to convey an idea which any onlookers would understand the meaning of. In First Amendment cases, the states have more leeway in regulating expressive conduct than written or expressive words. Applying a similar test to O’Brien, the state must show that the law was for an important government interest and that it was unrelated to suppressing expression. Texas said that its government interest was to protect the speech; which was not implicated in Johnson’s case. Second, Texas asserted that they wanted to keep the flag as a symbol of national unity; but this is related to a political message and did not qualify for the lenient standard. Because the regulation of speech was content-based, the Court submitted the case under the most exacting constitutional scrutiny; under that scrutiny, it was found that preserving the flag as a symbol did not justify the punishment.<br />
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Johnson was not, we add, prosecuted for the expression of just any idea; he was prosecuted for his expression of dissatisfaction with the policies of this country, expression situated at the core of our First Amendment values. If he had burned the flag as a means of disposing of it because it was dirty or torn, he would not have been convicted of flag desecration under this Texas law. The Texas law is thus not aimed at protecting the physical integrity of the flag in all circumstances, but is designed instead to protect it only against impairments that would cause serious offense to others. Texas law thus depended on the likely communicative impact of his expressive conduct.<br />
<br />
== Distinction Between Content-Based and Content-Neutral Laws ==<br />
The Supreme Court frequently has declared that the very core of the First Amendment is that government cannot regulate speech based on its content. The Court stated, above all else, the First Amendment means that government has no power to restrict expression because of its message, its ideals, its subject matter or its content.<br />
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In Turner Broadcasting System v FCC, the Court explained the content-based restrictions generally must meet strict scrutiny, while content neutral laws only need to meet intermediate scrutiny.<br />
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=== Reed v. Town of Gilbert ===<br />
Facts: Reed ran a church whose place of worship varied from week to week. Thus, to notify his congregation, he posted signs outside week to week, often removing them after church service has concluded. The town of Gilbert found this illegal, nothing that its sign code prevents the display of outdoor signs unless the signs fall within an exempt category. These categories permit signage, but with restrictions. The restriction prevented signs like these, i.e. directional signs, from being kept posted for more than 12 hours.<br />
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Rules: Categorizing signs based on their purpose is content-based speech regulation and is subject to strict-scrutiny review.<br />
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Reasoning: The first amendment, applicable to the States through the Fourteenth Amendment, prohibits restrictions on speech based on its message. If a law is based on content, the government must show that the law is tailored narrowly to serve a compelling state interest. A law is content based if it restricts the topic, idea, or type of message of the speech. A neutral justification can’t save a law that’s content based. The sign code classifies categories of exemptions based on the subject of the speech and is therefore content based.<br />
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Why is there so much concern about content neutrality? Obviously, the fear is that the government will target particular messages and attempt to control thoughts on a topic by regulating speech. The government could try to control dissent and advance its own interests by stopping speech that expresses criticism of government policy, while allowing praise. A subject-matter restriction on speech can accomplish the same goal.<br />
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=== How is it determined whether a law is content based? ===<br />
The requirement that the government must be content-neutral in its regulation of speech means that the government must be both viewpoint neutral and subject matter neutral. In other words, a law will be found to be content based if it is either a viewpoint or subject matter restriction. Viewpoint-neutral means that the government cannot regulate speech based on the ideology of the message. <br />
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==== Matal v Tam ====<br />
Facts: Tam had a band and wanted the name “The Slants” as a band name to reclaim the derogatory term since he and his bandmates were Asians. The Lanham act prohibited the registration of trademarks that disparages any person, whether living or dead.<br />
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Rules: The law’s prohibition on disparaging trademarks violates free speech because it discriminates based on viewpoint, singling out marks that offends persons and groups.<br />
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Reasoning: In interpreting the statute, the prohibition on registering trademarks that disparages persons covers racial and ethnic groups; thus applying to Tam’s trademark. Generally, a government regulation that favors one viewpoint and restrains another is unconstitutional.<br />
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The Court considered 3 categories meriting Reduced or No Scrutiny. <br />
<br />
* Are trademarks government speech? – a narrow category of expression that requires extensive government involvement and is exempt from first amendment scrutiny. If government itself speaks, then it doesn’t have to be viewpoint neutral.<br />
*# But trademarks aren’t government speech. The government doesn’t make, edit, or regulate trademarks, just approves them.<br />
*# Trademarks are private speech subject to scrutiny<br />
* Is trademark registration a government subsidy? – These tolerate viewpoint discrimination. Free speech doesn’t compel the government to promote things that it doesn’t want to.<br />
*# But trademarks aren’t government subsidy. <br />
* Are trademarks commercial speech? – these are subject to relax first amendment scrutiny. Restrictions here must be narrowly tailored to serve a substantial government interest.<br />
*# Even if it were commercial speech, the disparagement clause could not withstand relaxed scrutiny. The clause was intended to encourage the free flow of commerce and to shield underrepresented groups from exposure to demeaning advertising. But demeaning speech is protected by the first amendment, the clause wasn’t narrowly drawn to serve the government’s purpose.<br />
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Two years later, in Iancu v Brunetti, the court struck down another provision of the Lanham Act, which prohibited registration of trademarks which are scandalous or immoral. A clothing manufacturer wished to register as a trademark “FUCT.” The court held that it was viewpoint based because of the act’s criteria for “immoral or scandalous” trademark. The meanings of “immoral” and “scandalous” are not mysterious, but resort to some dictionaries still helps to lay bare the problem. When is expressive material immoral? According a standard definition, when it is inconsistent with rectitude, purity, or good morals. So the Lanham Act permits registrations of marks that champion society’s sense of morality but not ones that denigrate from those concepts.<br />
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== Vagueness and Overbreadth ==<br />
Laws that regulate speech can be challenged as facially unconstitutional on the grounds that they are unduly vague and overbroad. A successful challenge usually means that the laws is entirely invalidated, as opposed to being declared unconstitutional as to certain application. <br />
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=== Vagueness ===<br />
A law is unconstitutionally vague if a reasonable person cannot tell what speech is prohibited and what is permitted. It is important to emphasize that unduly vague laws violate the due process whether or not speech is regulated. In part, vagueness doctrine is about fairness, it is unjust to punish a person without providing clear notice as to what conduct was prohibited. Vague laws also risk selective prosecution; under vague statutes and ordinances, the government can choose who to prosecute based on their views or politics. <br />
<br />
If a law fails to provide such minimal guidelines, a criminal statute may permit a standard sweep that allows policemen, prosecutors, and juries to pursue their own personal predilections. Although a law regulating conduct ca be challenged under the due process vagueness doctrine, courts are particularly troubled about vague laws restricting speech out of concern that the will chill constitutionally protected speech.<br />
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==== Coates v. Cincinnati ====<br />
Facts: Coates and co were convicted of violating an ordinance of the city of Cincinnati that made it a criminal offense for three or more people to assemble on a city sidewalk and there conduct themselves in a manner annoying to persons passing by. Coates appealed his conviction on the ground that the city ordinance was unconstitutionally vague. Coates’ conviction was upheld by the state supreme court and Coates petitioned the United States Supreme Court for Review.<br />
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Rules: A city’s criminal ordinance can be facially unconstitutional if it’s vague or overbroad.<br />
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Reasoning: Although a city can constitutionally adopt ordinances to prohibit certain antisocial conduct, the city can’t constitutionally adopt ordinances that are vague or overbroad. An ordinance is unconstitutionally vague if it is unclear to an average person of common intelligence what conduct is actually prohibited. If a statute is vague, then it violates the fourteenth amendment’s due process protections if it subjects a person to criminal penalties without providing adequate prior notice.<br />
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An ordinance can become unconstitutionally overbroad if it penalizes constitutionally protected conduct. The First Amendment protects freedom of assembly and association, which the ordinance penalizes. There could be discrimination in enforcement of an overbroad law because enforcers can pick and choose what the broad law defines.<br />
<br />
The ordinance failed to define what annoying was and therefore failed to give adequate notice to Coates and co.<br />
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=== Overbreadth ===<br />
A law is unconstitutionally overbroad if it regulates substantially more speech than the Constitution allows to be regulated, and as a person to whom the law constitutionally can be applied can argue that it would be unconstitutional as applied to others. A person’s speech Is unprotected by the First Amendment and who could constitutionally be punished under a narrow statute may argue that the law is unconstitutional because of how it might be applied to third parties not ever the court. <br />
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==== Schad v. Borough of Mount Ephraim ====<br />
Facts: Schad opened an adult bookstore in the Borough of Mount Ephraim. He installed a coin operated device which allowed customers to watch a stripper. The live entertainment service was deemed to be a violation of the commercial zoning ordinance. The ordinance contains an exhaustive list of permissible commercial uses and did not include live entertainment.<br />
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Rules: A law is impermissibly overbroad if it excludes a broad category of protected expression without justification.<br />
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Reasoning: The first amendment, as incorporated into the states through the fourteenth amendment, requires states to prove a sufficient justification for laws that exclude a broad category of protected expression. When a law infringes on a protected liberty, the laws must be narrowly drawn to further a sufficiently substantial government interest.<br />
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Here, the Borough argues live entertainment will prevent their desire to create a commercial zone, but the law lists a range of commercial uses that do more than create a commercial zone to meet the immediate needs of residents. They also argue that they banned live entertainment to prevent the harm associated with it, the law shows no evidence that live entertainment is more harmful than others. The Borough has also failed to prove its interests can’t be met by restrictions that are less intrusive on protected forms of expressions. <br />
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Although the power of a local government to zone and control land is broad, this power isn’t unchallengeable and must be exercised within constitutional limits.<br />
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In subsequent cases, the Court made it clear that the requirement for substantial overbreadth applies in all cases, whether the law regulates conduct that communicates pure speech. A statute may be invalidated on its face, only if the overbreadth is substantial.<br />
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The concept of substantial overbreadth is not readily reduced to an exact definition. It is clear however, that the mere fact that one can conceive of some impermissible applications of a statute is not sufficient to render it susceptible to an overbreadth challenge. In short, there must be a realistic danger that the statute itself will significantly compromise recognized First Amendment protections of parties not before the court to make it facially challenged on overbreadth grounds.<br />
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It appears, then, that substantial overbreadth might be demonstrated by showing a significant number of situations where a law could be applied to prohibit constitutionally protected speech. In contrast, if the Court believes that the law will apply to relatively few situations where speech is constitutionally protected, it will not be declared overbroad.<br />
<br />
The second major aspect of the overbreadth doctrine is that a person to whom the law constitutionally may be applied can argue that it would be unconstitutional as applied to others. The usual rule of standing is that a person to whom a statute may constitutionally be applied will not be heard to challenge that statute on the ground that it may conceivably be applied unconstitutionally to others. <br />
<br />
=== Relationship between vagueness and overbreadth ===<br />
The concepts of vagueness and overbreadth are closely related; laws often are challenged under both of these doctrines simultaneously. These concepts are best understood as overlapping and not identical. <br />
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==== Board of Airport Commissioners v. Jews for Jesus, Inc. ====<br />
Facts: The board of airport commissioners made a resolution saying that all first amendment activities by any individual or entity are banned in the Central Terminal Area and violators are subject to legal action. A member of Jews for Jesus was handing out religious pamphlets and was asked to leave or face legal actions based on the resolution. <br />
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Rules: Legislation banning all First Amendment speech is unconstitutional unless it’s subject to a limiting construction.<br />
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Reasoning: The First Amendment overbreadth doctrine states that a person whose speech may be prohibited can challenge a statute on its face because it also threatens others not before the court. But it can only be invalidated on its face if the overbreadth is substantial and there’s realistic danger that the statute will harm other’s First Amendment rights. An overbroad statute may still be valid if courts can narrow its construction. If state courts haven’t defined the statute’s constructions, the Supreme Court can only do so upon certification from the state or abstention. It was overbroad, and it could not be limited because California had no procedure to define resolution’s construction and abstention would make it unfeasible to provide a limiting construction in a limited time frame.<br />
<br />
The resolution was so broad that any limiting construction would require a lot of case-by-case adjudication and if limited to prevent speech not having to do with the airport, it would still be overly vague.<br />
<br />
== Defamation ==<br />
{| class="wikitable"<br />
|Under state statute<br />
|<br />
|Public Official/Person<br />
| colspan="3" |Private Person<br />
|-<br />
| rowspan="2" |State of Mind<br />
| rowspan="2" |Defendant is liable if they can say<br />
| rowspan="2" |NYT v Sullivan<br />
| colspan="3" |Gertz v R. Welch<br />
|-<br />
|Liability<br />
| colspan="2" |P and P D’s<br />
|-<br />
|Knowledge<br />
|“ I knew it was false, but said it anyway”<br />
|Okay for the State to Punish<br />
| colspan="2" |OK<br />
|OK<br />
|-<br />
|Recklessness<br />
|“I did not know if it was true or false but didn’t care, so I said it anyway”<br />
|Okay for the State to Punish<br />
| colspan="2" |OK<br />
|OK<br />
|-<br />
|Negligence<br />
|“I thought it was true, but I didn’t do much to check and said it”<br />
|State may not punish<br />
| colspan="2" |OK<br />
|NO <br />
|-<br />
|Strict Liability<br />
|“I thought it was true, and I did all I could to check, so I said it”<br />
|State may not punish<br />
| colspan="2" |NO<br />
|NO<br />
|}<br />
<br />
=== Public/private figures ===<br />
<br />
* Dun and Bradstreet case – private figure, private issue <br />
<br />
=== Generally, ===<br />
<br />
* If dealing with public official or figure – apply NY Times v. Sullivan <br />
* If dealing with private figure/public issue – apply Gertz <br />
* If dealing with private figure/private issue – common law applies<br />
<br />
=== Reputation, Privacy, Publicity, and the First Amendment ===<br />
Many tort claims seek to impose liability for speech. Similarly, the false light tort is liability for speech that creates a false impression about a person and his or her activities. Speech can be the basis for a claim for the intention infliction of emotional distress. Also, speech that discloses private information or exploits the commercial likeness of another may be the basis for a tort of invasion of privacy or for violating the right to publicity.<br />
<br />
==== New York Times v Sullivan ====<br />
Facts: Sullivan was a public official of Alabama and sued New York Times and several others on defamation grounds. It is undisputed in the case that the statements in the Times were all either exaggerations or completely false, thus being libelous per se. <br />
<br />
Rules: If the plaintiff is a public official or is running for office, they can recover damages for defamation only by proving clear and convincing evidence that the defamatory statements were a lie and that there was malice in the speaker.<br />
<br />
Reasoning: The Constitutional safeguard was fashioned to assure unfettered interchange of ideas for to bring political and social changes desired by the people. If alone, neither factual error nor defamatory content suffices to remove the constitutional shield from criticisms of official conduct, then the combination of the two would be no less inadequate. Compelling critics to guarantee the truth in all their assertions is self-censorship. The Constitution require a federal rule that prohibits a public official from recovering damages for a defamatory lie relating to their conduct unless they prove that the statement was made with “actual” malice. <br />
<br />
==== Requirements of this case ====<br />
<br />
# The plaintiff must be a public official or is running to be one.<br />
# The plaintiff must prove his or her case with clear and convincing evidence<br />
# The plaintiff must prove falsity of the statement<br />
# The plaintiff must prove actual malice ( knowledge of falsity but disregarded it)<br />
<br />
=== Public Figures as Plaintiffs ===<br />
The Supreme Court has held that the same rules apply in defamation suits brought by public figures. In Curtis Publishing v Butts and Associated Press v Walker, both cases had plaintiffs who were not public officials but were very prominent in their community. <br />
<br />
There was not a majority in either case, but a plurality opinion did say that although the plaintiffs were not officials, the public interest in the circulation of the materials and the publisher’s interest in circulating them, is not less than that in NYT v Sullivan.<br />
<br />
==== Gertz v. Robert Welch, Inc. ====<br />
Facts: Gertz was an attorney that sued a cop for wrongful death on behalf of the victim’s family. American Opinion is a magazine that made statements about a grand Communist conspiracy against the Government and noted that Gertz was one of these Communists trying to ruin the reputation of law enforcers. In their magazine, they painted Gertz as an architect of anarchy against the officer whom he supposedly framed.<br />
<br />
Rules: The First Amendment does not allow newspaper or broadcasters to assert defamatory falsehoods against private individuals in the same capacity as it would with public people.<br />
<br />
Reasoning: Although there is no place for falsehoods in the marketplace of ideas, they are an inevitability in the never-ending debate of society. The first amendment recognizes that this debate allows the defamatory information about public individuals, so long as no malice exists, as preventing such criticism would involve self-censorship. However, a private individual should not be put under the same scrutiny and deserves more protection from defamatory falsehoods. Gertz was never a public individual, his notoriety were part of the case’s coverage and was not something he consented to; likewise, any influence he may have is only incidental. Private people have far less of a platform to rebut and protect themselves for defamatory falsehoods compared to public individuals. <br />
<br />
==== In Dun & Bradstreet v Greenmoss Buliders ====<br />
the Court said that the distinction must be drawn in suits against private figures between speech that involves matters of public concern and those that do not. Not all speech is of equal first amendment importance. It is speech on matters of public concern that are at the heart of first amendment protection. In contrast, speech on matters of purely private concern is of less important to the first amendment. <br />
<br />
If public concern is defined in terms of the public’s actual interest, the media’s judgment to publish is likely strong, if not conclusive, evidence of people’s interest in the material. But if public concern is defined from a more objective viewpoint, then Courts are in the position of deciding what people in their enlightened best interest, should want to know.<br />
<br />
==== How about lying? ====<br />
<br />
* Alvarez case re Stolen Valor Act <br />
** Is the statute constitutional? <br />
*** Does it involve speech – yes <br />
*** Does it infringe speech – yes <br />
*** Is it overbroad or vague – not as far as the majority is concerned <br />
*** Is it content-based – yes <br />
*** Is it within a less-protected class – no <br />
* Key parts of the opinion: <br />
** “The Court has never endorsed the categorical rule the Government advances: that false statements receive no First Amendment protection” <br />
** Clarification re role of rule regarding knowing and reckless disregard <br />
** Distinction between perjury and other prohibitions <br />
** Concern re reach of the statute and with fear of slippery slope <br />
** Fails under strict scrutiny means-test prong<br />
<br />
=== Intentional Infliction of Emotional Distress ===<br />
<br />
==== Hustler Magazine v Falwell ====<br />
Facts: Hustler Magazine made a parody about Minister Falwell that grossly depicted him as a motherfucker. <br />
<br />
Rules: Public people may not recover for the tort of intentional infliction of emotional distress by reason of publications as the one at issue here without showing that the publication contains a false statement of fact made with “actual” malice. <br />
<br />
Reasoning: Although the parody here was unpleasant and disgusting, it is no different from political editorial cartoons that depict public people in outrageous ways. <br />
<br />
==== Snyder v Phelps ====<br />
Facts: The Snyders lost a son in Afghanistan and they were burying him. Phelps and his Westboro congregation picketed a couple of feet away from Snyder’s funeral, touting offensive words regarding homosexuals.<br />
<br />
Rules: A church protesting a military funeral on public land in a peaceful manner is considered public speech protected by the First Amendment.<br />
<br />
Reasoning: It was on public land and it was speech regarding public concern. Likewise, what inflicted the distress was the contents of the speech and not the manner of the protest itself. <br />
<br />
== Obscenity ==<br />
<br />
=== Roth v United States ===<br />
Issues: The issue is whether the federal obscenity act violated the First Amendment protection of free speech<br />
<br />
Rules: Obscenity is a low value form of speech that is not protected by the first amendment<br />
<br />
Holding: No<br />
<br />
Reasoning: Historically, the first amendment was used to protect speech that has some inherent social value; typically ones that may contribute to social changes in the marketplace of ideas. Obscenity is seen as having little value in this regard and is not protected by the first amendment.<br />
<br />
=== Paris Adult Theater v Slaton ===<br />
Facts: Owners and operators of a porn movie theater argued that the civil cases against them were unconstitutional because their theaters show protected content under the first amendment. They argue that because only consenting adults come into their theater then it would not be obscene.<br />
<br />
Rules: In Roth v United States, the Supreme Court held that obscenity is not a protected form of speech under the First Amendment.<br />
<br />
Reasoning: Besides the above reasoning; the States also have a vested interest in keeping their community safe, and such safety and enrichment may include the regulation of obscene materials. Thus, a state may do whatever it sees fit in regulating these obscene materials.<br />
<br />
=== Obscenity Standards ===<br />
<br />
==== Miller v California ====<br />
Facts: Miller sent, to the mail, a bunch of illustrated adult books and was penalized by the state of California under its criminal obscenity laws for distributing obscene materials to people who have in no way of consenting to receiving such materials.<br />
<br />
Rules: A State may regulate obscene materials without infringing on the First Amendment as applicable to the States through the Fourteenth Amendment<br />
<br />
Reasoning: Besides the above reasoning. The court also used this case to set certain limits on Constitutional protection of obscene materials. The basic factual guidelines are<br />
<br />
# Whether the average person, applying contemporary community standards, would find the work as appealing to prurient interest.<br />
# Whether the work depicts or describes, in the patently offensive way, sexual conduct specifically defined by the applicable state law<br />
# Whether the work, taken as a whole, lack serious literary, artistic, political, or scientific value.<br />
<br />
Under the holdings announced today, no one will be subject to prosecution for the sale or exposure of obscene materials unless these materials depict or describe patently offensive “hard core” sexual conduct specifically defined by the regulating state law.<br />
<br />
=== Child Pornography ===<br />
<br />
==== New York v Ferber ====<br />
Issues: At issue in this case is the constitutionality of a New York criminal statute which prohibits persons from knowingly promoting sexual performances by children under the age of 16 by distributing material which depicts such performances<br />
<br />
Rules: The Miller standard is incompatible with laws against child pornography, but there is a huge, vested interest in the state to suppress this sort of obscenity that great surpasses any Constitutional limits.<br />
<br />
Holding: It is Constitutional <br />
<br />
Reasoning: In order for a State actor to create statutes that violate Constitutional provisions, that State actor must have an interest that will justify its enactment. Here, the protection of minors from sexual abuse is that justification. Although, this test is unnecessary as Child pornography is already seen as obscene and therefore unprotected by the first amendment. <br />
<br />
However, beyond safeguarding the rights of minors, the Court also had other reasons. Such as, these materials are permanent records of child exploitation and abuse. Third, the sale of this content is unanimously seen as illegal across the nation. Fourth, it is unlikely for this content to have any value in literature, art, science, or education. Fifth, suppressing this content will not be inconsistent with past decisions.<br />
<br />
The government cannot ban child pornography based on its condemnation of the material. Rather, the government’s interest is limited to protecting children from being used in the making of the material.<br />
<br />
== Protected but Low-value Sexual speech ==<br />
The Supreme Court has indicated there is a category of sexual speech that does not meet the test for obscenity and thus is protected by the First Amendment, but is deemed to be speech of low value, and thus the government has latitude to regulate such expression. The Court never has defined the contours of this category, but it clearly involves sexually explicit material.<br />
<br />
==== Zoning Ordinances ====<br />
<br />
===== Young v American Mini Theaters =====<br />
Facts: Zoning ordinances adopted by the city of Detroit differentiate between motion picture theaters which exhibit sexually explicit “adult” movies and those which do not<br />
<br />
Issues: The principal question presented by this case is whether that statutory classification is unconstitutional because it is based on the content of communication protected by the First Amendment.<br />
<br />
Rules: Since what is ultimately at stake is nothing more than a limitation on the place where adult films may be exhibited, even though the determination of whether a particular film fits that characterization turns on the nature of its content, we conclude that the city’s interest in the present and future character of its neighborhoods adequately supports its classification of motion pictures.<br />
<br />
Holding: It is constitutional<br />
<br />
Reasoning: The first amendment protects low value speech that may have some sort of artistic, literary, educational, or scientific value. Here, theater porn is considered to have some artistic value. Likewise, there is some wisdom in the state actor to differentiate between adult theaters and regular theaters. Additionally, the zoning laws do not deter the presentation and establishment of these theaters, just that they are not allowed to be within a same area; local ordinances do this regularly with other businesses regardless of content. Therefore, there is no infringement of Constitutional rights.<br />
<br />
== Government Techniques for Controlling Obscenity and Child Pornography ==<br />
<br />
==== Stanley v Georgia ====<br />
Facts: The dude was suspected for his book marking activities, Cops searched his houses, but they found not evidence relating to that, but they did find film reels of obscene material.<br />
<br />
Rules: prosecuting the mere possession of obscene materials in one’s home is a violation of the first amendments<br />
<br />
Reasoning: Although States do have a reason to regulate the distribution of obscene material, the ownership of these materials does not constitute a punishable violation, and even more so in one’s own home. Given the present state of knowledge, the State may no more prohibit mere possession of obscene matter on the ground that it may lead to antisocial conduct than it may prohibit possession of chemistry books on the ground that they may lead to the manufacture of homemade spirits.<br />
<br />
==== Osborne v. Ohio ====<br />
Facts: Ohio (plaintiff) criminalized the possession of child pornography in order to prevent the exploitation and revictimization of children. The relevant statute defined child pornography as material that showed a child in a state of nudity and was possessed by a person who was not the child’s parent or guardian and who did not have permission from the child’s parent or guardian to possess the material for a proper purpose.<br />
<br />
Rules: the government can criminalize the private possession of child pornography<br />
<br />
Reasoning: The government may criminalize the private possession of child pornography. The freedoms enshrined in the First Amendment may be limited if the government can show a strong enough interest. In the case of child pornography, the government has an interest in protecting children from exploitation or from being further victimized through the resharing of explicit images.<br />
<br />
== The Broadcast Media ==<br />
<br />
=== FCC v Pacifica Foundation ===<br />
Facts: A radio station played George Carlin’s seven dirty words and was reported to the FCC and was about to be sanctioned for it.<br />
<br />
Rules: Under the First Amendment, the Federal Communications Commission may regulate a radio broadcast that is indecent but not obscene.<br />
<br />
Reasoning: Such vulgar words have very little social value, but although it can have value given the right context, it is the fact that the radio station was very accessible that context would not matter. Many people are tuning in and out of the station, people in their own home who have a reasonable expectation of privacy, and impressionable kids may not know the context of the monologue, nor would they be aware of the prior warnings. Thus, the government is allowed such regulations.<br />
<br />
=== The Internet ===<br />
<br />
===== Reno v ACLU =====<br />
Facts: The “indecent transmission” provision of the Communications Decency Act of 1996 (CDA) prohibited the knowing transmission of obscene or indecent messages via the internet to any recipient under the age of eighteen. The “patently offensive display” provision of the CDA prohibited the knowing, sending, or displaying of patently offensive messages in a manner that is available to a person under eighteen years of age.<br />
<br />
Rules: Under the First Amendment, the government may not regulate the transmission and display of content on the internet unless it does so for a compelling purpose and uses means that are narrowly tailored to that purpose.<br />
<br />
Reasoning: The internet was entitled to a more expansive first amendment freedom because websites do not intrude onto the viewers, but is sought after. Likewise, the internet is on limited frequencies, it is for everyone. The statute was also vague and overbroad<br />
<br />
== Schools ==<br />
<br />
=== Tinker v Des Moines Independent Community School District ===<br />
Fact: A couple of kids at school wore black armbands to show their disdain for the Vietnam war draft. The school took away their armbands and punished the students.<br />
<br />
Rules: In a public-school setting, prohibiting an expression of an opinion is unconstitutional unless there is a specific showing that engaging in the forbidden conduct would materially and substantially interfere with appropriate discipline in the operation of the school.<br />
<br />
Reasoning: The Constitution asks us to take risks involving the freedoms of speech. The problem posed is not the simple regulation of skirts and clothes nor does it involve the aggressive or disruptive action or even group demonstration. It is directly affecting pure speech; passive expression of opinion unaccompanied by any disorder or disturbance. <br />
<br />
The Court applied Tinker to the college context, in Papish v Board of Curators where it was held that a student could not be expelled for a political cartoon in a newspaper. In more recent years, the Court has been much less protective speech in school environments and much more deferential to school authorities. <br />
<br />
=== Bethel School District No. 403 v. Fraser ===<br />
Facts: Fraser, a high school senior who was suspend for three days by the school after he gave a lewd speech in front of the school during an assembly.<br />
<br />
Rules: Students do not shed their first amendment rights when entering the school gates. Schools may properly punish students’ speech with suspension if they determine that speech to be lewd, offensive, or disruptive to the school’s basic educational mission.<br />
<br />
Reasoning: Surely it is a highly appropriate function of public school education to prohibit the use of vulgar and offensive terms in public discourse. Nothing in the constitution prohibits the states from insisting that certain modes of expressions are inappropriate and subject to sanctions. The school must teach students beyond just books, this includes through moral values. The pervasive sexual innuendo in Fraser’s speech was plainly offensive to both teachers and students – indeed to any mature person. By glorifying male sexuality and its verbal content, the speech acutely insulting teenage girls. Speech could be seriously damaging to its less mature audience of 14 year olds.<br />
<br />
=== Morse v. Frederick ===<br />
Facts: Frederick, during a school sanctioned televised event, showed a 14-foot tall banner saying “Bong hits for Jesus” and was punished by the school.<br />
<br />
Rules: Under the First Amendment, school officials may prohibit student speech that can reasonably be interpreted as promoting illegal drug use<br />
<br />
Reasoning: Similar to the above reasoning. However, this has an additional caveat of how the defendant claims that the speech was nonsense and did not mean anything except to attract television cameras. However, it was plainly reasonable for the principal to interpret the message as advocating for drug use as kids know that bong hit is related to marijuana use.<br />
<br />
== When must the government make content-based choices? ==<br />
For instance, if the government is choosing to subsidize speech, there is no way that it can avoid content considerations in deciding what to finance. The Court indicated that in such circumstances the government must be viewpoint-neutral but otherwise can consider content.<br />
<br />
=== National Endowment for the Arts v Finley ===<br />
Facts: The National Foundation on the Arts and Humanities Act (NFAHA) requires the Chairperson of the National Endowment for the Arts (NEA) to ensure that “artistic excellence and artistic merit are the criteria by which grant applications are judged, taking into consideration general standards of decency and respect for the diverse beliefs and values of the American public.” Finley and three others (plaintiffs) were performance artists who applied for NEA grants. Finley was informed that she had been denied funding, and brought suit against the NEA (defendant) in district court. Finley alleged that the NEA’s grant-awarding policy violated their First Amendment rights.<br />
<br />
Rules: In making determinations regarding recipients of government subsidies, the government may consider content but must remain viewpoint-neutral.<br />
<br />
Additional Rule: Facial invalidation “is, manifestly, strong medicine” that “has been employed by the Court sparingly and only as a last resort.” To prevail, respondents must demonstrate a substantial risk that application of the provision will lead to the suppression of speech.<br />
<br />
Reasoning: In the competition for government funding, the government may choose to prioritize spending on one form of speech or activity over the other. This is not exclusion and it is also not impermissible because criminal penalty is not at stake. Any content-based considerations that may be taken into account in the grant-making process are a consequence of the nature of arts funding. The very assumption of the NEA is that grants will be awarded according to the artistic worth of competing applications; absolute neutrality is impossible. If a subsidy were manipulated to have a coercive effect, then judicial relief is an appropriate remedy. However, unless and until the NFAHA is applied in a manner that raises concern about the suppression of disfavored viewpoints, it is constitutional.<br />
<br />
=== Government Speech ===<br />
<br />
==== Pleasant Grove City, Utah v Summum ====<br />
Facts: Summum (plaintiff), a religious organization headquartered in Salt Lake City, Utah, filed suit and a request for a preliminary injunction in federal court against the City of Pleasant Grove, Utah, (City) (defendant) after the City refused to erect a permanent stone monument that contained the Seven Aphorisms of Summum in a public park. The religious group claimed the City’s refusal violated Summum’s First Amendment rights.<br />
<br />
Rules: although a park is a traditional public forum for speeches and other transitory expressive acts, the display of a permanent monument in a public park is not a form of expression to which forum analysis applies. Instead, the placement of a permanent monument in a public park is best viewed as a form of government speech and is therefore not subject to scrutiny under the Free Speech Clause.<br />
<br />
Reasoning: Often, statutes in public parks are seen as Government speech. While government speech is not restricted by the Free Speech Clause, the Government does not have free hand to regulate private speech on government property. Just as government-commissioned and financed monuments speak for the government, so do privately financed and donated monuments that the government accepts and displays on government land. If government entities must maintain viewpoint neutrality in their selection of donated monuments, they must either “brace themselves for an influx of clutter” or face the pressure to remove longstanding and cherished monuments. To be sure, there are limited circumstances in which the forum doctrine might properly be applied to a permanent monument. Here, the City’s decision to reject Summum’s monument is best viewed as a form of government speech and is therefore not subject to scrutiny under the Free Speech Clause.<br />
<br />
==== Walker v Texas Division, Sons of Confederate Veterans ====<br />
Facts: Texas offers automobile owners a choice between ordinary and specialty license plates. Those who want the State to issue a particular specialty plate may propose a plate design, comprising a slogan, a graphic, or (most commonly) both. If the Texas Department of Motor Vehicles Board approves the design, the State will make it available for display on vehicles registered in Texas. The Texas Division of the Sons of Confederate Veterans proposed a specialty license plate design featuring a Confederate battle flag. The Board rejected the proposal.<br />
<br />
Rules: Generally, the First Amendment cannot be used to challenge government speech.<br />
<br />
Reasoning: Just like with how the Government cannot compel the SCV to express speech they do not agree with, the SCV cannot compel the same of the government. Thus, the Government is not required by the First Amendment permit the SCV’s license plates. <br />
<br />
When government speaks, it is not barred by the Free Speech Clause from determining the content of what it says. That freedom in part reflects the fact that it is the democratic electoral process that first and foremost provides checks on government speech. The free speech clause instead helps produce informed opinion among members of the public, who then are able to influence the government, not the other way around. <br />
<br />
==== Rust v Sullivan ====<br />
Facts: In 1970, Congress enacted Title X of the Public Health Service Act (Act), which provides federal funding for family-planning services. The Act authorizes the p. 1296Secretary to “make grants to and enter into contracts with public or nonprofit private entities to assist in the establishment and operation of voluntary family planning projects which shall offer a broad range of acceptable and effective family planning methods and services.”<br />
<br />
the Secretary of Health and Human Services, issued new regulations that attached three principal conditions on the grant of federal funds for Title X projects. Firstly, Title X projects could not provide counseling concerning the use of or provide referral for abortion as a method of family planning. Secondly, projects could not engage in activities that encouraged, promoted, or advocated abortion as a method of family planning. Thirdly, Title X projects were required to be organized so they were physically and financially separate from prohibited abortion activities.<br />
<br />
Rules: A federal law may, as a condition of receiving federal funds, constitutionally restrict fund recipients from engaging in abortion-related activities.<br />
<br />
Reasoning: Rust argues that the regulation prohibits “all discussion about abortion as a lawful option – including counselling, referral, and the provision of neutral and accurate information about ending a pregnancy – including counselling the clinic to provide more information that promotes continuing the pregnancy. There is no question that the regulations are Constitutional. The government’s asserted purpose for the regulations is to encourage family planning rather than provide prenatal care. Thus if certain activities are not funded, then it is because they are out of scope of the program. To hold that the government unconstitutionally discriminates on the basis of viewpoint when it chooses to fund a program dedicated to advancing certain permissible goals, would render numerous government programs constitutionally suspect. Rust is entirely free to pursue an abortion outside the receipt of the funds. Thus, the regulations do not violate her first amendment rights.<br />
<br />
==== Legal Services Corp. v. Velazquez ====<br />
Facts: In 1974, Congress enacted the Legal Services Corporation Act. The Act establishes the Legal Services Corporation (LSC) as a District of Columbia nonprofit corporation. LSC’s mission is to distribute funds appropriated by Congress to eligible local grantee organizations “for the purpose of providing financial support for legal assistance in noncriminal proceedings or matters to persons financially unable to afford legal assistance.”<br />
<br />
Rules: Federal laws prohibiting lawyers from receiving federal funds from challenging existing laws violate the First Amendment.<br />
<br />
Reasoning: Under Rust, the restriction were deemed necessary to enforce the limits of the Title X project, and thus, did not Constitute invidious discrimination against a particular viewpoint. However, this wide constitutional latitude for governmental speech does not always apply to instances in which the government provides subsidies to private speakers. This is particularly relevant to the LSC as it was designed to facilitate private speech rather than a government message. Additionally, the government created a subsidy to further a specific purpose.<br />
<br />
At the same time, however, the government places a substantial limitation on this speech prohibiting LSC-funded lawyers from giving advice to clients regarding the Constitutional validity of Federal welfare statutes. By limiting this type of advice or communication, the government not only restricts speech in this arena, but also threatens to severely impair the judiciary.<br />
<br />
The LSC funding restriction is unconstitutional because the speech involved is ultimately private, and because the restriction of this speech has severe negative consequences on the judicial system.<br />
<br />
== Compelled Speech ==<br />
<br />
=== West Virginia State Board of Education v Barnette ===<br />
Facts: In 1942, WVSBE adopted a resolution that compelled all children to salute the American flag.<br />
<br />
Rules: A state may not compel individuals to engage in involuntary expression.<br />
<br />
Reasoning: Government may censor ideas only if their expression constitutes a clear and present danger of injury. If government censorship is limited, then compulsion should be even more so. Since the students’ refusal to salute the flag didn’t violate anyone’s rights, then the government would not be allowed to compel it. If there is any fixed star in our constitutional constellation, it is that no official, high or petty, can prescribe what shall be orthodox in politics, nationalism, religion, or other matters of opinion, or force citizens to confess by word or act their faith therein.<br />
<br />
The Court found that the first amendment cannot enforce a unanimity of opinion on any topic, and national symbols like the flag should not receive a level of defense that trumps Constitutional protections. <br />
<br />
The Court followed this principle in other cases, such in Wooley v Maynard, where it ruled that an individual could be punished for blocking out the portion of his car license plate that contained the state motto. The Court said that the right of freedom of speech includes the right to both speak freely and to refrain from speaking at all.<br />
<br />
=== National Federation of Family and Life Advocates v Becerra ===<br />
Facts: NIFLA sought to enjoin the enforcement of the California Reproductive Freedom, Accountability, Comprehensive Care, and Transparency Act. The law’s stated purpose is to ensure access to reproductive health services for California women regardless of income. NIFLA argued that the act’s requirements that (1) licensed clinics provide information to patients about free and low-cost publicly funded services and that (2) unlicensed clinics inform patients of their unlicensed statutes is a violation of their first amendment rights. <br />
<br />
Rules: Content-based restrictions on professional speech are subject to strict scrutiny.<br />
<br />
Reasoning: Content-based regulations of speech violate the first amendment unless the satisfy strict scrutiny; these means that the regulations must be showed to be properly tailored to serve compelling state interests. The Court never recognized professional speech as a different form of public speech subject to different rules. However, there are two exceptions from strict scrutiny.<br />
<br />
# When professionals are required to disclose factual, noncontroversial information, in their commercial speech.<br />
# Where states regulate professional conduct that incidentally involves speech.<br />
<br />
The first requirement did not fit the state’s compelling reason to regulate speech. While the second one was unjustified and unduly burdensome.<br />
<br />
== Laws prohibiting discrimination ==<br />
Many state and local governments have adopted laws that prohibit discrimination by private groups and clubs. Frequently, those wishing to discriminate bring challenges to these laws; the claim is that freedom of association protects their right to discriminate and exclude whomever they want from their group.<br />
<br />
=== Roberts v US Jaycees ===<br />
Facts: USJ is a social organization that only permitted young men to become regular members. The Minnesota legislature made a law banning these discriminations.<br />
<br />
Rules: A state may prohibit a private organization from excluding members on the basis of gender upon showing a compelling interest in preventing these discriminations. <br />
<br />
Reasoning: The bill of rights protects the right to form personal relationships without interference from the state. But it doesn’t protect all relationships. Relationships protected by the first amendment are marriage and cohabitation with relatives, which are distinguished by small circles, high selectivity, and seclusion from others. A business doesn’t meet these factors.<br />
<br />
A relationship is constitutionally protected depending on<br />
<br />
# Size<br />
# Purpose<br />
# Policies<br />
# Selectivity<br />
# Congeniality <br />
<br />
And other pertinent characteristics.<br />
<br />
Because the Jaycees were neither small nor selective and participation of strangers was central. It lacked the distinct characteristics needed for constitutional protection. The first amendment protects collective efforts on behalf of shared goals, such as pursuits of political, educational, and cultural ends. Government interference with the internal organization of a group may be justified by compelling interests that can’t be achieved by less restrictive means.<br />
<br />
=== Boy Scouts of America v. Dale ===<br />
Facts: The BSA revoked the membership of one of its eagle scout members because that person was both gay and a gay’s rights activist. <br />
<br />
Rules: Under the First Amendment’s protection of the freedom of expressive association, a state may not prohibit a private organization from barring homosexuals from membership.<br />
<br />
Reasoning: Forced inclusion of an unwanted person in a group infringes on the group’s freedom of expressive association if the presence of that person significantly affects the group’s ability to advocate public or private viewpoints. However, this freedom is not absolute. It may be override by “regulations adopted to serve compelling state interests, unrelated to the suppression of ideas. The BSA is a nonprofit organization that seeks to instill ethical values in boys. It is indisputable that an association that seeks to transmit such values engages in expressive activity. Thus, it is necessary to determine whether the forced inclusion of Dale would significantly affect that organization’s ability to advocate their viewpoints. The BSA teaches boys to be “morally straight” and “clean.” The BSA argues that homosexuality is at odds with those goals. Just as considerable deference is given to an association’s assertions regarding the nature of its expression, it is also important to give deference to an association’s view of what would impair its expression.<br />
<br />
Dale’s membership with the BSA would, force the organization to accept gay people and their conduct. The application of the NJ law would require to accept Dale, which apparently is against the BSA’s viewpoints. <br />
<br />
= Incorporation =<br />
<br />
== Pre-Civil War ==<br />
Individual rights were explicitly protected prior to the bill of rights. <br />
<br />
=== Barron v Baltimore ===<br />
This case limited the reach of the 5th Amendment only to the federal government. Marshall found that the limitations on were specifically intended to limit national government power. He cited the intent of the framers and the development of the bill of rights as an exclusive check on the federal government, Marshall reasoned that the Supreme Court had no jurisdiction in this case because the 5th Amendment was not applicable to the states. <br />
<br />
==== Dread Scott Case – distinguishes between state and national citizenship. ====<br />
<br />
* Scott was held not to be a Us citizen, so no right to use under the 14th amendment.<br />
* Court held that slaves were property. Yikes<br />
* Court held that Missouri Compromise was unconstitutional limit on property ownership.<br />
<br />
== Incorporation of the Biil of Rights into the Due Process Clause ==<br />
Because the Slaughter-House cases, the application of the Bill of Rights to the states could not be through the privileges and immunities clause. In the early twentieth century, the Supreme Court suggested an alternate approach: finding that at least some of the Bill of Rights provisions are part of the liberty protected from state inference by the Due Process clause of the Fourteenth Amendment.<br />
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In Chicago, Burlington & Quincy Railroad v City of Chicago, the Supreme Court ruled that the due process clause of the fourteenth amendment prevents states from taking property without just compensation. Although the Court did not speak explicitly of the Fourteenth Amendment incorporating the Takings Clause, that was the practical decision.<br />
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Twinning v New Jersey is a case where the Court first expressly discussed the incorporation of the bill of rights. The Court said that it is possible that some of the personal rights safeguarded by the first eight amendments against national action may also be safeguarded against state action, because a denial of them would be a denial of due process. <br />
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Twinning expressly opened the door to the Supreme Court applying provisions of the Bill of Rights to the states and incorporating them into the Due Process clause. <br />
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=== Palko v Connecticut – Considers the process in context of double jeopardy under Fifth Amendment. ===<br />
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* Selective incorporation debate<br />
* Is the right “of the very essence of a scheme of ordered liberty” “a principle of justice so rooted in the traditions and conscience of our people to be ranked as fundamental.”<br />
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== Current State of the Doctrine ==<br />
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* Everything is incorporated except<br />
** The third amendment right against quartering<br />
** Fifth amendment right to a grand jury<br />
** Seventh amendment right to a jury trial in civil cases for more than $20<br />
** Eighth Amendment right against excessive fines.<br />
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=== Possible Tests ===<br />
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* Palko<br />
** Implicit in concept of ordered liberty<br />
** Rooted in traditions and conscience so as to be fundamental<br />
* Adamson<br />
** Does the conduct “offend those canons of decency and fairness which express the notion of justice of English-speaking peoples”<br />
* Duncan v Louisiana <br />
** Focus on whether the Bill of Rights provision is essential to fundamental fairness.<br />
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=== McDonald v. City of Chicago ===<br />
Facts: Petitioners challenged a law enacted by Chicago that prohibited residents from possessing handguns, claiming the law violated the second amendment<br />
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Rules: A bill of rights guarantee applies to the states if it is fundamental to the nation’s scheme of ordered liberty or deeply rooted in the nation’s history and traditions.<br />
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Reasoning: The Court found that individual self defense is a basic right, which forms the central component of the Second Amendment’s right to keep and bear arms, and which is deeply rooted in the nation’s history and traditions. Following the civil war, in response to the efforts of some states to disarm black soldiers and other black people Congress enacted a law which protected all citizens’ rights to keep and bear arms. <br />
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= Economic Substantive Due Process =<br />
The fifth and fourteenth amendments provide, respectively, that neither the federal nor state governments can deprive any person of life, liberty, or property without due process. The due process clause have been implemented to provide two different types of protection. One is termed “procedural due process” that refers to the procedures the government must go through to take away a person’s life, liberty, or property.<br />
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The second is substantive due process which asks whether the government has an adequate reason for taking away a person’s life, liberty, or property. In other words, the focus is on the sufficiency for the government’s action, not on the procedures the government has followed.<br />
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== Substantive Due Process ==<br />
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=== Allgeyer v Louisiana ===<br />
Facts: A Louisiana statute prohibited foreign insurance corporations from conducting business in Louisiana without maintaining at least one place of business and an authorized agent in the state. Louisiana implemented the statute as an exercise of its police power, intending to protect its citizens from deceitful insurance companies. Allgeyer and Company violated this statute by purchasing insurance from a firm based in the state of NY.<br />
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Rules: Freedoms protected by the due process clause include economic freedoms and prohibit a state from preventing its citizens from contracting with foreign insurance companies to insure property located within the state. <br />
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Reasoning: Although Louisiana would have been able to prohibit corporations from doing business within its borders, the act in question of sending written correspondence to a foreign insurance corporation is permitted by the 14th Amendment. The due process clause of the amendment protects economic freedoms, including the freedom to contract without out-of-state parties. Thus, Louisiana’s attempt to inhibit such contracting, even though it was regarding property located within the state, deprived Allgeyer of its economic liberties without due process.<br />
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=== Lochner v. New York ===<br />
Facts: In 1896, NY legislature enacted the bakershop act which limited the hours bakers were permitted to work to no more than 10 per day. Lochner owned a baker in NY and was fined twice for overworking his employee.<br />
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Rules: A state may not regulate the work hours mutually agreed upon by employer and employees as this violates their 14h amendment right to contract freely under the due process clause,<br />
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Reasoning: The general right of an employer to make a contract in relation to his business is part of the liberty of the individual protected by the Fourteenth Amendment to the United States Constitution. The right to purchase or to sell labor is part of the liberty protected by this amendment, unless there are circumstances that exclude the right. States may impose reasonable conditions on the right to contract that further the health, safety, and general welfare. Pursuant to their Constitutional police powers, states may prohibit contracts which violate either a federal or state statute, or contracts to use one’s personal property for immortal or illegal purposes. <br />
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States have previously been permitted to regulate hours. However, state police power is not absolute and must be balanced against individual liberty concerns protected by the 14th amendment. <br />
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=== Laws protecting unionizing ===<br />
In the early part of the 20th century, as workers attempted to unionize, many states and federal government adopted laws to facilitate unionization by prohibiting employers from insisting, as a condition, that employees do not join a union.<br />
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==== Coppage v Kansas ====<br />
Facts: In 1903, Kansas made it unlawful for employers to prevent their employees from joining a union.<br />
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Rule: The due process clause of the 14th amendment prevents states from making laws that prohibit employment contracts barring employees from joining a union.<br />
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Holmes Dissent: Lochner should be overruled. The right to contract in that case was wrongly upheld by relying on an economic theory that was largely unsupported by the majority of states that wishes or precedent decisions. This is an issue that should be uniquely decided by each state rather than by the judiciary. There is noting in the Constitution that prohibits states from making laws that one made by Kansas, and thus, the law should be upheld.<br />
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=== Maximum Hours ===<br />
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==== Muller v Oregon ====<br />
Facts: In 1903, the State of Oregon passed a law that limited working hours of female employees to no more than ten per day. Muller, the owner of a laundry business, was convicted for violating the statute after he made his female employees work for more than ten hours. <br />
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Rules: Under the 14th Amendment, a state may constitutionally limit the work hours of men and not women because the state’s strong interest in promoting the health of the weaker sex <br />
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Reasoning: Reports, affidavits, and statistics all suggest that working long hours are particularly dangerous to women because of their special physical organization. In addition, to describe the effects of long hours on women’s health, the reports also suggest that working more than ten hours per day outside of the home diminishes women’s ability to perform maternal functions, rear and educate children, and maintain the home. <br />
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=== Minimum Wage Laws ===<br />
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==== Adkins v Children’s Hospital ====<br />
Facts: In 1918, Congress enacted a law guaranteeing a minimum wage to women and children employed in DC’s children’s hospital, which employed many women.<br />
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Rules: Congress cannot make a law regulating the federal minimum wage for women as this violates the freedom of contract.<br />
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Reasoning: Although the freedom to contract is firmly established in the Court’s jurisprudence, nothing in its precedent decisions suggest that this freedom is absolute. However, the legislature may only interfere with the freedom to contract in the case of exceptional circumstances. While the difference between the sexes was acceptably upheld in Muller, the health and maternal functions concerns that justified that is not present here.<br />
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=== Consumer Protection ===<br />
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==== Weaver v Palmer Bros Co ====<br />
Facts: PA passed the act of 1923 to regulate the manufacturing, sterilization, and sale of bedding. The law specifically prevented the use of ‘shoddy” or scraps of new and second-hand materials, in making new bedding. Palmer uses shoddy in a variety of its products. <br />
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Rule: A state may not enact consumer protection legislation when no significant public health and safety concerns exist, or when such concerns may be easily alleviated.<br />
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Reasoning: There is no dispute between the parties over the fact that shoddy is capable of being thoroughly disinfected before it is used in the manufacturing of new bedding. Additionally, no reports exist of it spreading sickness or diseases. All health and safety concern can be eliminated through the disinfecting process. <br />
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=== Pressure for Change ===<br />
By the 1930’s, enormous pressures were mounting for the Court to abandon the laissez-faire philosophy of the Lochner era. The depression created a widespread perception that government economic regulations were essential. With millions unemployed and with wages incredibly low for those with jobs, employees had no realistic chance of bargaining in the workplace. <br />
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Lochner rested on the assumption that freedom of contract and related property rights were part of the natural liberties possessed by people. Legal realists attacked this premise and argued that the law reflected political choices, using the freedom of contracts to invalidate state laws was a political choice that favored employers over employees. <br />
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==== West Coast Hotel Co. v. Parrish ====<br />
Facts: Washington passed a law which regulated the minimum wages paid to female and minor employees. Parrish was employed as a made at a hotel owned by West Coast. Together with her husband, she sued to recover the difference between the wages she was paid and the minimum wage fixed under the law. <br />
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Rule: A state may regulate the wage paid to female employees when that regulation is for the purposes of promoting employee’s health, safety, and welfare.<br />
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Reasoning: Changing social and economic circumstances since Adkins warrant a fresh consideration of the issue. The liberty asserted by West Coast is that of freedom to contract, but this freedom is not expressed in the Constitution. Rather, the Constitution, through the 14th amendment, clearly outlines the liberty interests of freedom from actions which attacks a person’s health, safety, and welfare. Thus, all asserted liberty interests are ultimate restrained by the health, safety, and welfare interests that comprise the due process. <br />
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changing economic times mean that workers who are not paid a living wage would have to rely on taxpayers for the care of their various needs. This is an unprecedented problem because the United States is currently in the middle of the “Great Depression.” Thus, more workers than ever are seeking community assistance, which leads to an impermissible burden on taxpayer<br />
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==== United States v. Carolene Products Co. ====<br />
Facts: Congress passed the filled milk act that criminalized the shipment in interstate commerce of skimmed milk compounded with any fat or oil other than mil fat, so as to resemble mil or cream. Carolene was accused of shipping Milnut, which was skim milk and coconut oil. <br />
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Rules: States posses authority to regulate widely used articles of food for the benefit public welfare. <br />
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Reasoning: Congress had a rational basis to enact this law because of the many hearings it conducted to find out whether this would be good for public welfare.<br />
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=== Economic Substantive Due Process Since 1937 ===<br />
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==== Williamson v Lee Optical of Oklahoma ====<br />
Facts: OK made it unlawful for any person not licensed as an optometrist or ophthalmologist in the state to fit lenses to a face or fashion existing lenses into a frame unless given by a prescription by a state licensed eye doctor. Lee Optical sued OK against Williamson, the official charged with enforcing the law, because Lee believed that the law violated the Due process and the equal protection clauses.<br />
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Rules: A state may regulate a business if its legislature determines there is a particular health and safety problem at hand and the regulation in question is a rational way to correct those problems.<br />
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Reasoning: Although the OK law might be arbitrary and wasteful in many cases, it is absolutely necessary in other cases where directions from a prescription are required for fitting glasses. Regardless, it is a decision for the state legislature, not the judiciary, to balance the pros and cons of the requirement. The legislature made a rational determination that the law is needed in the present case. <br />
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= Fundamental Rights =<br />
The supreme court has held that some liberties are so important that they are deemed fundamental rights and that the government generally cannot infringe on them unless strict scrutiny is met. <br />
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To meet strict scrutiny, the law must be necessary to serve a compelling governmental interest<br />
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* Ends part of the test –is it a compelling government interest?<br />
* Means part of the test <br />
* Does it achieve the purpose/interest?<br />
* Is it necessary to achieve the purpose/interest: are there less restrictive alternatives?<br />
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== The Ninth Amendment ==<br />
This amendment is often mentioned in discussion of fundamental rights, especially rights not expressly mentioned in the Constitution. IT states that the enumeration in the Constitution of certain rights shall not be construed to disparage others retained by the people.<br />
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=== Procedural Due Process ===<br />
The existence of a right triggers two distinct burdens on the government. One is substantive and the other is procedural.<br />
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==== Framework for Analyzing fundamental rights ====<br />
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# Is there a fundamental right? – If a right is deemed fundamental, the government usually will be able to prevail only if it meets strict scrutiny. But if the rights is not fundamental, generally, only the rational test basis is applied.<br />
# Is there a Constitutional right infringed? – If there is a fundamental right, this is the next question. There is no doubt that a Constitutional right is infringed and the government must be justified when the exercise of a right is prohibited. <br />
# Is there a sufficient justification for the government’s infringement? – The government needs a compelling state interest to infringe on a fundamental right<br />
# Is the means sufficiently related to the purpose? – Under strict scrutiny, it is not enough for the government to prove a compelling purpose, they must also show that the law is necessary to achieve the objective. <br />
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=== Constitutional protection for family autonomy ===<br />
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==== Right to marry. ====<br />
Loving v Virginia – Marriage is one of the basic civil rights of man, it is fundamental to our very existence and survival. To deny this fundamental freedom on so unsupportable basis as the racial classification is surely to deprive all of the state’s citizens of liberty without due process of law.<br />
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Zablocki v Redhail – It is not surprising that the decision to marry has been placed on the same level of importance as the decision to procreate, have kids, raise kids, and family relationships. It would make little sense to recognize a right of privacy with respect to other matters of family life and not with respect to the decision to enter the relation that is the foundation of the family in our society. <br />
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(it’s illegal to stop a person from getting married if they have kids)<br />
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Bowen v Owens -It is rational to assume that divorced widowed spouses are generally less dependent on the resources of their former spouses than are widows and widowers. Remarriages also lessen these dependencies <br />
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===== Obergefell v. Hodges =====<br />
Facts: In response to some states legalizing same-sex marriage, various states enacted laws and constitutional amendments defining marriage as between one man and one woman. When Obergefell’s partner, John Arthur became terminally ill, they decided to get married in Maryland. After Arthur died, however, the couple’s home state of Ohio refused to list Obergefell as Arthur’s surviving spouse on the death certificate. <br />
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April DeBoer and Jayne Rowse adopted 3 kids, but the state banned the adoption of kids by a same-sex couple. <br />
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Ipje DeKoe and Thomas Kostura got married in NY before DeKoe deployed to Afghanistan. They later moved to Tennessee which refuses to recognize their union. These and similarly situated plaintiffs all separately sued state officials with enforcing state marriage laws in their respective federal courts, alleging violations of their rights under the Fourteenth Amendment. <br />
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Rules: Same sex couples have a Constitutional right to marry. The marriage right must be recognized across all states. <br />
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Reasoning: Marriage is a fundamental right under the due process clause. In Loving, the court struck down a law that interfered with the right to marry. In Zablocki, the court invalidated a law that limited the ability of people to get married. Ultimately, the four principles underpinning the protection of the right to marry must apply equally to opposite and same-sex couples<br />
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# The right to choose whether and whom to marry is inherent in the concept of individual autonomy<br />
# The right serves relationships that are equal in importance to all who enter them<br />
# Assuring the right to marry protects children and family which implicates a myriad of rights related to procreation and childrearing<br />
# Marriage is the very keystone of our social order and foundation of the family unit.<br />
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Same-sex couples have an equal right to intimate associations. Refusing to allow same-sex couples to marry denies them a myriad of legal rights, including those related to taxation, insurance benefits, interstate succession, spousal evidentiary privileges, child custody and support, and more. In this instance, the liberty interest protected by the due process intersects with the right to equal protection and same-sex marriage bans violates both. <br />
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==== Right to Custody of One’s Children ====<br />
The Supreme Court has recognized that parents have a fundamental right to custody of their children. The Court has remarked that a natural parent’s desire for and right to the companionship, care, custody, and management of his or her children is an interest far more precious than any property right.<br />
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Stanley v Illinois – The Stanleys never married but lived together on and off and had three kids over an 18-year period. When Joan died, the state instituted a dependency proceeding. Under state law, an unmarried father was presumed to be an unfit parent, so they tried to take Stanley’s kids away from him.<br />
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The Supreme Court later held that ALL parents are entitled to a hearing to determine their fitness before the state deprives them of custody of their children.<br />
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===== Michael H. v. Gerald D. =====<br />
Facts: Gerald D and Carole D were married in Vegas and resided in California. Carole later cheated on Gerald with a neighbor. Carole gave birth to a kid, Carole then informed Gerald that Michael might be the father. Gerald and Carole split up and Carole took up residence with yet another guy and stopped Michael from seeing his daughter. The child’s guardianship is at issue because a California law presumes that if a mom has a kid during a marriage and her husband is not impotent or sterile, then that kid is the husband’s kid.<br />
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Rules: The right of a potential biological father to assert paternal rights over a child born into a woman’s existing marriage with another man is not traditionally recognized in historical jurisprudence and is not a fundamental right protected by the due process clause. <br />
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Reasoning: The due process clause jurisprudence governing “liberty” interests requires such interest to be both fundamental as well as traditionally protected by society. An asserted liberty interest of certain parental rights must be rooted in history and tradition. The due process clause of the fourteenth amendment traditionally protects only relationships developed within the unitary family. No such historical protection exists for a third party, but history is more inclined to protect relationships among traditional family units.<br />
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==== The Right to keep a family together ====<br />
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===== Moore v City of East Cleveland, Ohio =====<br />
Facts: The City of East Cleveland enacted a housing ordinance that limited the occupancy of a dwelling unit to members of a single family. The ordinance narrowly defined the term family as encompassing only a few categories of related individuals. Inez Moore lived in East Cleveland in a home with her son and two grandsons. Under the housing ordinance this arrangement was outside the legal definition of “family”<br />
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Rules: The right of related family members to live together is fundamental and protected by the Due Process Clause and necessarily encompasses a broader definition of family than just members of a nuclear family.<br />
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Reasoning: The government argued that its housing ordinance should be sustained based on the court’s previous decision in Village of Belle Terre v Boraas where a housing ordinance limiting occupancy in single residence was sustained because it bore a rational relationship to permissible state objectives. However, that case is different because it expressly allowed all who were related by “blood, adoption, or marriage” to live together. It only prevented unrelated individuals from living together, which this one prevents blood relatives from living together. Although the government had a legitimate purpose for the law, it however serves a marginal benefit and is not necessary to accomplish the goal.<br />
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==== The Right of Parents to control the upbringing of their children ====<br />
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===== Meyer v Nebraska =====<br />
Facts: Under Nebraska law, it was a crime for any individual or teacher in any private, parochial, or public school to teach any subject to any person in any language other than English. Foreign languages could be taught as languages to students only after completion of eighth grade. Meyer, a teacher in Nebraska, was convicted of violating the law by teaching German to Raymond, a child.<br />
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Rules; A state may not prohibit the teaching of foreign languages to a young child in school when such teaching has been requested by the child’s parents because this interferes with the fundamental liberty interest of a parent to control his or her child’s education.<br />
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Reasoning: The scope of the protected liberty interest under the due process clause does not include the freedom from bodily restraint. Rather, recognized liberty interests include the freedom to contract, to engage in any of the common occupations of life, to acquire skill, knowledge, to marry, to establish a home, to raise kids, to practice religion, and to generally the common law notion of happiness. These liberties cannot be interfered with by arbitrary or unreasonable reasons that do not further any legitimate state purpose.<br />
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===== Troxel v. Granville =====<br />
Facts: A Washington statute permitted any person to petition a superior court in the state for visitation rights at any time and authorized the court to grant such visitation rights whenever visitation might serve the best interest of the child. Jenifer and Gary Troxel petitioned a Washington Superior Court for the right to visit their paternal grandchildren after their son, the children’s father, committed suicide. Tommie Granville, the mother of these kids, opposed the petition.<br />
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Rules: Under the Due Process Clause, a state court may not grant visitation rights to a person, even when doing so would be in a child’s best interest, if those visitation rights are opposed by the child’s parent because doing so interferes with the parent’s fundamental liberty interest in raising their child.<br />
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Reasoning: There is difficulty in attempting to define the concept of average American family because the composition of families varies across the board. Many states have passed similar non-parental visitation statutes to that in Washington, because they recognize the reality that grandparents and other relatives play significant roles in the rearing of children. <br />
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==== Right to Procreate ====<br />
Buck v Bell – A virginia law provided that a person with a mental illness could be sterilized for the benefit of the person or society. Sterilization decisions were made by the mental hospital in which the person resided. The court held here that the right to reproduce is not an identified fundamental liberty interest, and thus, the sterilization is allowed. <br />
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===== Skinner v Oklahoma =====<br />
Facts: An Oklahoma statute, the Habitual Criminal Sterilization Act, allows the forced sterilization of any habitual criminal within the state. The statute defines a habitual criminal as a person, having been convicted two or more times for crimes “amounting to felonies involving moral turpitude” either in Oklahoma Court or in a court of any other state, is thereafter convicted of such felony in Oklahoma and sentenced to prison. That person is then sterilized. <br />
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Rules: A state law requiring forced sterilization of criminals convicted of crimes of moral turpitude unconstitutionally infringes on the fundamental rights of marriage and procreation and violates the equal protection clause of the fourteenth amendment.<br />
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Reasoning: The legislation deals with some of the most basic civil rights of man. Marriage and procreation, both rights impacted by forced sterilization, are fundamental to the very survival of the human race. The power to sterilize, if exercised, can have a far-reaching and potentially devastating effects not only on Skinner as an individual, but on the future of the human race if done imprudently. The Oklahoma statute infringes on these fundamental rights, so it is best examined with strict scrutiny.<br />
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==== Right to purchase and use contraceptives ====<br />
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===== Griswold v Connecticut =====<br />
Facts: Griswold was Executive director of planned parenthood. Buxton was a licensed doctor and professor at Yale medical who served as director of the league in New Haven. The center was open and operated from November 1 to 10 of 1961, when the two men were arrested for giving information, instruction, and medical advice to married people for preventing conception.<br />
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Rules: An implied right of privacy exists within the bill of rights that prohibits a state from preventing married couples from using contraception.<br />
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Reasoning: A right of privacy protecting the intimate relations of married couples is implied in the bill of rights. The ninth amendment provides that the enumeration of rights in the constitution should not be construed to disparage or deny other rights retained by people. The protected activities in each amendments are “penumbras” that are not specifically enumerated but instead represents various zones of privacy in which the government cannot intrude.<br />
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===== Eisenstdat v Baird =====<br />
Facts: Under a Massachusetts statute, it is a crime to give away any drug, medicine, instrument, or article whatever for the prevention of conception, with the exception of a registered physician providing such items to married couples. Baird was convicted of delivering a lecture on contraception to a group of students in Boston University, and after he gave a young woman a package of Emko vaginal foam.<br />
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Rules: Under the Equal Protection clause, a state may not outlaw distribution of contraception to an unmarried person.<br />
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Reasoning: The practical effect of the Massachusetts statute is that only married persons seeking contraception from a registered physician for the purpose of preventing conception can get contraception. Single people cannot, and if married people don’t want to prevent a pregnancy but want to get contraception anyway, they’re also barred. The argument that the primary purpose of the law is preventing premarital sex and the spread of disease is rejected. It is unlikely that Massachusetts actually intended to withhold contraception from unmarried fuckers to punish them with unwanted pregnancy or diseases. <br />
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==== Right to Abortion ====<br />
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===== Roe v Wade =====<br />
Facts: Article 1196 of the Texas Penal Code restricts legal abortions to those procured or attempted by medical advice for the purpose of saving the life of the mother. Roe, a pregnant single woman, brought the suit against a Texas state official on the grounds that the statute was unconstitutional in restricting her right to an abortion.<br />
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Issue: Does the Constitutional right to privacy protect a woman’s right to choose to have an abortion<br />
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Rule: The constitutional right to privacy protects a woman’s right to choose to have an abortion.<br />
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Holding: Yes<br />
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Reasoning: The Constitutional right to privacy protects a woman’s right to choose to have an abortion. However, abortions may be regulated by a state after the first trimester of pregnancy and may be completely prohibited after the point of validity of a fetus unless necessary to preserve the health of the mother. Historically, women have had a greater right to terminate their pregnancies than they currently enjoy. There are three reasons to why there was a gradual strictness. First, It was seen to decrease illicit sexual activity by limiting abortion clinics, second concerns over safety of abortion procedures prompted a decrease in its prevalence to protect women’s health, and finally, states increasingly pushing their own interests.<br />
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The Court here held that a woman’s right to choose is under the purview of the right to privacy. But, it is not absolute. At some pint in the pregnancy, fetus being seen as a person outweighs the mother’s privacy. Thus the state interests grow substantially. With respect to the state’s interests in protecting the health of the mother, the interests becomes compelling at approximately the end of the first trimester. A state can therefore only regulate after viability, not before, but when a mother’s life is in danger, then she may have an abortion.<br />
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===== Planned Parenthood v Casey =====<br />
Facts: Planned parenthood brought a suit against Case, the governor of PA, challenging five restrictions on abortion under PA law. Most significantly, the PA statute required informed consent and a 24-hour waiting period for all women prior to undergoing an abortion. All minors seeking abortion were required to obtain the informed consent oof at least one parent, while a married woman need to show that she informed her husband of her intent to deletus fetus. <br />
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Issues: Is a state court restriction on abortion that requires informed consent and a 24-hour waiting period unconstitutional?<br />
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Rules: A state abortion regulation places an undue burden on a woman’s right to an abortion and is invalid if its purpose or effect is to place a substantial obstacle in the pat of a woman seeking an abortion before the fetus attains viability.<br />
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Holding: No<br />
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Reasoning: The holding in Roe v Wade is reaffirmed. There, the Court held: (1) a woman has the right to choose to have an abortion before viability to obtain it without undue interference from the state (2) a state may restrict abortions after fetal viability as long as it passes a law that exempts pregnancies that endanger the woman’s life or health and (3) a state has a legitimate interest from the outset of the pregnancy in protecting the health of the woman and the life of the fetus. The precedent holdings should be overturned only if changing circumstances render the established rules unworkable. Although Roe has endangered opposition, it has in no sense proven unworkable in its limitations of state restrictions on abortion. Although medical advances have moved the moment of viability, the holding in Roe is still relevant. The PA restrictions in its present case can be upheld as constitutional regulations on abortion designed to help women make informed and rational choices. An undue burden exists because it puts a substantial obstacle that interferes with a woman’s right to an abortion. <br />
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==== Government Regulation of Abortions ====<br />
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===== Whole Woman’s Health v Hellerstedt =====<br />
Facts: The state of Texas passed two laws governing abortions. The first required that a doctor performing the abortion have admitting privileges at a hospital no more than 30 miles from where the abortion is going to be performed (Admitting-privileges Requirement). This provision was adopted to ensure that women had easy access to a hospital in the event that complications from the abortion arose. The second provision required that the standard for each abortion facility meet the minimum standards for ambulatory surgical centers (The surgical center requirement). Whole Woman sued the defendant, commissioner of the Texas Department of State Health Services, claiming that the laws were unconstitutional. The district court determined that the laws would reduce the number of abortion facilities in Texas from 40 to eight. <br />
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Rules: A law with the purpose or effect of placing a substantial obstacle in the path of a woman seeking an abortion imposes an undue burden on a woman’s right to have an abortion and is thus unconstitutional. <br />
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Holding: Yes<br />
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Reasoning: A law with the purpose or effect of placing a substantial obstacle in the path of a woman seeking an abortion imposes an undue burden on a woman’s right to have an abortion and is unconstitutional. Under Planned Parenthood v Casey, states can impose limited restrictions on abortions that ensures the safety of the patient, but these restrictions cannot unduly burden the patient’s right to have an abortion. In this case, the district court did not err that the laws were Unconstitutional. <br />
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===== Gonzales v Carhart =====<br />
Facts: In November 2003, President Bush signed into law the Partial-Birth Abortion Ban Act. The PBABA prohibited “intact dilation and evacuation” (intact D&E), a particular manner of ending fetal life in the second trimester whereby a surgeon killed the fetus by dilating the mother’s cervix, and pierce the fetus’ head with scissors, and using suction to extract the fetus from the Uterus. Dr. Leroy Carhart, a physician that performed this procedure brought suit in federal district court against AG Alberto Gonzales based on the Constitutionality of PBABA. <br />
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Rules: Congress may ban a specific type of partial-birth abortion provided its restrictions on the practice are narrow and clear and the ban does not constitute an undue burden on a woman’s right to an abortion<br />
<br />
Reasoning: Before viability, a state cannot prohibit any woman from getting an abortion. Additionally, a state cannot impose upon this right an undue burden. An undue burden exists if the purpose or effect of a regulation is to place a substantial obstacle in the path of a woman seeking an abortion before viability. However, a regulation that merely creates a structural mechanism in which the state, or the parent, guardian or a minor, can express profound respect for the life of the unborn is permitted if the regulation is not a substantial obstacle. <br />
<br />
==== Constitutional Protection for Medical Care Decisions ====<br />
<br />
===== Right to refuse =====<br />
Washington v Harper – The Court said that prisoners had the right to be free from involuntary administration of antipsychotic drugs. The court observed that prisoners possess a significant liberty interest in avoiding unwanted administration of antipsychotic drugs under the Due Process clause. The court therefore said that the force administration of the medication in a nonconsenting person represents a substantial interference with that person’s liberty.<br />
<br />
====== Cruzan v. Director, Missouri Department of Health ======<br />
Facts: Nancy Cruzan was involved in a serious automobile accident. Paramedics found Cruzan without respiratory or cardiac functions, but revived her at the scene. After waking up from a coma, she stayed in a vegetative state in which she exhibited no cognitive or motor functions. To assist her, surgeons implanted a gastronomy feeding and hydration tube. When it became clear that she was not going to recover, her parents opted to pull the plug. <br />
<br />
Rules: A state may require that a guardian seeking to remove life-prolonging treatment prove by clear and convincing evidence that the person in the persistent vegetative state would have wanted the treatment withdrawn under such circumstances.<br />
<br />
Reasoning: Based on precedent, a competent person has a constitutionally protected liberty interest under the Fourteenth Amendment to refuse unwanted medical treatment. However, an incompetent person is unable to make such a choice. A choice must be made for them by their guardian. Thus, a court must balance the liberty interests of the incompetent individual and the state’s interest in preserving life. <br />
<br />
===== Right to Physician assisted death =====<br />
<br />
====== Washington v Glucksberg ======<br />
Facts: Under Washington state law, it is a crime to knowingly cause or aid another person to attempt suicide. Glucksberg, a Washington physician, along with other doctors sued the state alleging that Glucksberg frequently treated terminally-ill patients and would have assisted those patients in ending their lives if not for Washington’s ban on assisted suicide. Glucksberg brought suit in federal district court seeking a declaration that the Washington state law violated a liberty interests protected by the Fourteenth Amendment. <br />
<br />
Rules: The right to physician-assisted suicide is not a constitutionally-protected liberty interest under the Due Process Clause of the Fourteenth Amendment.<br />
<br />
Reasoning: In almost every state, there is a ban on physician-assisted suicide, representing those states commitment to the protection and preservation of all human life. Even in more recent years with advances in medical technology, most assisted-suicide bans have been reexamined and reaffirmed by states. Even though many states have expanded their laws to permit living wills and surrogate decision-making regarding the withdrawal of life sustaining medical equipment, voters and state lawmakers alike consistently uphold bans on assisted suicide.<br />
<br />
There is a two step analysis on whether a fundamental right exists under the due process clause<br />
<br />
# Whether the right is objectively rooted in the US history and tradition and implicit in the concept of ordered liberty such that neither liberty nor justice would exist if that right is sacrificed<br />
# Whether careful description exists of the fundamental liberty. <br />
<br />
==== Constitutional protection for sexual orientation and sexual activity ====<br />
Bowers v Hardwick – The Supreme Court held that the right to privacy does not protect a right to engage in private consensual homosexual activity. The Court opined that it was not a right that exist because it was not supported by the constitution’s text, the framer’s intent, or tradition.<br />
<br />
===== Lawrence v. Texas =====<br />
Facts: Cops were brought to the home of John Lawrence in response to a report of a weapons disturbance. When the police went into his home, they say him engaging in gay love with his partner. The state charged the two men with engaging in deviate sexual intercourse with a person of the same sex. <br />
<br />
Rules: The due process clause does include a right to liberty in a person’s decisions concerning intimacies of their physical relationships.<br />
<br />
Reasoning: The due process clause does include a right to this liberty. The right to liberty under this clause has been held to protect the rights of married couples to make decisions regarding procreation by invalidating a law prohibiting the use of contraception. His same right has been extended to unmarried couples. This right was the basis of the Roe v Wade decision which held that a woman has the right to elect an abortion under some circumstances as a fundamental decision affecting her future. This right to liberty has been extended to decisions relating to marriage, procreation, contraception, family relationships, child rearing, and education. However, Bowers v Hardwick upheld a law that goes against this notion. The decision’s reliance on historical data and practices were misplaced. Much of the information relied on by Bowers has been put into question. Additionally, since the decision was issued, there has been an emerging awareness that liberty gives substantial protection to adults in deciding how to conduct their private lives in matters relating to sex. <br />
<br />
Regardless of historical circumstances, the key issue is whether the majority may use the power of the state to enforce its views of morality on the whole society through operation of criminal law. The answer is no. <br />
<br />
==== Right to Education ====<br />
<br />
===== San Antonio Independent School District v Rodriguez =====<br />
Facts: Mexican-American parents whose children attended schools in Edgewood Independent School district brought a class action lawsuit against the school district. The suit was brought on behalf of school children throughout the state who were members of minority groups or who were poor and resided in school districts financed by a low property tax base. In the late 40’s, the Texas legislature sought to mitigate the inequality of resources among school districts created by differences in property tax bases. The legislature enacted the Texas Minimum Foundation school Program, which called for state and local contributions to a fund earmarked specifically for teacher, salaries, operating expenses, and transportation costs. Individual school districts were responsible for providing twenty percent of the revenue for this fund and did so by imposing property taxes on citizens residing within the district. The property values in Rodriguez’s district were far lower than property value of other districts, making the amount collected to educate Rodriguez’s kids significantly lower per pupil than that allocated for children in more affluent districts.<br />
<br />
Rules: Education is not recognized as a fundamental right under the fourteenth amendment to the constitution, and thus a state regulation impacting the right to education should be analyzed under rational basis review to determine if it bears a rational relationship to a legitimate state purpose.<br />
<br />
Reasoning: The analysis on whether education itself is explicitly or implicitly guaranteed as a right in the Constitution. It is not explicitly written and there is no implicit basis for holding education is so protected. Rodriguez’s argument that education is essential to the effective exercise of First Amendment freedoms and to intelligent utilization of the right to vote is rejected. No evidence has been offered that the present levels of educational expenses in Texas provide an education falling short of fulfilling these purposes.<br />
<br />
=== Constitutional Provision concerning equal protection ===<br />
The Constitution as originally drafted and ratified had no provisions assuring equal protection of the laws. This of course, is not surprising for a document written for a society where blacks were slaves and where women were discriminated against. After the Civil war, widespread discrimination against former slaves led to the passage of the Fourteenth Amendment, which provides in part that no state shall deny a person within its jurisdiction the equal protection of the laws. <br />
<br />
==== A framework for equal protection analysis. ====<br />
<br />
===== What is the classification – =====<br />
The first question is what is the government’s classification? How is the government drawing a distinction among people? Equal protection analysis must always begin by identifying how the government is distinguishing among the people.<br />
<br />
===== What is the appropriate level of scrutiny? =====<br />
Discrimination based on race or national origin is subject to strict scrutiny. Also, generally, discrimination against aliens is subject to strict scrutiny. Although, there are several exceptions where less scrutiny is used. <br />
<br />
The government must have a compelling government purpose<br />
<br />
The government must have a significant reason for discriminating<br />
<br />
It must show that it cannot achieve its objective through less discriminatory means.<br />
<br />
The government has the burden of poof<br />
<br />
Intermediate scrutiny is used for discrimination based on gender and against nonmarital children. Under this level, a law upheld if it is substantially related to an important government purpose. The means used need not be necessary, but must have a substantial relationship to the end being sought.<br />
<br />
Rational basis is a level of scrutiny that all laws challenged under equal protection must meet. All laws not subject to the higher two levels are evaluated here. Here, a law will be upheld if it is rationally related to a legitimate government purpose. The objective need not be compelling or important. The means chosen only needs to be a rational way to meet the end.<br />
<br />
The challenger has the burden of proof for a rational basis test<br />
<br />
===== Does the government action meet the level of scrutiny? – =====<br />
The level of scrutiny is the rule of law applied to a particular government action that’s challenged. The court evaluate both the law’s ends and its means. <br />
<br />
In evaluating the relationship of the means of a particular law to the end, the Court often focuses on the degree to which a law is underinclusive or over inclusive.<br />
<br />
And underinclusive law is one that does not apply to individuals who are similar to those whom the laws applies<br />
<br />
Overinclusive laws are ones that, if it applies to those who need not be included in order for the government to achieve its purpose.<br />
<br />
===== The protection of fundamental rights under equal protection =====<br />
Usually equal protection is used to analyze government action that draws distinction among people based on specific characteristics. Sometimes, though, equal protection is used if the government discriminates against people as to the exercise of their fundamental rights.<br />
<br />
====== Skinner v Oklahoma ======<br />
Rules: A state law requiring forced sterilization of criminals convicted of crimes of moral turpitude unconstitutionally infringes on the fundamental rights of marriage and procreation and violates the equal protection clause of the fourteenth amendment.<br />
<br />
Reasoning: The legislation deals with some of the most basic civil rights of man. Marriage and procreation, both rights impacted by forced sterilization, are fundamental to the very survival of the human race. The power to sterilize, if exercised, can have a far-reaching and potentially devastating effects not only on Skinner as an individual, but on the future of the human race if done imprudently. The Oklahoma statute infringes on these fundamental rights, so it is best examined with strict scrutiny.<br />
<br />
===== The rational basis test =====<br />
<br />
====== What constitutes a legitimate purpose? ======<br />
Romer v Evans<br />
<br />
Facts: Several Colorado municipalities passed ordinances banning discrimination based on sexual orientation in housing, employment, education, public accommodations, health, and welfare services. In response to this ordinance, Colorado voters passed Amendment 2, which prohibited all governmental intervention designed to protect the status of a person based on their sexual orientation, conduct, practices, and relationship. Evans represented an aggrieve class of homosexuals who sued the state governor. <br />
<br />
Rules: A law prohibiting anti-discrimination protections for the gay, lesbian, and bisexual community violates the Equal Protection Clause of the Fourteenth Amendment.<br />
<br />
Reasoning: The equal protection clause provides that no person may be denied the equal protection of the laws. If a law neither burdens a fundamental right nor targets a suspect class, the law will pass Constitutional muster so long as it is rationally related to a legitimate state purpose. In this case, Colorado argues that Amendment 2 is not unconstitutional because it puts the LGBTQ+ in the same spot as all other persons. However, the state supreme court found that the effect of Amendment 2 repeals existing statutes, regulations, and policies that bar discrimination based on sexual orientation. Additionally, it functions to ensure that no similar laws protecting the LGBTQ will ever be enacted. Thus, the amendment does treat them differently from the other people. Thus, it does not have any legitimate purpose to pass the rational basis test.<br />
<br />
Must it be the actual purpose or is a conceivable purpose enough?<br />
<br />
The Court’s enormous judicial deference under the rational basis test is, in part, because of its willingness to accept any conceivable legitimate purpose as sufficient, even if it was not the government’s actual purpose.<br />
<br />
The requirement for a reasonable relationship<br />
<br />
Under the rational basis review, the Court must also decide whether the classification drawn in a statute are reasonable in light of its purpose. However, the Court repeatedly has expressed that this is the most relaxed and tolerant form of scrutiny.<br />
<br />
Tolerance for under inclusiveness under rational basis review.<br />
<br />
Railway Express Agency v New York<br />
<br />
Facts: A law made by the state of NY prohibited vehicles devoted solely to displaying advertisements, but permitted business vehicles to display signs related to their business so long as the vehicles were not solely used for advertising. <br />
<br />
Rules: A state law that is substantially underinclusive does not necessarily violate the Equal Protection Clause because a state may rationally decide to address public problems in phases<br />
<br />
Reasoning: In passing the law, NY stated that it was seeking to address a traffic congestion problem. Railway argued that to be rationally related to this legitimate purpose, the law should have been regulating trucks operating in NY and not the contents of the advertising on those trucks. It does not matter that the regulation seems under inclusive, as the regulation could have rationally decided that it is most pressing to regulate just one type of advertising at that time. <br />
<br />
Tolerance for overinclusiveness<br />
<br />
New York Transit Authority v Beazer<br />
<br />
Facts: The NYTA made a policy that it would not hire or employ people currently participating in one of NYC’s several methadone maintenance programs. About 40,000 persons received methadone treatments in NY and treatments were primarily administered to treat the physical withdrawal symptoms of heroin addicts. Beazer and three other persons brought suit in federal district court against NYTA in a class action on behalf of all people who had been or would have been subject to discharge or rejection by the NYTA.<br />
<br />
Rules: A state regulation that is over inclusive because it regulates a general class of people based on the conduct of particular members within that class does not violate the Equal protection clause of the constitution if it is rationally related to a legitimate purpose.<br />
<br />
Reasoning: Beazer argued that users of methadone should not be included in the general class of narcotics users. However, the district court found that several differences exist between users of methadone and persons that used no drugs at all. Additionally, a substantial number of people enrolled in methadone maintenance programs cannot be expected to complete them, and thus there is a great risk of recidivism among employees and potential hires in this class of persons. The NYTA can try to distinguish among methadone users and determine which people are most likely to present a drug risk, yet such a rule would be imprecise and almost impossible to apply in practice.<br />
<br />
Cases in which laws are deemed arbitrary and unreasonable<br />
<br />
US Department of Agriculture v Moreno<br />
<br />
Facts: Congress passed a food stamp act to govern and reform its food stamp program. A part of the act excluded people from participating in food stamps if their household contained people who were unrelated to any other people in the household. Moreno lived with Sanchez, a person to whom she was not related and Sanchez’s three kids. Moreno met all the income requirement, but did not receive any benefits because of the household issue.<br />
<br />
Rules: A state regulation that arbitrarily creates two classes of persons and deprives one class of government benefits violates the Equal protection and due process clause because it is based on mere legislative preference for one class that is not rationally related to a legitimate state purpose.<br />
<br />
Reasoning: For this legislative classification to be upheld, it would have to be rationally related to a legitimate governmental interest. In the present case, Congress stated that the purpose was to stimulate the agricultural economy by encouraging people to purchase farm surpluses. The governing of relationships within private homes bears no rational relation to the state purpose. However, because legislative enactments do not necessarily have to be sustained by the actual purpose, an analysis is undertaken to see if other purposes exist that can constitutionally sustain the statute. Congress argued that unrelated people in houses are more likely to abuse the program and thus could have passed legislation that is rationally related to the legitimate purpose of preventing fraud. However, this act did not target people likely to abuse the program or commit fraud, but rather it targeted people that are so desperately need of aid that they cannot afford to alter their living arrangements for program eligibility.<br />
<br />
City of Cleburne, Texas v. Cleburne Living Center, Inc.<br />
<br />
Facts: The living center filed an application for a special use permit with the city. The center should a permit to build residential housing for mentally disabled people. The facility would house up to thirteen people, who would be supervised at all times. The city denied the application.<br />
<br />
Rules: The mentally disabled are not a quasi-suspect class and thus any legislative regulations affecting their rights are subject to rational basis review and not intermediate scrutiny.<br />
<br />
Reasoning: The mentally disabled are not a quasi-suspect class and thus rational review would have been appropriate. First, it is undeniable that mentally disabled people require special care for functioning in the world, so legislative judgments are likely to be rational and should not be criticized more closely. Second, on a national scale, federal lawmakers have shown great appreciation for the plight of the mentally ill and enacted significant laws prohibiting discrimination against them. Third, these laws show that mentally ill people are not politically powerless and have been able to attract attention of lawmakers to provide their rights. Fourth, finding the mentally ill a quasi-suspect class would pose problems in the future for classifying other groups as such that possibly share some but not all characteristics with them. For these reasons, rational basis review is appropriate for any law related to the mentally ill. <br />
<br />
However, there was no rational basis for the city to reject the home. They require special permits for this housing plan but not for other building plans. Their goal was supposedly to avoid any harassment or negative attitude towards the mentally ill community, but there was no connection between this and their permit.<br />
<br />
===== Classification based on race and origin =====<br />
<br />
====== Race and discrimination before the thirteenth and fourteenth amendment ======<br />
<br />
====== Dread Scott v Sanford ======<br />
Facts: Dread Scott was an African American man born a slave in Virginia in the late 1700s. In 1830, he was taken by his owners to Missouri and purchased by Army Major John Emerson in 1832. Emerson took Scott with him on various assignments in areas where slavery was outlawed. While in Wisconsin, Emerson allowed Scott to marry and later left Scott and his wife in Wisconsin when he was reassigned to Louisiana. While in Louisiana, Emerson married Eliza Sanford. He then sent for Scott and his wife to travel to Louisiana to serve him and Eliza. Scott tried to buy his freedom, but Eliza refused. <br />
<br />
Rules: People of African descent brought to the United States and held as slaves, as well as their descendants (either slave or free), are not considered citizens of the United States and are not entitled to the protections and rights of the Constitution.<br />
<br />
Reasoning: The inquiry is necessarily limited to a class of people that include only those whose ancestors were African, imported and sold in the US as slaves. AT the time of the framers’ drafting of the Constitution, the prevailing view in the United States was that African people were slaves and therefore property and not people. <br />
<br />
====== Post Civil War Amendments ======<br />
Strict Scrutiny for Discrimination based on race and national origin<br />
<br />
It is now clearly established that racial classification will be allowed only if the government can meet the heavy burden of demonstrating that the discrimination is necessary to achieve a compelling government interest. Ironically, the Court first articulated this requirement in Korematsu v Japanese Americans during World War II. The Court held that all legal restrictions that curtail the civil rights of a single racial group are immediately suspect. That is not to say that all restrictions are unconstitutional, but must be subject to the most rigid scrutiny.<br />
<br />
Proving Existence of a Race or national origin<br />
<br />
There are two alternative ways of demonstrating the existence of a race or national origin classification.<br />
<br />
Is where the classification exists on the face of the law<br />
<br />
Alternatively, if a law is facially neutral, a race or national origin classification might be proven by demonstrating discriminatory administration or impact.<br />
<br />
Race Specific Classifications that disadvantage racial minorities.<br />
<br />
Korematsu v United States<br />
<br />
Facts: On May 9 1942, under Civilian Restrictive Order No 1, based on Executive Order 9066, Japanese-Americans were ordered to move to relocation camps in light of the US’s involvement In WWII. Korematsu was an American citizen of Japanese descent who was convicted by the United States Government in federal district court for violating Civilian Order No 34 which excluded Japanese Americans from remaining in San Leandro, a region designated as a military area. <br />
<br />
Rules: State laws restricting the rights of persons based on race are subject to strict scrutiny and will only be upheld if they further a “pressing public necessity.”<br />
<br />
Reasoning: Although all legal restrictions which restrict the civil rights of a single racial group is automatically suspect, it does not follow that all such restrictions are automatically unconstitutional. Such restrictions are subject to rigid scrutiny by the courts and will only be upheld in instances of pressing public necessity. The United States Government does not have the resources to make individualized determinations of loyalty during the war effort, therefore exclusion of Korematsu from the West Coast, regardless of his personal loyalties, is justified because of the existence of a “pressing public necessity.<br />
<br />
Racial Classifications Burdening both whites and minorities<br />
<br />
Loving v Virginia<br />
<br />
Facts: Mildred Jeter, a black woman and her husband, Richard Loving, a white man moved to Virginia and resided in Caroline County. The laws of the state banned interracial marriages. They were then indicted for violating Virginia law, where they plead guilty and were sent to jail. <br />
<br />
Rules: A state may not restrict marriages between persons solely on the basis of race under the Equal Protection and Due Process Clauses of the Fourteenth Amendment.<br />
<br />
Reasoning: State bans on interracial marriages were passed as a reaction to slavery and have been present since the colonial period. Such bans were affirmed by the Racial Integrity act of 1924, passed during a period of extreme nativism following WWI. However, in the fifteen years preceding this case, fourteen states have repealed their own similar bans. In the present, this state seeks to uphold its ban on the grounds that it has a legitimate purpose to preserve racial integrity and pride. It argues that it is complying with obligation by prevent all interracial marriages, not just whites. The argument that the mere equal application is enough to pass constitutional muster is obviously rejected. <br />
<br />
Palmore v Sidoti<br />
<br />
Facts: The Sidotis were both white people, married to each other. They had a kid. They later divorced and Linda lived with and married a black man named Clarence Palmore Jr. After learning of this, Sidoti sought sole custody of their kid, citing that changed conditions as grounds for his petitions, as well as making several allegations of instances in which Linda had not properly cared for the child. After the hearing, Florida court made no findings of fact which indicated that the child had not been properly cared for by either parent. However, the curt relied on the recommendation of a counselor and awarded custody to Anthony because Linda was married to a black man.<br />
<br />
Rules: The deprivation of custody of an infant from its mother solely because of the risk of racial biases violates the Equal Protection Clause.<br />
<br />
Reasoning: Child custody in state court proceedings are rarely in the purview of the federal judiciary. The lower court’s expressions of its views about the damaging effect on the child from living in a racially mixed household, as in this case, raises some federal issues. Racial and ethnic prejudices are still unfortunately alive and well, and the child in the case might very well be subject to these biases. However, the existence of these biases is not enough to remove an infant from its mother’s custody. <br />
<br />
Segregation Laws<br />
<br />
Plessy v Ferguson<br />
<br />
Facts: In 1890’s, the state of Louisiana passed a law that provided for the separate railway cars of whites and blacks. Plessy, a biracial man, challenged the law by taking a seat in the white railway. He was forcibly ejected and jailed. <br />
<br />
Rules: Public accommodation that are segregated according to racial classifications do not violate the equal protection clause so long as such accommodations are separate but equal.<br />
<br />
Reasoning: While the object of the Fourteenth Amendment is to promote the equality of all races before the law, it cannot have been intended to abolish all distinctions based on color, or to enforce social equality when whites and blacks do not actually want to commingle. These laws are fine so long as they do not implicate superiority or inferiority. <br />
<br />
Attacks on the Separate but equal laws<br />
<br />
Missouri ex rel Gaines v Canada – <br />
<br />
The Supreme Court held that it was unconstitutional for Missouri to refuse to admit black kids to its law school, but instead to pay for blacks to attend out-of state law schools. The Court explained that the basic consideration is not as to what sort of opportunities other states may provide, but as to what opportunities the state itself furnishes to white students and deny to black students solely based on color. In response, the state made new school for black students instead of admitting them into the white schools.<br />
<br />
Sweatt v Painter – Sweatt<br />
<br />
was a black person who applied to a Texas law school. However, the state’s black only law school offered to admit Sweatt when the whites only school denied him. He sued the rejecting university on racial grounds. . No matter how comparable the two schools might be in resources or other tangible factors, they are not comparable in the opportunities they would provide for Sweatt to network with the white students who constitute the majority of future Texas lawyers or to obtain a prestigious degree that would give him access to top legal jobs. By denying Sweatt equal access to these intangible benefits, Texas violated the Equal Protection Clause.<br />
<br />
McLaurin v Oklahoma <br />
<br />
The Supreme Court held that once blacks were admitted in a previously all-white school, the university could not force them to sit in segregated areas.<br />
<br />
Brown v Board of Education<br />
<br />
Facts: The present case represented a consolidation of several states where African American minors sought the aid of their state courts in gaining admission to public schools on a non-segregated basis. In all instances, Brown, and other minor African American children were denied admission to public schools attended by white children under laws requiring or permitting segregation of race. They alleged that the segregation deprived them of the equal protection of the laws under the fourteenth amendment.<br />
<br />
Rule: Separate educational facilities based on racial classifications are inherently unequal and violate the Equal Protection Clause of the Fourteenth Amendment.<br />
<br />
Reasoning: In deciding the issue, it is impossible to rely on the original intent surrounding adoption of the Fourteenth Amednment because prior cases and the legislative history involved in its enactment are inconclusive as to the true extent of its meaning. Additionally, it is not helpful to look at the status of public education at the time the amendment was adopted. <br />
<br />
The basic language of the amendment suggests that it was passed to prohibit all forms of discrimination against African Americans. In the present case, all basic attributes of the white and black schools are essentially the same. To determine whether the segregated schools violate the Fourteenth Amendment as interpreted, it is necessary to examine the actual effect of this segregation on the institution of public education as a whole. Modern studies confirm that the children experiencing segregation feel inferior, become less motivated, and perform at a lower standard than children that do not experience segregation.<br />
<br />
====== Facially Neutral Laws with Discriminatory Impact or Administration ======<br />
The requirement of proof of a discriminatory purpose.<br />
<br />
Washington v. Davis<br />
<br />
Facts: Davis was an African American who, along with another black person applied for admission to the DCPD. Both men were turned down and brought suit in federal district court against Washington. , the mayor of Washington, D.C., alleging that the police department used racially discriminatory hiring practices by administering a verbal skills test (Test 21) disproportionately failed by African Americans.<br />
<br />
Rules: A state-sponsored racial classification violates the equal protection provisions in the Fifth Amendment’s Due Process Clause only if it is shown to have both a disproportionate impact on a particular race and is motivated by invidious racial discrimination.<br />
<br />
Reasoning: The purpose of the equal protection clause is to prevent official conduct that discriminates on the basis of race. However, the Court has never adopted a rule which invalidates official conduct that merely has disproportionate impact on a particular race without evidence of a discriminatory purpose. However, this purpose can be inferred based on the totality of facts, including the fact that a law burdens one race more heavily than another. However, the mere instances of a disproportionate impact does not, without more, trigger strict scrutiny. <br />
<br />
The test itself is neutral on its face and was administered to all applicants to ascertain whether they had reached a particular level of verbal skill necessary for becoming a successful police officer. Thus Washington, D.C. did not act unconstitutionally in its hiring practices. The judgment of the court of appeals is reversed.<br />
<br />
McCleskey v. Kemp<br />
<br />
Facts: McCleskey is a black man who was convicted of two counts of armed robbery and one count of murder in Atlanta. At trial the jury recommended that he be sentenced to death on the murder charge. The court followed the recommendation. He filed a petition for a writ of habeas corpus in federal district court, alleging that the sentencing was administered in a discriminatory manner. <br />
<br />
Rules: A criminal defendant alleging an equal protection violation must prove the existence of a discriminatory purpose and a racially disproportionate and discriminatory effect.<br />
<br />
Reasoning: He must prove that the decisionmakers in this case acted with a discriminatory purpose. He offers no evidence to prove his claim, relying entirely on study results. IF the study were accepted as evidence, then an equal protection violation would occur in every instances in which a black man was sent to death for murdering a white man.<br />
<br />
====== Is proof of a discriminatory effect also required ======<br />
Palmer v Thompson<br />
<br />
Facts: In 1962, Jackson Mississippi operated 5 public parks, four of the swimming pools were designated for whites only. Fifth pool was designated for blacks only. .<br />
<br />
Rules: A state regulation based on racial classifications is unconstitutional under the Equal Protection Clause if the plaintiff proves both a discriminatory purpose and a discriminatory impact of the regulation.<br />
<br />
Reasoning: Neither the Fourteenth Amendment nor any act of Congress places an affirmative duty on states to operate swimming pools. Additionally, this case does not present a situation where whites are permitted to use pools while blacks are denied access. None of the Court’s precedents invalidate legislative judgements solely based on discriminatory intent. Discriminatory intent is difficult to prove because of the many viewpoints and compromises factored into a legislative decisions. However, the plaintiff here failed to prove any discriminatory intent or impact.<br />
<br />
===== How is a discriminatory purpose proven? =====<br />
<br />
====== Personnel Administration of Massachusetts v Feeney ======<br />
Facts: The state enacted a veteran preference statute that provided that all veterans qualified for state civil service positions must be considered for appointment ahead of any qualifying non—veterans. Feeney was a female non-veteran applicant for the civil service that scored very high on a number of competitive civil service exams. She was passed over for males with lower scores who were veterans.<br />
<br />
Rules: To prove that a state actor violates the Equal Protection Clause by enacting legislation with a discriminatory purpose, a plaintiff must show that the decisionmaker selected or reaffirmed a particular course of action at least in part because of, not merely in spite of, its adverse effects upon an identifiable group.<br />
<br />
Reasoning: The state’s veteran preference law was enacted to reward veterans for their service, to ease their transition from military to civilian life, to encourage patriotic service and to attract loyal and disciplined people into the civil service. Despite the state’s attempt to include as many women as possible, a disproportionate amount of men are included largely because of gender-based restrictions in the military itself. <br />
<br />
====== Village of Arlington Heights v. Metropolitan Housing Development Corp. ======<br />
Facts: The Metropolitan Housing Development Corp applied for a permit from the Village of Arlington Heights to rezone a fifteen-acre parcel of land from its zoning classification as a single-family use to a multiple-family use classification. MHDC planned to build a racially-integrated complex featuring nearly two hundred townhouse units marketed to low and moderate income tenants. The village denied the permit request and MHDC brought suit alleging that the denial of the permit was racially charged.<br />
<br />
Rules: A state-sponsored racial classification will not be held to violate the Equal Protection Clause of the Fourteenth Amendment unless a plaintiff shows that the law is motivated by a discriminatory purpose and has a discriminatory impact.<br />
<br />
Reasoning: In determining the existence of a discriminatory purpose, several factors must be considered<br />
<br />
The historical background predating the decision<br />
<br />
The specific sequence of events leading up to the challenged classification<br />
<br />
Departures by the state actor from normal procedures<br />
<br />
Substantive departures, particularly if the factors usually considered important by the decisionmaker strongly point to a decision contrary to the one reached<br />
<br />
The legislative or administrative history surrounding the adoption of the legislative classification.<br />
<br />
Nothing in the factual records indicated that the sequence of events leading up to the denial of the permit sparks suspicion.<br />
<br />
===== Application: Discriminatory use of peremptory challenges =====<br />
One of the most important areas where the Court has followed and applied this analysis is in holding Unconstitutional the discriminatory use of peremptory challenges. Law providing for peremptory challenges are facially race neutral. But peremptory challenges based on race or gender are motivated by a discriminatory intent and have a discriminatory impact. Those, the Court has held that race or gender based peremptory challenges deny equal protection whether exercised by a prosecutor, criminal defendant, or civil litigant.<br />
<br />
Batson<br />
<br />
First, the criminal defendant must set forth a prima facie case of discrimination by prosecutor<br />
<br />
Second, one the defendant has presented a prima facie case of discrimination, the burden shifts to the prosecutor to offer a race-neutral explanation for the peremptory challenges<br />
<br />
Third, the trial court must decide whether the race-neutral explanation is persuasive or whether the defendant has established purposeful discrimination<br />
<br />
===== Introduction: The Problem of Remedies =====<br />
<br />
====== Brown II ======<br />
Facts: In its original decision in Brown v Board of Education, the United States Supreme Court held that racial discrimination in public education was unconstitutional. The Court upheld a challenge by Brown to discriminatory racial policies in public schools operated by various boards of education in several states.<br />
<br />
Rules: Adequate compliance with the Court’s previous holding that racial discrimination in public education in unconstitutional requires public schools to desegregate “with all deliberate speed”<br />
<br />
Reasoning: Since the original decisions, one year ago, public school have taken substantial steps towards full desegregating. Individual school officials are responsible for implementing constitutional principles in good faith, but the various district court that originally heard the cases against all schools involved in Brown are best equipped to determine whether a good faith effort was made. The case is remanded to those courts. In rendering decisions on the cases, each respective court is guided by principles of equity. <br />
<br />
====== Regents of Univ. of CA v. Bakke ======<br />
Facts: UC, Davis Medical school practiced a policy whereby it reserved 16 out of 100 places in its entering class for members of racial minority groups. A special committee was appointed to administer this admissions policy. Allan Bakke brought suit against the regents of the school on the grounds that the policy was unconstitutional. <br />
<br />
Rules: Under the Equal Protection Clause of the Fourteenth Amendment, a public university may not discriminate on the basis of race in its admissions policies, even if doing so benefits members of minority races.<br />
<br />
Reasoning: Under the equal protection clause, a public university may not discriminate on the basis of race in its admissions policies, even if doing so benefits minority races. All racial and ethnic classifications are inherently suspect and must be viewed with strict scrutiny.<br />
<br />
====== Fullilove v. Klutznick ======<br />
Facts: Congress enacted a statute to help minority business enterprises which were businesses owned or controlled by black americans and other minorities. Government reports and studies in the congressional record establish that MBEs had been discriminated against in public contracting opportunities.<br />
<br />
Rule: A federal affirmative-action statute that conditions the receipt of federal funds on state and local governments using a portion of the funds to purchase goods or services from minority business enterprises is constitutionally permissible under the Fourteenth Amendment’s Equal Protection clause.<br />
<br />
Reasoning: A federal statute that conditions the receipt of federal funds for building projects on state and local governments using at least 10 percent of the funds to purchase goods or services from MBEs is constitutionally permissible. It was held in Bakke that intermediate scrutiny was the appropriate test in such cases. In this case, the statute survives intermediate scrutiny and is upheld.<br />
<br />
====== Wygant v. Jackson Board of Education ======<br />
Court held layoff plans was not necessary to achieve compelling purpose of remedying proven past discriminations as the district could achieve it with less discriminatory means<br />
<br />
Court held remedying past societal discrimination is not sufficiently compelling enough of a purpose<br />
<br />
Court held that providing Black role models is not a sufficiently compelling government purpose<br />
<br />
====== Richmond v. J.A. Croson ======<br />
Facts: The City of Richmond adopted the MBUP that required primary contractors to whom the city awarded construction contracts to subcontract at least 30% of the dollar value of the contract to one or more Minority Business Enterprise. The 30% set-aside did not apply to primary contractors that were themselves controlled by minority groups. <br />
<br />
Rules: Without evidence of past particular race-based discrimination, a city may not enact a plan to provide a race-based set-aside to exclusively promote minority business enterprises, as this does not constitute narrowly tailored means geared towards accomplishing a compelling state purpose.<br />
<br />
Reasoning: A state or local subdivision of government has the authority to eradicate the effects of private discrimination within its own legislative jurisdiction as long as it identifies such discrimination with sufficient particularity so as not to run afoul of the fourteenth amendment. <br />
<br />
====== Grutter v Bollinger ======<br />
Facts: The University of Michigan Law School followed an unofficial policy that sought to achieve student body diversity by giving substantial weight to the race of each applicant in making admissions decisions, in addition to its consideration of other academic and non-academic variables. (similar facts to Gratz) <br />
<br />
Rules: Consideration of race as a factor in admissions by a state law school does not violate the fourteenth amendment because supporting student body diversity is a compelling state interest; however, the school must demonstrate it previously made serious, good faith consideration of workable, race-neutral alternatives to achieve the sought after racial diversity.<br />
<br />
Reasoning: The Law School provides an individual, holistic review of each of its applicants and reasons that alternative methods of achieving the Law School’s purpose risk sacrificing both academic excellence and other types of diversity in the school. However, the Law School should cease racial consideration in its admissions policies after instances of past discrimination have been sufficiently remedied.<br />
<br />
====== Gratz v. Bollinger ======<br />
Facts: Gratz and Hamacher were both white people that applied for admission in to the University of Michigan’s undergrad program. Both were denied admission and filed suit in federal district court against a university administrator, seeking to challenge the university’s admission policy on the grounds that it violated the equal protection clause of the fourteenth amendment. The challenged policy ranked applicants on a 150 point scale that accorded different points to factor such as grade, tests, and achievements. However, an applicant automatically received twenty bonus points for being an underrepresented minority. D<br />
<br />
Rule: A university’s admissions policy that automatically gives preference to minority students on the basis of race, without additional individualized consideration, violates the Equal Protection Clause of the Fourteenth Amendment.<br />
<br />
Reasoning: The university’s use of race as justification for automatically assigning twenty points to each minority applicant is not narrowly-tailored to achieve its purpose of promoting student body diversity. Under this system, applicants are not afforded individualized review and the extra twenty points virtually guarantee admission to any minimally qualified minority applicant. <br />
<br />
====== Fisher v. University of TX at Austin ======<br />
Top 10% plan for ¾ of the class; rest filled based on high school GPA, test scores, essays, and race<br />
<br />
A court must engage in strict scrutiny of a public university’s race-based admissions process and afford no deference to the university’s chosen method of considering race to promote diversity<br />
<br />
====== Schuette v. Coalition to Defend Affirmative Action ======<br />
Court held that a Michigan initiative that amended the state constitution to prohibit the state or any of its political subdivisions from discriminating against or giving preference to any person, on the basis of race or gender, in education, contracting, or employment, did not violate the equal protection clause.<br />
<br />
No state is required affirmative action and a state may choose to eliminate it.<br />
<br />
====== Parents Involved in Community Schools v Seattle School District No. 1 ======<br />
Facts: Seattle school district No. 1 and Jefferson County School district voluntarily adopted student assignments plans that relied on race to determine which public schools certain children could attend. In each case, the schools used this system to ensure that the racial balance in any given public school fell within a predetermined range based on the racial composition of the school district as a whole. Parents Involved in Community Schools (PICS) (plaintiff) were parents of students denied assignment to particular schools under these plans solely because of their race.<br />
<br />
Rules: Public schools may not assign students to schools solely on the basis of race for the purpose of achieving racial integration, although the use of narrowly tailored, race-conscious objectives to achieve general diversity in schools is permissible.<br />
<br />
Reasoning: School assignments relying on racial classifications are subject to strict scrutiny. The school district’s use of racial classifications must be narrowly tailored to achieve a compelling government interest. There are two government interests that qualify as compelling: the interest of remedying the effects of past discrimination; and the interest of promoting student body diversity in the context of higher education. The racial assignment programs at issue are not related to either of this previously recognized interest. The school districts cite studies showing that students tend to gain intangible benefits from being educated in a racially diverse environment. This argument is rejected. The school districts provide no evidence that the amount of racial diversity necessary to achieve these intangible benefits coincides with the amount of racial diversity achieved by their racial assignment policies.<br />
<br />
===== Other Discrimination =====<br />
<br />
====== Discrimination against non-citizens ======<br />
This is different from national origin-based discrimination<br />
<br />
Non-citizens are covered by the text of the equal protection clause<br />
<br />
Strict scrutiny is used here generally, except in cases of “alienage” where a rational basis test is used instead.<br />
<br />
====== Graham v. Richardson ======<br />
Facts: Arizona participated in an assistance program funded in part by federal grants and administered by Arizona under federal guidelines. In addition to the federal requirements, Arizona required that program beneficiaries be US citizens ore have resided in the US for at least 15 years. Similarly, PA funded its own welfare program, but only US citizens were permitted to receive benefits. Richardson was a lawfully admitted resident alien but was denied welfare because she did not meet Arizona’s residency requirement. Leger was a lawfully admitted resident alien denied in PA. Both filed separate class actions against Graham, the Commissioner of AZ’s public welfare department and PA’s welfare department. Both alleged that the requirements violated the equal protection clause.<br />
<br />
Rules: Under the equal protection clause, states may not include conditions to the receipt of welfare benefits based on the beneficiary’s US citizenship or years of residence.<br />
<br />
Reasoning: The plaintiffs were entitled to receive the same benefits as any US citizen. The guarantee of equal protection of laws to all persons necessarily include lawful resident aliens. State “classifications based on alienage, like those based on nationality or race, are inherently suspect and subject to close judicial scrutiny.” Aliens are a “discrete and insular” minority and states will only be able to regulate aliens as a class in a narrow circumstance. <br />
<br />
Some classifications can be upheld only if they are necessary to accomplish a compelling government purpose. Further, the federal government has plenary power over matters of immigration and naturalization, and Congress has not imposed burdens on aliens who become indigent after admission. Although there is no need to decide whether aliens have a right to travel, once admitted, they are free to live in any state on equal privileges with all citizens under non-discrimination laws. <br />
<br />
====== Foley v. Connelie ======<br />
Facts: Under NY state law, no person shall be appointed to the state police force unless they are a citizen of the US. Edmund Foley was a lawfully admitted permanent resident in the US and was eligible for naturalization. He applied for admission to be a New York state trooper; a position conditioned on the passage of several competitive examinations. However, New York state officials prohibited Foley from taking the Police Department Examinations because Foley was not a citizen. <br />
<br />
Rules: A state may confine employment in its police force to US citizens only because cops perform basic governmental functions that may be constitutionally reserved for members of the national political community.<br />
<br />
Reasoning: Immigrants enjoy many freedoms in the United States that are not presented in other nations. However, no precedent exists that immigrants are entitled to unlimited freedoms in the United Sates or that all limitations are automatically suspect and subjected to strict scrutiny. Such a holding would depreciate the historic values of citizenship and jeopardize the existence of a strong political community in the United Sates. A lesser standard of scrutiny is required here. For an alienage classification in a connotationally state-controlled matter to be upheld, a state must justify the classification through a showing of some rational relationship between the interest protected and the limiting classification. The US has an interest in its political community for example, it may require government officers involved in the making of state policy to be US citizens. Although cops do not formulate laws, they are endowed with a great amount of discretion for carrying out those laws. Hence, states can constitutionally limit the participation of aliens in their police departments. <br />
<br />
====== Ambach v. Norwick ======<br />
Facts: Under NY Education law section 3001, a person who is not a citizen of the US may not be certified as a public school teacher unless they manifest an intention to apply for a citizenship. Norwick was born in Scotland and was a subject of Great Britain. She had resided in the US since the 60s and married a US citizens. Dachinger was a Finnish subject who came to the US also in the 60s and also married a US citizen. Both met the educational requirements to be public school teachers in NY. However, both refused to seek citizenship despite their eligibility to do so, and as a result, were denied certification as public school teachers for failure to meet the requirements of NY Education law section 3001.<br />
<br />
Rules: A state may refuse to employ as elementary and secondary school teachers aliens who refuse to seek naturalization.<br />
<br />
Reasoning: A rational basis test is used here. This distinction is based on the fundamental importance the Constitution places on citizenship. In determining whether teaching in public schools constitute a government function for equal protection purposes, the Court should look to the role of public education and to the degree of responsibility and discretion teachers have in fulfilling that role. Here public education fulfills an extremely fundamental role in society that it prepares people for participation as citizens in a representative government. Teachers in the public school system are directly involved in preparing students for this purpose. Hence, teachers are important to carry out governmental functions in public education. As such, the Constitution requires only that a citizenship requirement applicable to teaching in public schools bear a rational relationship to state interest.<br />
<br />
Here, the goal of educating children about government and helping them become responsible citizens constitutes a legitimate state interest. Section 3001(3) is rationally related to that interest because it excludes from the important role of teaching only those aliens that have demonstrated their unwillingness to obtain United States citizenship.<br />
<br />
===== Congressionally Approved Discrimination =====<br />
<br />
====== Matthews v Diaz – ======<br />
The Court unanimously upheld a federal statute that denied Medicaid benefits to aliens unless they have been admitted for permanent residence and have resided for at least five years in the US. Here, the Court drew a distinction between alienage classification imposed by the federal government and those created by state and local governments. Strict scrutiny is used on the latter, but the Court said that the federal law was upheld because it was not wholly irrational and served a legitimate purpose of the federal government in preserving the fiscal integrity of the program.<br />
<br />
However, in Hampton v Wong, the Court clarified this and articulated a distinction between decisions by Congress or the president and those by federal administrative agencies; ration basis review is used only for the former. The Court invalidated a federal civil service regulation that denied employment to aliens. The Court said that “if the rule were expressly mandated by the Congress or the President, we might presume that any interest which might rationally be served by the rule did in fact give rise to its adoption.” The Court therefore explained that if civil service regulations had been adopted via federal law or a presidential order, it would be justified by the national interest in providing an incentive for aliens to become naturalized. <br />
<br />
Distinctions on the basis of citizenship that are contained in federal law and presidential orders get rational basis review<br />
<br />
But not decisions by federal administrative agencies (Hamptom v. Wong)<br />
<br />
Mathews v. Diaz - Difference is federal law vs. state law, and federal law gets rational basis review<br />
<br />
===== Undocumented Aliens and Equal Protection =====<br />
<br />
====== Plyler v. Doe ======<br />
Facts: Taxes amended its education laws to withhold state funds for the education of children not legally admitted into the country. It also authorized school districts to refuse to enroll children not legally admitted into the country. Doe and other aliens affected by this amendment sued the state of Texas, alleging that the amended statutes were unconstitutional.<br />
<br />
Issues: May states deny free public education to children not legally admitted in the US?<br />
<br />
Rules: States may not<br />
<br />
Reasoning: While the court must respect the political decision of Congress, especially in the area of immigration, states have no similar authority regarding the classification and discrimination of aliens. However, states do have the authority to take action regarding undocumented aliens if it complies with federal goals as well as furthering a legitimate state goal. There is no evidence of any federal policy that supports denial of education to undocumented children. A heightened level of judicial review should be applied in cases dealing with the children of undocumented aliens. Children of immigrants do not choose to enter the country unlawfully, and depriving them of an education will contribute to a large, disenfranchised underclass of undocumented aliens. Therefore, the law will only be held unconstitutional if it furthers a substantial goal of the state. There are three possible goals, yet none are substantial enough to validate the discrimination.<br />
<br />
===== Gender Discrimination =====<br />
The Supreme Court first addressed a gender discrimination issue in 1872 in Bradwell v Illinois which upheld an Illinois law that prohibited women from being licensed to practice law. A very short majority opinion ruled against Bradwell without considering gender discrimination. <br />
<br />
====== The Emergence of Intermediate scrutiny ======<br />
In Reed v Reed, the Supreme Court for the first time invalidated a gender classification, but the Court professed to apply only a rational basis review. <br />
<br />
====== Frontiero v. Richardson ======<br />
Facts: Congress passed a law granting members of the armed services with dependents an increased in housing allowance, as well as medical and dental benefits for their dependents. Under the law, a serviceman was permitted to claim his wife as a dependent, regardless of whether the wife was actually dependent. In contrast, a servicewoman was only permitted to claim her husband as a dependent based on a showing that her husband was actually dependent on the woman for more than half of his support. <br />
<br />
Ruling: Governmental classifications based on sex are inherently suspect and must subjected to strict scrutiny.<br />
<br />
Reasoning: Women, like racial minorities, have faced a long history of discrimination. As a result, women could not vote or serve on juries or bring suits in their own names, or own property or sometimes serve as legal guardians of their own kids. Although the plight of women has improved over time, women are still subject to discrimination in higher education institutions, the job market, and the political arena. Sex is an immutable characteristic determined solely by the accident of birth and discrimination on its basis has no relationship with one’s capabilities. <br />
<br />
====== Craig v. Boren ======<br />
Facts: An OK statute prohibited the sale of non-intoxicating 3.2 percent alcoholic beer to males under 21, but permitted the sale of such beer to women over age 18. Craig, a liquor vendor in OK sued against the OK state official, Boren, as the law violated the Equal protection act. The government alleges that the law was supposed to limit traffic accidents because statistically, young-men were apparently more likely to drink and drive.<br />
<br />
Rules: A governmental regulation involving gender discrimination is constitutional if it is substantially related to the achievement of an important government purpose.<br />
<br />
Reasoning: Although the government presented statistics to prove their point, they nonetheless fail to show the correlation with age and sex. Just because it showed that more males of the 18-20 age group were killed or arrested for drunk driving, it does not show that all that it was their sex that caused these accidents to happen. Likewise, the government failed to show how 3.2% alcohol is non-intoxicating. <br />
<br />
====== United States v Virginia ======<br />
Facts: The Virginia Military Institute (VMI) boasted a long and proud tradition as Virginia’s only exclusive male public college. The United States brought suit against Virginia and VMI alleging that the school’s male-only admission policy was unconstitutional insofar as it violated the Fourteenth Amendment’s equal protection clause. On appeal from a District Court ruling favoring VMI, the Fourth Circuit reversed. It found that VMI’s policy was unconstitutional. After which, VMI decided to create an alternative learning program for women that differed from VMI in its academic offerings, methods, and financial resource.<br />
<br />
Rules: All governmental gender classifications must be substantially related to an important government purpose that can be demonstrated by the government if it offers and exceedingly persuasive justification for the classification.<br />
<br />
Reasoning: The standard of review for any governmental gender classification is intermediate scrutiny. This standard requires the government to provide an exceedingly persuasive justification for policies that discriminate against women. Inherent differences exist between the binary sexes, but these differences can be used only for the purpose of remedying the history of discrimination against women and not for the denigration of members of either sex. Virginia has not shown an exceedingly persuasive justification for excluding all women from VMI’s training. Virginia argues that the existence of a single-sex school furthers the important purpose of maintaining diversity in public school education, this argument is rejected. Had it really wanted to promote diversity, it would not have discriminated against women in the first place.<br />
<br />
==== When is it discrimination? ====<br />
To prove if there is gender discrimination, the two factors must be met<br />
<br />
The gender classification can exist on the law. That is, the law in its very terms draws a distinction among people based on gender.<br />
<br />
If a law is facially gender neutral, proving a gender classification requires demonstrating that there is both a discriminatory impact to the law and a discriminatory purpose behind it.<br />
<br />
===== Geduldig v. Aiello =====<br />
Facts: The State of California administered a disability insurance system that paid benefits to people in private employment who were temporarily unable to work because of a disability not covered by worker’s comp. The program received no state funding but instead was funded entirely by contributions of one percent of the wages of the participating employees. Aiello and other women suffered disabilities from pregnancies, sued the director of California’s Department of HR Development, Geduldig. They allege that the law discriminates against women because it does not include disabilities resulting from pregnancies.<br />
<br />
Rules: Discrimination based on pregnancy in a state disability insurance program is subject to rational basis review.<br />
<br />
Reasoning: Such discrimination does not violate the Equal Protection Clause’s prohibition on gender discrimination. One of the main benefits of the CA program is the fact that it is completely self-sustainable and does not rely on state funding. However, if CA extends its coverage to all temporary disabilities related to pregnancies, then the program could not run on contributions alone. Thus CA chose to focus more on employment related disabilities, but only some and not all. <br />
<br />
==== Gender Classification Benefiting Women ====<br />
Interestingly, the majority of supreme court cases concerning gender discrimination have involved laws that benefit women and disadvantage men. Two principles emerged from these decisions.<br />
<br />
Gender classifications benefiting women based on role stereotypes generally are not allowed<br />
<br />
Gender classifications benefiting women designed to remedy past discrimination are generally permitted.<br />
<br />
===== Orr v. Orr =====<br />
Facts: William and Lilian Orr were divorced in 1974. Under Alabama’s alimony law, husbands, not wives, are required to pay alimony upon divorce. As a result, William was required to pay monthly alimony to Lilian. Lilian sued William for nonpayment. <br />
<br />
Rule: A state alimony law may not discriminate on the basis of gender if the state’s compensatory and ameliorative purpose are equally served by a gender-neutral classification.<br />
<br />
Reasoning: If the purpose of the alimony statute is to announce the state’s preference for an allocation of family responsibilities in which the wife plays a dependent role, then it is unconstitutional because that is not a legitimate purpose. In contrast, Alabama states two other purposes for the law 1. To help needy spouses and 2 to compensate women for past discrimination in marriage and divorce. Requiring men, and not women to pay alimony is not substantially related to either of the stated purposes. Alabama already conducts individualized administrative hearings as part of each alimony ruling. The hearing officer can easily consider the parties’ financial status and assign alimony on is better equipped to pay. Hence, there is no need for the state to generalized based on gender.<br />
<br />
===== Mississippi University for Women v. Hogan =====<br />
Facts: The Mississippi University for Women (MUW) was a state-sponsored single-sex public university. MUW upheld a policy of excluding men from admission. Joe Hogan was an RN in Mississippi that did not hold a degree in nursing. However, he had worked for over five years as a nursing supervisor in Columbus, the city where MUW is located. He applied for the MUW’s nursing program and was denied based o his gender despite being qualified.<br />
<br />
Rules: A statute that discriminates on the basis of gender may be unconstitutional if the statutory objective itself reflects archaic and stereotypical notions relating to gender.<br />
<br />
Reasoning: For a state law that discriminates based on gender to be upheld, the proponent of the law must demonstrate an exceedingly persuasive justification” for the discrimination. This burden is met only be showing that the discriminating classification serves an important governmental objective and that the discrimination is substantially related to the achievement of the objective. However, when reviewing the constitutionality of a law, the reviewing court must also take care in ascertaining whether the statutory objective itself reflects archaic and stereotypic notions relating to gender. Here, the school states that it needed to remedy past discrimination. However, the court must still check the policy as a whole to see if whet her the actual purpose is based on gender stereotypes. The school did not have a legitimate reason for its policy. A state can use the purpose of compensating for past discrimination against a gender group only if the members of the gender that benefit by compensation are actually disadvantaged before through discrimination. Here, the state failed to show when women were discriminated from entering nursing schools. Additionally, the female-only policy reflects archaic stereotypes.<br />
<br />
===== Michael M. v. Superior Court of Sonoma County =====<br />
Facts: A California law defined statutory rape as sexual intercourse with a female under the age of 18 who is not the perpetrator’s wife. Michael M was a 17 year old male charged with statutorily raping a 16-year old girl. He sought dismissal of his charges on the grounds that the law violated the Equal Protection Clause. The trial court denied his motion and the Supreme Court of California affirmed. The state supreme court found that the statutory rape statute discriminated on the basis of sex because only women can be victims and only men can be charged with violating it. The state claims that the law was to prevent teen pregnancies.<br />
<br />
Rules: A state statutory rape law that discriminates against males does not violate the Equal Protection Clause because it deters men from engaging in sexual behavior that might lead to illegitimate pregnancies.<br />
<br />
Reasoning: The statute stated purpose in enacting the law was preventing illegitimate teen pregnancies. This finding by the legislature is entitled to great deference. The state of California has a significant interest in preventing illegitimate pregnancies among teen females because of the significant physical, emotional, and financial risk that comes with the pregnancies. When a teen is pregnant, certain complications arise that can only be borne by teen girls. Additionally, very few similar risks exist to deter teen males from engaging in sexual activity that leads to pregnancies. The state acted rationally in creating this law. <br />
<br />
===== Rostker v. Goldberg =====<br />
Facts: When Russia invaded Afghanistan in the 80’s, president Carter reactivated the draft registration process. Carter attempted to expand the scope of the draft by requiring both males and females to register. Congress reacted by passing the Military Selective Service Act which prohibited the president from requirement women from registering. Goldberg, a male citizen, and several other males brought suit against Rostker.<br />
<br />
Rules: A congressional act that requires men and not women to register for a military draft does not violate the due process clause because women cannot statutorily participate in combat and thus are not similarly situated as men.<br />
<br />
Reasoning: The Court is required to give special deference to decisions of Congress in the realm of national defense and military affairs. Congress’s goal in passing the MSSA of “raising and supporting armies” is an important government interest. Congress passed the MSSA to provide a mechanism by which armies can be raised to respond quickly to a combat situation. Congress’s purpose in enacting the MSSA is to facilitate combat. However, all branches of the military have enacted statutory prohibitions on the participation of women in combat. There is no reason to require women to register for a draft that is designed to address an emergency combat situation that they are not prepared to handle. <br />
<br />
==== Gender Classification Benefiting Women as a Remedy ====<br />
<br />
===== Califano v Webster =====<br />
Facts: Under section 215 of the Social Security Act, old-age insurance benefits were computed based on a wage-earner’s average monthly wage minus his or her lowest years of earnings during a specific period of employment. Until a 1972 amendment to the SSA, this period of employment was treated differently for males and females. Webster (plaintiff) brought suit against Califano (defendant), administrator of the Social Security program, in federal district court on the grounds that the statutory scheme privileging women was unconstitutional.<br />
<br />
Rules: A social security act provision that advantages women in calculating old-age insurance benefits does not violate the equal protection clause if it is directed towards remedying the historic effects of economic discrimination against women.<br />
<br />
Reasoning: All governmental classification based on gender must serve important governmental objectives and must be substantially related to the achievement of those objectives to past Constitutional muster. Traditionally, the reduction of the disparity in economic conditions between men and women have been recognized by the Court as one such important governmental objective. Congress did not pass the SSA based on archaic and stereotypical generalizations about women, rather, the sole purpose of the SSA is to attempt to correct the economic disparities historically facing women in the job market. <br />
<br />
===== Nguyen v. Immigration and Naturalization Service =====<br />
Facts: A federal law stated that a child born out of wedlock in a foreign country to an American mother was automatically an American citizen. However, the law stated that a child born out of wedlock in a foreign country to an American father was not automatically an American citizen. Under the latter situation, the law provided that the child could be come a citizen if the father established paternity before the child turned 18. Nguyen was born in Vietnam to a Vietnamese mother and American father. Nguyen became a permanent resident of the US when he was six. At 22, Nguyen pled guilty to sexual assault on a minor. The INS commenced a deportation proceeding. Boulais, the father, did not establish that he was Nguyen’s father until Nguyen was 28. <br />
<br />
Rules: A federal law establishing different requirements for derivative citizenship of an illegitimate child born abroad based on the citizen parent’s gender does not violate the equal protection clause.<br />
<br />
Reasoning: The statutory citizenship requirements represents a governmental gender clasffication. The law must be evaluated under an intermediate scrutiny standard to see if the requirements are substantially related to accomplishing an important government interest. The statute requires one of three affirmative steps to be taken by a child seeking American citizenship when the child’s citizen parent is the father, but not if the citizen parent is the mother: legitimation; a declaration of paternity under oath by the father; or a court order of paternity. Congress rationally chose to impose these requirements on unmarried men and not unmarried women because of significant biological differences. <br />
<br />
Specifically, the imposition of strict proof requirements for a paternal relationship and not a maternal one is justified by two government interest<br />
<br />
The interest that a parent-child relationship exists<br />
<br />
The assurance that the child and the citizen parent have some demonstrated opportunity or potential to develop not just a legal relationship, but an actual bond.<br />
<br />
The Court can readily see a mother-child relationship just by her giving birth; however, this opportunity does exist for unmarried fathers who are not always aware that a child was conceived.<br />
<br />
==== Other discriminations. ====<br />
Rational basis review<br />
<br />
Discrimination on the basis of age<br />
<br />
Discrimination on the basis of mental or physical health (but remember Cleburne)<br />
<br />
Discrimination on the basis of wealth or poverty<br />
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Discrimination on the basis of sexual orientation<br />
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===== SOUTH BAY UNITED PENTECOSTAL CHURCH, ET AL., v. GAVIN NEWSOM, GOVERNOR OF CALIFORNIA =====<br />
The Issue: California has enacted a prohibition that may have unfairly targeted or disadvantaged religious gatherings. The prohibition prevents singing indoors during the Covid-19 pandemic. <br />
<br />
The Guidelines said “Places of worship should discourage audience members from singing, chanting, and similar practices that may increase the likelihood of transmission from contaminated exhaled droplets and aerosols. Performers who are singing, chanting, or playing wind instruments without masks must follow the guidance for live events and performances.”<br />
<br />
Chief Justice Roberts Concurrence: Roberts acknowledges the likely background, competence, and expertise politically accountable officials have to asses public health. However, the state has concluded that singing indoors poses a great risk of transmitting Covid. Roberts sees no basis in this record for overriding that aspect of the state public health framework. However, at the same time, the state presents determinations – that the maximum number of adherents who can safely worship in the most cavernous cathedral is zero – appears to reflect not expertise or discretion, but instead insufficient appreciation or consideration for the interests at stake.<br />
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Statement of JUSTICE GORSUCH, with whom JUSTICE THOMAS and JUSTICE ALITO join:<br />
<br />
Often, Courts addressing free exercise challenge face the question of whether a law reflects “subtle departures from neutrality,” “religious gerrymandering,” or “impermissible targeting” of religion.” But not here. Since the start of Covid-19, California has openly imposed strict rules on religious organizations more than any other business. <br />
<br />
Apparently, California is the only State in the country that has gone so far as to ban all religious activities. When a state obviously targets religion for differential treatment, the justices job becomes much clearer.<br />
<br />
The prohibition claims to have the compelling government interest of public health. Gorsuch acknowledges that they are not scientists or experts in public health, but the Court may not abandon the field when government officials with experts in tow seek to infringe on Constitutional Liberties. The whole point of strict scrutiny is to test the government’s assertion, and the Court’s precedents make plain that it has always been a demanding, and rarely satisfied standard. Even in times of crises, especially in times of crises, the Court has a duty to hold governments to the Constitution.<br />
<br />
Still, California says it can thread the needle. It insists that religious worship is so different that it demands especially onerous regulations. The state offers essentially four reasons why<br />
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Religion involves a large number of people mixing from different households<br />
<br />
…. In close proximity<br />
<br />
…. For extended periods of time<br />
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…. With singing.<br />
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The Court is not downplaying the suffering many have experienced during Covid. But California errs to the extent that it suggests that these four factors are always present in worship or have never been present in secular activities.<br />
<br />
Large amount of people<br />
<br />
Here, the government made no difference between worship and people waiting in check outlines or being pack into trains. It also doesn’t consider small group meetings for worship or confession. Nor does California explain why the less restrictive option of limiting the number of people who may gather at one time is insufficient for houses of worship, even though it has found that answer adequate for so many stores and businesses.<br />
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Close interaction<br />
<br />
The government tours the mild climate in suggesting that worshippers might enjoy more space outdoors. Yet, California is not as concerned with the close proximity of hairstylist or manicurists to their customers. The state also does not force them or retailers to do their businesses in parks or lots. Nor does it explain why the narrower option it considers in many secular settings such as social distancing, masks, plexiglass, and cleaning, does not suffice for worship.<br />
<br />
Time<br />
<br />
California worries that worship brings people together for an extended period of time. Yet, it does not limit citizens from running in and out of other establishments; no one is barred from lingering in malls, salons, bus terminals. Nor has the government explained why narrowly tailored options , like reasonable limit on the length of religious gatherings, would fail to meet its concerns.<br />
<br />
When it comes to the first three factors, California singles out religion for worse treatment than many secular activities. At the same time, the State fails to explain why narrower options it finds sufficient in secular context do not satisfy legitimate state interests.<br />
<br />
Singing<br />
<br />
California has sensibly expressed concerns that singing may be particularly potent in transmitting covid and, thus it banned singing at all indoor private gatherings. But, on further inspection, the singing ban may not be what it appears. It seems that California’s powerfully entertainment industry is exempted from this. So, once more, we appear to have a State playing favorites during a pandemic, expending considerable effort to protect its lucrative industry. Like earlier, California failed to explain why even a single masked cantor cannot lead worship behind a mask or plexiglass. Or why even a lone muezzin may not sing the call to prayer from a remote location inside a mosque. <br />
<br />
California has been moving the goalpost for its “temporary” ban on indoor worship, however, it can’t hardly wait for its lucrative movie studios, malls, and cosmetologists. Drafting narrowly tailored regulations can be difficult. But if Hollywood may host a studio audience or film a singing competition, while a single soul may not enter a place of worship, something has gone awry.<br />
<br />
Justice Barret and Kavanaugh Concurring: (Both agree with the statement made by Justice Gorsuch) As the case appears, it remains unclear whether the singing ban applies across the board (Generally applicable) or favors certain sectors. Of course, if a chorister can sing in a Hollywood studio, but not the church, then the regulation is not neutral.<br />
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JUSTICE KAGAN, with whom JUSTICE BREYER and JUSTICE SOTOMAYOR join, dissenting:<br />
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Justices of this court are not scientists. Nor do they know much about public health policy. Yet today, the Court displaces the judgements of experts about how to respond to a pandemic. The Court orders California to weaken its restrictions on public gatherings by making a special exception for worship services. The majority does so even though the policies treat worship just as favorably as secular activities that, according to medical experts, pose the same risk of Covid transmission.<br />
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The governing caselaw demands neutrality for free exercise. A government cannot put limits on religious activities if fails to prohibit nonreligious activities that endangers the government’s interests in a similar or greater degree. The Constitution does not require things which are different in fact to be treated in law as they were the same. States must treat like cases alike, but dissimilar cases accordingly. <br />
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The state has put limits on areas like lecture halls, theaters, and even churches. The scheme hones in on these indoor gatherings because they pose a heightened danger of Covid transmission. The Department of Public Health explained that there is a broad consensus among medical experts that transmission of the novel coronavirus is more likely at indoor public gatherings which bring together many different people from different households. To further elaborate on this point, experts says that increase in risk when gatherings are of an extended duration and when there is a lot of verbal interaction. That risk, of course, extends not only to participants, but everyone they associate with in the community.<br />
<br />
The state regulation is less stringent on shopping malls because they involve less proximity and less time than indoor worship or similar events do. Shoppers are less likely to receive a sufficient viral load of droplets to contract COVID. The State has regulated religious conduct with non religious conduct in a similar way. The only secular conduct that the State treats better is the kind that experts have found does not imperil its interests – the kind that poses less risk of Covid transmission. <br />
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===== ROMAN CATHOLIC DIOCESE OF BROOKLYN,NEW YORK v. ANDREW M. CUOMO, GOVERNOR OF NEW YORK =====<br />
The Issue: There is an Executive Order that limits areas into only admitting 10 and 25 people inside. Two organizations, one a Catholic Church, and another a synagogue, filed this application against the Executive Order issued by the Governor of New York. <br />
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There are two classifications of areas, red and orange. In red zones, no more than 10 people may attend each religious service, while in orange zones, it’s capped at 25.<br />
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The synagogue argues that the Governor specifically targeted Orthodox Jewish communities and gerrymandered the boundaries of red and orange zones. Both the church and synagogue maintain that the regulation treat houses of worships much more harshly than comparable secular facilities. And, they add that without contradiction, they have complied with all public health guidance, have implemented additional precautionary measures, and have operated at 25% or 33% capacity for months without a single outbreak. <br />
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Likelihood of Success on the Merits – The applicants have made a strong showing that the challenged restrictions violate the minimum requirement of neutrality to religion.<br />
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In the red zone, while a synagogue or church may not admit more than 10 people, businesses labelled as essential may admit whoever they wish. This list of essential businesses include may establishments not essential, like acupuncturists, camp grounds, and garages. The disparate treatment is even more striking in an orange zone. While attendance is limited to 25, non-essential businesses are allowed to admit whoever and no matter how many they want. The results are troubling as the District Court mentions, there could literally be hundreds of people shopping in malls on any given day, yet a nearby place of worship would be prohibited to 10 or 25. The Governor has stated that factories and schools have contributed to the spread of Covid, but they are treated less harshly than the church.<br />
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Although public health is compelling state interest, it is hard to see how the challenged regulations can be regarded as narrowly tailored. They are far more restrictive than any Covid-related regulation that have previously come before the court, more so than any other jurisdiction hard-hit by covid. The District Court noted that there had not been any Covid outbreak in any of the Diocese’s churches since they reopened. Not only is there no evidence that the applicants have contributed to the spread of covid, but there are many less restrictive rules that could have been adopted. It is hard to believe that places of worship that can seat 400 to 1000 people would create a more serious risk than any other activity that the state allows.<br />
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Irreparable Harm – There can be no question that the challenged restrictions, if enforced, will cause irreparable harm. The loss of First Amendment freedoms, for even minimal periods of time, unquestionably constitutes an irreparable injury. <br />
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Although Catholics can just watch the mass on TV, they are barred from doing things that require in-person attendance, such as communion. Same goes for Jewish people whose sabbath requires attendance.<br />
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Public Interest – Finally, it has not been shown that granting the applications will harm the public. State has not claimed that attendance at the applicants’ services has resulted in the spread of disease. And the state has not shown that public health would be imperiled if less restrictive measures were imposed. Members of this Court are not public health experts, but even in a pandemic, the Constitution cannot be put away.<br />
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After the applicants filed this with the Court, the Governor has reclassified the areas. The dissenting opinion suggests to reject this application and let them file a new one again once there is a similar reclassification. But, there is no saying when it would get reclassified again. Not granting relief now would impair the rights of the two places of worship to exercise their religious beliefs.<br />
<br />
= First Amendment – Freedom of Religion =<br />
The first Amendment has the freedom to establish religion and the freedom to exercise religion, which are referred to as the establishment cause and free exercise clause. The Free exercise clause was applied to the states through its incorporation into the Due Process Clause of the Fourteenth Amendment. The framers did no entrust the liberty of religious beliefs to either clause alone. As the court declared in Lee v Welsman, a state-created orthodoxy puts at grave risk that freedom of belief and conscience which are the sole assurance that religious faith is real, not imposed.<br />
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The two clauses are at odds, after all, the government may be free to establish a national religion, but may not compel anyone who may want to exercise a different belief. The Court has recognized that this tension is inherent in the First Amendment, and has noted the difficulty in finding “a neutral course between the two Religion clauses, both of which are cast in absolute terms, either of which, if expanded to a logical extreme, would tend to clash with each other.<br />
<br />
== History in interpreting the religion clauses ==<br />
As with all Constitutional provisions, some look to history as a guide to the meaning of the Religion Clauses. This is particularly difficult for those provisions because there is no apparent agreement among the framers as to what they meant. A too literal quest for advice from the framers on the issue is futile and misdirect. <br />
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* Seperationism – secular government with strong division between church and state<br />
** Voluntarism – advancement of church should come from voluntary support not from support of the state<br />
** Seperatism – both religion and government function best if they are independent from each other<br />
* Non-prefernetialism<br />
** Don’t prefer one Christian sect over another<br />
** Don’t prefer one religion over another<br />
** Don’t prefer religion over non-religion.<br />
<br />
== What is Religion? ==<br />
<br />
=== United States v Seeger ===<br />
Facts: Seeger was convicted in the District Court of New York for refusing to submit into induction into the Armed Forces. He declared that he was conscientiously opposed to participating in the war for reasons of his religious beliefs, but preferred to leave the question of a supreme being open rather than a yes or no. But this did not necessarily mean that he lacked faith. He believed in devotion to goodness and virtue for their own sakes and religious faith is a purely ethical creed.<br />
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Rules: Because of how a large percentage of religions in the world derived their faith from more than just a supreme being, but rather through a belief of understanding and peace, and because many of these religions exist in America; the Military Act violated the Freedom to Exercise Clause by limiting its definition of religion to merely those relating to a supreme being.<br />
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Reasoning: There are a lot of religions in the United Sates, more than just those that believe in some sort of supreme being. Many religions and faits believe in an ultimate goal of peace and equality among all. Hinduism and Buddhism are beliefs that do not focus solely on a supreme being or at times, do not believe in one at all, but rather they believe in knowledge and self-purification. These religions exist in the United States, and it would be limiting to only recognize those with a God as being part of a religion. <br />
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Seeger and a later case, Welsh, did not offer any criteria for assessing whether a particular view is religious under this definition. However, the plurality explained that belief in God is characteristic of most religions, but not a prerequisite for religion.<br />
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=== Requirement for Sincerely Held Beliefs ===<br />
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==== United States v Ballard ====<br />
Facts: The Ballards were indicted and convicted for using and conspiring to use the mail to defraud. They sent pamphlets and other literature for their “I Am” movement. They also started corporations and solicited memberships for this movement. The movement was supposedly about how the Ballards have the power to heal and other supernatural abilities.<br />
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Rules: The law knows no heresy, and is committed to the support of no dogma, the establishment of no sect. The first amendment not only forestalls compulsion by law or the acceptance of any creed or practice of any form of worship, it also safeguards the free exercise of the chosen religion.<br />
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Reasoning: The First Amendment embraces two concepts regarding religion; the freedom to believe and to act. A person is allowed to believe any religion and act on those beliefs without government interference. Different religions consider different things as heretical, heresy trials are foreign to the Constitution. If the jury were allowed to review the veracity of the defendants in this case, to see whether it’s heretical, then this would open the floodgates for other cases to question other religious practices. Additionally, the consideration of heresy would involve the government preferring one sect or religion over another to define what is heretical or not; which violates the religious freedoms in the first amendment.<br />
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==== Dogma ====<br />
The Court have held in Thomas v Review Board of the Indiana Employment Security Division, that a person is guaranteed by the free exercise clause to believe in things that may not be shared by all members of their religious sect. It is not within the court’s purview to see whether the petitioner or his fellow worker more correctly perceive the commands common to their faith or not. Courts are not arbiters of scriptural interpretation.<br />
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==== Masterpiece Cakeshop, Ltd. v. Colorado Civil Rights Commission ====<br />
Facts: The Mullins asked the cakeshop to make a cake to celebrate their same-sex wedding. The shop refused because the owner held sincere religious objections to same-sex marriage. He instead offered to sell generic cakes to the couple. The couple filed a complaint with the CCRC, triggering a multilevel review. <br />
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Rules: Adjudicatory proceedings against a person for unlawful discrimination must give neutral and respectful consideration to the person's defense of sincere religious motivation.<br />
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Reasoning: In protecting the civil rights of same sex couples, the government must also protect the rights of those who object on religious or philosophical grounds. Here, the commission three times upheld the baker’s right to refuse. By contrast, the commission ruled that he must make the cakes. The commission reached opposite results based on its determination of which baker’s position was reasonable or unreasonable rather than the sincerity of each of the baker’s position. The commission demonstrated hostility toward religion’s role in public life. <br />
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=== Laws before Division v Smith ===<br />
The Supreme Court’s earliest treatment of free exercise of religion was in Reynolds v US. There, a federal law prohibited polygamy in the territories and a defendant argued that his Mormon religion allowed for many wives. The supreme court rejected the free exercise argument and claimed that the constitutional provision required an exemption from otherwise valid criminal laws. As a law of the organization of society under the exclusive dominion of the United States, it is provided that plural marriages shall not be allowed. Can a man excuse his practices to the contrary because of his religious belief? To permit this would make the professed doctrines superior to the law of the land, and in effect, permit every citizens to be a law unto themselves.<br />
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The Court drew a distinction between beliefs and action, the Free Exercise Clause limited government regulation of beliefs, but not action. Congress was deprived of all legislative power over mere opinion, but was left free to reach actions which were in violation of social duties or subversive to good order. <br />
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In Sherbert v Verner, the Court expressly held that strict scrutiny should be used in evaluating laws burdening free exercise of religion and declared the denial of employment benefits to a woman who was discharged from her job rather than work on her Saturday sabbath. The court explained “if, therefore, the decision of South Carolina is to withstand the appellant’s constitutional challenge, it must be either because her disqualification as a beneficiary represents no infringement of the State to her constitutional right to free exercise or because any incidental burden on free exercise may be justified by a compelling state interests. <br />
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Here, not only is it apparent that the appellant’s declared ineligibility for benefits derives solely from her religious practice, but the pressure on her to forego the practice is unmistakable. The ruling forces her to choose between following the precepts of her religion and forfeiting benefits, on the one hand, and abandoning one of the percepts to work, on the other. Governmental imposition of such a choice puts the same kind of burden on the free exercise of religion.<br />
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=== Compulsory Schooling ===<br />
The only other case where the Court found a violation of Free Exercise during this time was in Wisconsin v Yoder, where the court held that free exercise of religion required that Amish parents be granted an exception from compulsory school laws for their teens because it is a historically known part of their religion that secondary to higher education would bring worldly influence on their children. These worldly influences are seen to conflict with their beliefs. The Court concluded that the self-sufficient nature of Amish society made education for teens unnecessary. The lack of two additional years of compulsory education would not impair the physical or mental health of their child or result in an inability to be self-supporting or to discharge the duties and responsibilities of citizenship or in any other way that would detract from the welfare of society.<br />
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==== Employment Division, Department of Human Resources of Oregon v. Smith ====<br />
Facts: Oregon state law prohibits the knowing or intentional possession of controlled substances unless it is medically prescribed. Smith and Black were fired from their jobs after they ingested peyote for sacramental purposes at a Native American Church service. When they applied for unemployment benefits, the EDDHR said that they were ineligible for benefits because they have been discharged for misconduct. <br />
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Rules: Under the free exercise clause, a state may constitutionally refuse to carve out an exception from its generally applicable criminal laws for religious practices.<br />
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Reasoning: The first amendment protects the right to believe, but not the right to act. Here, the two argued they should be granted an exception. However, religious beliefs have never been held to excuse people from compliance with otherwise valid and neutral laws prohibiting conduct that the state is free to regulate. <br />
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Under strict scrutiny, the government must have a compelling state interest to burden religious practice. Here, the state’s interest to control the use of narcotics is compelling enough to warrant this burden.<br />
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===== Lukimi Babalu – =====<br />
In that case, the Court struck down a law that prohibited ritual sacrifice of animals on the ground that it was not neutral or generally applicable. The wording was very much religiously aimed and its definitions did not prevent the slaughtering of other animals in other religious or animals for non-religious purposes. The government alleges that the law was made to prevent animal cruelty, but because of its lack of general application and neutrality, it fails to meet this interest.<br />
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=== Trinity Lutheran Church of Columbia, Inc. v. Comer ===<br />
Facts: Missouri’s department of natural resources gives grant money to schools and non-profits to resurface playgrounds using rubber from recycled tires. The Church applied for a grant, but the department denied it solely because it was a church. The department’s policy categorically disqualified all religious organizations from the program because Missouri’s state constitution prohibits public funding of religion. <br />
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Rules: Excluding churches from a grant program that provides public funds to resurface playgrounds violates the Free Exercise Clause.<br />
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Reasoning: Disqualifying entities from receiving public benefits solely because of their religious character expressly discriminates on the basis of religion, triggering strict scrutiny. The Court recognized more than 50 years ago that denying or conditioning benefits based on religion may infringe on religious freedom. That means the policy expressly discriminates against churches because of their religious status, not because of what the church will do with the funds. Therefore, the policy infringes the free exercise of religion.<br />
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=== Statutory Protection of Religious Freedom ===<br />
The religious freedom restoration act was adopted to negate the Smith test and require strict scrutiny for Free exercise claims. The act declares that its purpose is to restore the compelling interest test as set forth in Sherbert and Yoder and to guarantee its application in all cases where free exercise of religion is substantially burdened and to provide a claim or defense to people whose religious exercise is substantially burdened by the government.<br />
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==== Trying to get rid of Smith ====<br />
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===== Fulton v Philadelphia =====<br />
Syllabus: Philadelphia contracts with private agencies, which certify prospective foster families under state criteria. However, Catholic Social Services refuse to certify unmarried couples or same-sex couplies. Other agencies do certify same-sex couples, and so no same sex couples would seek certification from CSS. The state informed CSS that unless it certifies same sex couples, it would no longer refer children to the agency. <br />
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CSS Filed suit.<br />
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The refusal of the state to contract with CSS unless CSS agree to certify same sex couples violates the Free Exercise Clause by requiring CSS either to curtail its own mission or to certify same sex couples as a violation of its religious beliefs. The state’s polices are neither neutral nor generally applicable so they are subject to strict scrutiny.<br />
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The contract’s non-discrimination requirement forbids interfering with the public accommodation opportunities of people based on sexual orientation. It defines public accommodation as “whose goods, services, facilities, privileges advantages or accommodations are extended, offered, sold or otherwise made available to the public. The Court held that certification as a foster parent is not readily accessible to the public.<br />
<br />
The non-discrimination requirement of the City’s standard foster care contract is not generally applicable. The contract requires agencies to provide services defined in the contract to foster parents without regard to their sexual orientation. But, this section also permits exceptions to this requirement at the sole discretion of the commissioner. This inclusion for discretion renders the non-discrimination provisions not generally applicable. <br />
<br />
A government policy can survive strict scrutiny only if it advances a compelling state interest and is narrowly tailored to achieve those interests. Philadelphia has no compelling interest in denying the CSS.<br />
<br />
===== Opinion of the Court: =====<br />
CSS sees marriage as being between a man and a woman, so it refuses to give referrals to same sex couples. It also sees adoption or parenthood as being something done by married couples; thus they refuse unmarried couples. However, although they deny these people, they do refer them to the many other foster care certification agencies in the state. CSS is protected by the First Amendment’s Free Exercise Clause, which states that Congress shall make no law that prohibits the free exercise of religion. <br />
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A law is not generally applicable it if invites the government to consider the particular reasons for a person’s conduct by providing a mechanism for individualized exceptions. Here, the City’s non-discrimination requirement has a clause where the commissioner can give exceptions based on their own discretions. Also, a lack of general applicability if it prohibits religious conduct but allows secular ones that undermine the government’s asserted interest in a similar way. <br />
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* For example, in one case, Hialeah, there was an ordinance that prohibited animal sacrifices based on faith, the government said it was to ensure proper disposal of animal carcasses in the open and to protect public health; but it does not affect secular acts like hunters disposing their game anywhere in the streets.<br />
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The city said that it has no intention of granting an exception to CSS for religious reasons, but the City may not refuse to extend that exception to cases of religious hardships without compelling reasons. So it is not a generally applicable requirement. <br />
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The City says that “principles of neutrality and general applicability still constrains the government in its capacity as manager” but the Court have never suggested that the government may discriminate against religion when acting as a manager.<br />
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The City said that CSS conducted an unlawful public accommodations practice in violation of the fair practices ordinance. The ordinance forbids denying or interfering with the public accommodation opportunities of people or otherwise discriminating against them. However, foster care has never been treated as a public accommodation in the State. Certification as a foster parent is not readily accessible to the public because it involves a customized and selective assessment that bears little resemblance to staying in a hotel, eating at a restaurant, or riding a bus.<br />
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The City stated that it had a compelling reason; namely, to maximize the number of foster parents, protecting the city from liability, and ensuring equal treatment of prospective foster parents and foster children. The Court checks whether these interests are compelling enough to deny CSS an exception.<br />
<br />
* CSS is likely to increate the number of available foster parents. <br />
* The city offers only speculation of being sued over CSS’s practices<br />
* The City can grant exceptions in its own discretions, so it gives no reason why it cannot grant CSS an exception for religious reasons.<br />
<br />
===== Concurrences =====<br />
The three justices want to use this case to overturn Smith, several others made clear they are almost ready to do so.<br />
<br />
* Really go after Smith – argue Smith just made free exercise an anti-discrimination analysis.<br />
* Tie free exercise to “forbidding or hindering unrestrained religious practices or worship.” “The key point to present purposes is that the text of the Free Exercise Clause gives a specific group of people the right to do so without hinderance.”<br />
* The three justices suggest Smith should be replaced with a rule that “a law that imposes a substantial burden on religious exercise can be sustained only if it is narrowly tailored to serve a compelling government interest”<br />
<br />
====== Gorusch Concurrence ======<br />
The Court has failed to answer whether Smith should be overruled, and this maneuvering around the Smith may have long lasting effects on it should apply to different cases.<br />
<br />
First, the City argues that its challenged rules qualify for that exception because they require all foster care agencies to recruit and certify same sex couples. For this part, the Majority assumes that Philadelphia’s rule is indeed neutral towards religion. The lower court noted that Philly’s FPO applies only to certain defined entities that qualify as public accommodations while the “generally applicable” law in Smith was applicable across the board. The Majority found that FPO was no general because it expanded the meaning of “public accommodations” not by using the FPO’s meaning, but by using a different law to define public accommodations. <br />
<br />
The Majority argues that foster care fail to qualify as public accommodation because it involves a customized selective process; however, where did this come from? Not in the state statute nor any case law, nor the briefs. The Majority just made it up. It is wrong because other laws hold an illustrative list of public accommodations, which includes schools, which do have customized selection processes for its students and faculty. <br />
<br />
The Majority feels like it’s reaching for anything to support is curious separate-statute move. Before concluding that a public accommodation law is generally applicable under Smith, courts must ask themselves whether it would be incongruous to apply that law to religious groups. The Majority doesn’t apply this nor does it answer it properly. The Majority says that the Rejection of Referral provision in the contract does not state a generally applicable rule because it contemplates exceptions. However, this applies to the referral stage of the foster process, where a kid is referred to a family; not when during recruitment or certification. For that stage, the contract prohibits discrimination all across the board.<br />
<br />
====== Concurrence (Barret) ======<br />
The Majority fails to answer whether to overrule Smith. The history is silent on the matter as there is no historical record that supports whether the framers understood the first amendment to require exemptions from generally applicable laws in at least some circumstances. The textual and structural arguments against Smith are compelling.<br />
<br />
====== Alito Concurrence ======<br />
The Alito concurrence is the same as the other two. (Just read Smith since it goes deeper on how Smith should be applied)<br />
<br />
== Competing Theories of the Establishment clause ==<br />
<br />
=== Strict Separation ===<br />
<br />
* The first theory often is termed “strict separation.” This approach says that to the greatest extent possible, government and religion should be separated. The government should be, as much as possible, secular; religion should entirely be in the private realms of society. <br />
* There are problems with this approach. A complete prohibition of all government assistance to religion would threaten the free exercise of religion. <br />
<br />
=== Neutrality Theory ===<br />
<br />
* A second major approach says that Government must be neutral on religion; that is, the government cannot favor religion over secularism or one religion over others. <br />
<br />
=== Accommodation ===<br />
<br />
* A third major theory is termed an “accommodation” approach. Under this view, the Court should interpret the establishment clause to recognize the importance of religion in society and accommodate its presence in the government.<br />
<br />
=== County of Allegheny v ACLU ===<br />
Facts: This is about the Constitutionality of two recurring holiday displays located on public property in Pittsburgh. The first is a manger placed on the Grand Staircase of the courthouse. The second is a menorah placed outside the City county building. <br />
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Issues: Whether the placement of these two religious ornaments is sufficiently likely to be perceived by adherents of the controlling religion as an endorsement and by non-adherents as disapproval of their religion, and thus is unconstitutional.<br />
<br />
Rules: Taken together with other ornaments represent both religious and secularized interpretation of winter holidays and thus are not an endorsement of a religion, but rather of the season.<br />
<br />
Holding: No<br />
<br />
Reasoning: The manger and menorah do send a religious message, the manger even more so, but it was placed along Santa’s house along with a talking wishing well. Likewise, the menorah does send a religious message, but it’s not a message most people would generally be familiar with unless they are members of those religions. The menorah was placed around other religious symbols like a Christmas tree and a saluting statue of lady liberty. Thus, taken together with their surrounding ornaments, it is clear that these displays are not endorsing either religion, but instead the holiday season.<br />
<br />
=== Government Discrimination Among Other Religions ===<br />
It is firmly established that the government violates the Establishment Clause if it discriminates among religious groups. Such discrimination will be allowed only if strict scrutiny is met. <br />
<br />
==== Lemon v Kurtzman ====<br />
Facts: These two appeals raise questions as to Pennsylvania and Rhode Island statutes providing state aid to church-related elementary and secondary schools. PA has adopted a statutory program that provides financial support to nonpublic elementary and secondary schools by way of reimbursement. RI has adopted a statute under which the State pays directly to teachers in nonpublic elementary schools to a supplement of 15% their annual salary.<br />
<br />
Issues: Are these two statutes Constitutional under the Free exercise clause?<br />
<br />
Rules: To consider whether the statute is unconstitutional under the free exercise clause, the following must be found (1) the statute must have a secular purpose; (2) its principal or primary effect must neither prohibit or advance religion; (3) the state must not foster an excessive government entanglement with religion<br />
<br />
Holding: Yes<br />
<br />
Reasoning: On their face, the statutes were made to look like they had a secular purpose. However, the cumulative impact of the statutes related with religion in an excessively entangling way with the government. In order to see whether the government entanglement with religion is excessive, we must examine the character and purpose of the institutions benefited and the nature of the aid that the state provides and the resulting relationship between government and religious authorities. <br />
<br />
In particular, an extensive degree of state supervision and surveillance is necessary to ensure compliance with the statutory requirements separating secular and religious education.<br />
<br />
===== The Requirement for a secular purpose =====<br />
The first prong of the Lemon test is the requirement that there be a secular purpose for a law. For example, in Stone v Graham, the Supreme Court declared unconstitutional a state law that required the 10 commandments to be posted on the walls of every public school classroom because it had no secular purpose. <br />
<br />
===== Requirement for a secular effect =====<br />
The second prong requires that the principal or primary effect of a law must be one that neither advances or inhibits religion. In recent years, this often has been expressed in terms of symbolic endorsement. <br />
<br />
Estate of Thornton v Caldor is an example where the Court used the second part of the Lemon test to invalidate a law. A Connecticut statute provided that no person may be required by an employer to work on his or her Sabbath. This was found unconstitutional because it favors people with religious interests over others.<br />
<br />
===== Prohibition of Excessive Entanglement =====<br />
The Final prong of the Lemon test forbids government actions that cause excessive entanglement with religion. The Court has said that a law violates the Establishment Clause when it requires a comprehensive, discriminating, and continuing state surveillance. The Court has also said that apart from any specific entanglement of the state in particular religious programs and assistance violates the Establishment clause if it carries the grave potential for entanglement in the broader sense of continuing political strife over aid to religion.<br />
<br />
====== Engel v Vitale ======<br />
Facts: The respondent board of education, acting in its official capacity under state law, directed the school district’s principal to cause the following prayer to be said aloud by each class in the presence of the teacher at the beginning of each school day “Almighty God, we acknowledge our dependence upon thee, and we beg thy blessings upon us, our parents, our teachers, and our country.” This daily procedure was adopted on the recommendation of the state Board of Regents as part of boosting moral and spiritual training in schools. <br />
<br />
Rules: Under the establishment clause of the first amendment, state officials may not compel an official state prayer, even if the prayer is denominationally neutral and students have the option of remaining silent or being excused<br />
<br />
Reasoning: The prayer is clearly a religious activity, and thus is unconstitutional for state officials, acting in their official capacity, to both compose and require a prayer. Historically, this very practice of establishing government composed prayers for religious services was one of the reasons that caused many of the early colonists to leave England and seek religious freedom in America. As such, the Constitution is particularly sensitive to preventing government action that officially establishes religion.<br />
<br />
====== Lee v. Weisman ======<br />
Facts: Robert E. Lee, a public middle school principal, invited a Jewish rabbi to say prayers at his school’s graduation ceremony. Daniel Weisman, whose daughter was among the expected graduates, sought a temporary restraining order in federal district court to prevent the rabbi from speaking at the graduation. His request was denied, and the rabbi delivered several prayers at the graduation. Weisman later sought a permanent injunction in federal court to bar this thing from happening again.<br />
<br />
Rules: Under the Establishment Clause of the First Amendment, the government may not invite clergy to deliver prayers at a public school graduation ceremony.<br />
<br />
Reasoning: At a minimum, the government may not coerce anyone to support or participate in religion or its exercise. Here, because students and parents are essentially obligated to attend the graduation, the recitation of prayers amounts to governmental coercion to participate in religious activities. The school principal, in choosing both the prayer and the rabbi, can fairly be said to have been acting on behalf of the state.<br />
<br />
====== Santa Fe Independent School District v. Doe ======<br />
Facts: Prior to 1995, the student elected to be the campus chaplain at Santa Fe High School customarily gave an admittedly “Christian” prayer over the stadium loudspeaker at each of the school’s varsity football game. Doe filed suit against the school on the grounds that permitting prayers before football games violated the free establishment clause.<br />
<br />
Rules: Under the establishment clause of the first amendment, a public school may not permit student-led, student-initiated prayer at school sporting events<br />
<br />
Reasoning: In authorizing the prayer, the government has not created a public forum because it permits only one student during the entire school year to access the forum for prayer. Rather, the government has created a limited public forum subject to all the limits and safeguards of the Constitution. Santa Fe’s policy is unconstitutional because it permits prayers offered by one student who was elected by a majority of students. Thus, only the majority’s religious viewpoint is represented, resulting in the endorsement of religion by the school district. Additionally, the text of the school district’s policy excessively entangles government with religion as it only permits students to say an invocation for the purposes of solemnizing an event.<br />
<br />
===== Religion as a part of Government Activities: Religious Symbols on Government property =====<br />
In a previous case, the Court considered the Constitutionality of a nativity scene and a menorah on government property. In two cases decided on the same day in 2005, the Court considered the constitutionality of Ten Commandments displays on government property.<br />
<br />
The Court declared the display in McCreary County unconstitutional but upheld the display in Van Orden. In reading the decisions, consider whether there is a meaningful distinction between these cases.<br />
<br />
====== McCreary County v. American Civil Liberties Union of Kentucky ======<br />
Facts: The County offices in Kentucky posted versions of the Ten Commandments on the walls of their courthouses. In 1999, the ACLU sued the counties in federal district court on the grounds that the displays violated the Establishment clause. Before the district court ruled, the counties expanded their displays on two occasions and issued resolutions stating that the Ten Commandments were their precedent for legal code. They surrounded the Ten Commandments with additional, framed historical non-religious documents in what was called the “Foundations of American Law and Government Exhibit.” The district court ruled that all three displays had a religious purpose and thus violated the Establishment Clause, and court of appeals affirmed. <br />
<br />
Rules: If a government action involving religion has an objectively observable religious purpose, then the action violates the First Amendment’s Establishment Clause. <br />
<br />
Reasoning: The Establishment Clause requires government neutrality on religious issues. Although protecting religious freedoms means protecting religion generally, the government must act as neutral as possible about promoting religion over non-religion. If the government supports a religion, it may offend non-religious people, and religious leaders may end up getting more power. This fusion of church and state undermines liberty and social stability.<br />
<br />
To avoid harm, the government must show that their message has a genuine secular purpose that is not secondary to a religious purpose. Based on Stone v Graham, the ten commandments are a primarily religious instrument but can be displayed in a secular way. It is the details of the government actions that matter.<br />
<br />
====== Van Orden v Perry ======<br />
Facts: In the Texas capitol building, there were markers commemorating the people, ideals and events that compose Texan identity. A part of that was a monolith with the 10 Commandments. However, there were also imageries like the eye of Horus, stars of David, and the Chi Rho. <br />
<br />
Rules: Religious displays by governmental actors are constitutional if they predominantly convey historical and social meaning.<br />
<br />
Reasoning: The decision would not be based on the Lemon test. The Court bases its decision on the nature of the monument and the country’s religious history. The 10 commandments had an undeniable religious significance. However, based on Texas’ history and government precedence, the display would be Constitutional.<br />
<br />
====== American Legion v. American Humanist Association ======<br />
Facts: After the great war, the military used the cross symbolically in military honors. The army marked soldiers’ graves with plain white wooden crosses or Stars of David instead of traditional rectangular slabs. Americans inextricably linked images of row upon row of white crosses with loves lost, making the plain white cross an iconic symbol. Ten fallen soldiers’ mothers and other residents of Maryland formed a committed in 1918 to erect a memorial and chose a cross. Later, the American Humanist Association sued claiming that the presence of the cross on public lands and its maintenance with public funds violated the first amendment’s establishment clause.<br />
<br />
Rules: A presumption of Constitutionality applies to memorials displaying religious symbols on public land if they have stood for many years and are associated with historically secular purposes and traditions.<br />
<br />
Reasoning: Lemon v Kurtzman gave a framework on how to handle establishment clause cases. The Lemon Test hinges on the purposes and effects of the challenged government action and the government’s entanglement with religion. But this test is problematic when applied to commemorative or celebratory purposes. Thus, a different approach must be taken.<br />
<br />
Long standing monuments using religious symbolism rules<br />
<br />
# The evidence of the original purpose is long gone<br />
# The purpose for maintaining the monument and the message it conveys may be altered or expanded with time.<br />
# Removing a long-standing religious symbol may be seen as “aggressively hostile to religion.”<br />
<br />
For these reasons, the passage of time gives a strong presumption that a monument with religious symbolism.<br />
<br />
The cross may have been a religious symbol, but the original purpose of the cross in this case has been long gone. The purpose of maintaining the monument has also been lost to time. Removing it, especially since its stance as a commemorative for soldiers, would be seen as an aggressively hostile to religion.<br />
<br />
===== When can government give aid to religion? =====<br />
Many establishment clause cases have involved the issue of government assistance to religion. Decisions in this area are numerous but often difficult to reconcile. The Court inevitable is involved in line drawing. Total government subsidy of churches or parochial schools undoubtedly would violate the Establishment Clause. Indeed, James Madison’s Memorial and Remonstrance Against Religious Assessments was made in the context of opposing a state tax aid to the church. But it also would be clearly unconstitutional if the government provided no public services to religious institutions. <br />
<br />
Therefore, the Court must draw a line between aid that is permissible and that which is forbidden. No bright line test exists or likely ever will be developed.<br />
<br />
====== Mitchell v. Helms ======<br />
Facts: Chapter Two of the ECIA provides for the allocation of federal funds for educational materials and equipment, such as library materials and computers, to elementary and secondary schools. Funds are provided to both public and private schools, but private schools must demonstrate that the services, materials, and equipment they receive will be used for the purposes of implementing “secular, neutral, and non-ideological” programs. In Jefferson Parish, roughly 30% of the funds were allocated to private schools. Most of these schools were religiously affiliated.<br />
<br />
Rules: A statutory scheme that allocates secular, neutral, and non-ideological educational materials to religious schools does not violate the Establishment Clause.<br />
<br />
Reasoning: According to Agostini v Felton, the Court has developed a two-part test for this matter. <br />
<br />
# Does the program or statute have a secular purpose?<br />
# Does the statute or program have a primary effect of advancing or inhibiting religion?<br />
<br />
Chapter 2 was given to religious schools without the consideration of their religious status. All schools, public and private are allotted Chapter 2 resources based on their enrollment. All materials that Chapter 2 funds provided are secular materials. If the schools were to use the funding for religious purposes, that is their own private decision that the government did not prevent nor endorse. <br />
<br />
====== Zelman v. Simmons-Harris ======<br />
Facts: The state of Ohio established the Pilot Project Scholarship Program to provide educational choices to families with children residing in the Cleveland City school district. The program was enacted to help combat serious problems with Cleveland public schools. The program provides tuition aids for students in k through grade 3, expanding each year through eighth grade, to attend a participating public or private school of their parents’ choosing. The program provides tutorial aid for students who choose to remain enrolled in public school. The tuition aspect of the program permits any private school, whether religious or nonreligious, to participate and accept program students. In 2000, 82% of participating private schools were religiously affiliated. <br />
<br />
Rules: The government can fund educational programs even when most students attend religious schools as long as there are nonreligious alternatives available.<br />
<br />
Reasoning: The program was proper based on the Lemon test. The program had a secular purpose to fund schools. The primary effect of the program was neutral on religion, and the program did not create any excessive entanglement between the government and religion because the decisions to join religious schools were made by private individuals.<br />
<br />
[[:Category:General Outlines]]</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=Income_Tax_Freeland/Outline&diff=42470Income Tax Freeland/Outline2022-05-31T23:06:04Z<p>Rezsue: Undo revision 42468 by Rezsue (talk)</p>
<hr />
<div>{{Infobox Text-Specific Outline<br />
|subject=Income Tax<br />
|text=Fundamentals of Federal Income Taxation: Cases and Materials<br />
|authors=James Freeland*Daniel Lathrope*Stephen Lind*Richard Stephens*<br />
|professor=Julian M. Fray<br />
}}<br />
'''Applicable Tax Rates'''<br />
<br />
<br />
Origination Clause → all tax bills must come out of the House. <br />
<br />
● Shell bill: the Senate receives a tax bill from the House, completely guts it (leaves it a shell of a bill), fills in its own provisions, passes it, and sends it back to the House.<br />
<br />
<br />
'''Court System'''<br />
<br />
Tax Court → same level as district court, subject to Circuit Court of Appeals in relevant district for binding authority; bench trials only (no jury); taxpayer does not need to pay first and seek a refund before bringing an action.<br />
<br />
District Court & US Court of Claims → taxpayer must pay the tax bill first, then seek a refund (bring action).<br />
<br />
The FIRST Tax Bill → February 28, 1913<br />
<br />
'''Federal Income Tax - Applicable Tax Rates'''<br />
<br />
<br />
Tax Cuts and Jobs Act (2017)<br />
<br />
● Tax breaks for individuals are temporary (easier to pass extensions)<br />
<br />
● Tax breaks for corporations are permanent<br />
<br />
● Result of lobbying efforts<br />
<br />
<br />
Authorities: lower tiers <u>do not</u> have authority outweighing higher tiers<br />
<br />
{| class="wikitable"<br />
|'''Tier 1'''<br />
|'''Tier 2'''<br />
|'''Tier 3'''<br />
|-<br />
|IRS Code<br />
<br />
Regulations<br />
<br />
Cases<br />
<br />
Treaties<br />
|Public Administrative Rulings<br />
<br />
Legislative History<br />
|Private Administrative Rulings<br />
<br />
IRS Publications<br />
|-<br />
|Get court deference; Chevron Deference for '''FINAL REGULATIONS''', otherwise, '''LAST IN TIME RULE'''<br />
|No deference, court looks to weight of arguments<br />
|No deference, court looks to weight of arguments<br />
|}<br />
<nowiki>*</nowiki>IRS letter rulings can be persuasive (agency interpretation if own law)<br />
<br />
'''Chevron Deference''': 2 part test ONLY ON '''FINAL REGULATIONS'''<br />
<br />
#If Congress has clearly addressed the issue, “that is the end of the matter” and the Court gives effect to the intent of Congress<br />
#If the statute is silent or ambiguous with respect to the specific question, the agency interpretation is given “controlling weight” unless it is arbitrary or capricious<br />
<br />
'''LAST IN TIME RULE''' → most recent authority wins <br />
<br />
'''Effective tax rate''' → tax liability as a percentage of taxable income; the total percentage of tax paid (overall rate, average after all brackets considered, total tax paid); Effective tax rates will show how '''progressive''' a tax is (the more brackets in the tax ladder, the more '''progressive''').<br />
<br />
● Will '''always''' be lower than the marginal tax rate. <br />
<br />
'''Marginal tax rate''' → rate of tax applicable to the taxpayer’s '''last dollar''' of taxable income (the tax bracket at the end, highest bracket applicable to taxpayer). <br />
<br />
'''2018 Marginal Tax Rates''' - Unmarried Persons <br />
<br />
{| class="wikitable"<br />
|'''10%'''<br />
|'''$0-$9,525'''<br />
|-<br />
|'''12%'''<br />
|'''$9,526-$38,700'''<br />
|-<br />
|'''22%'''<br />
|'''$38,701-$82,500'''<br />
|-<br />
|'''24%'''<br />
|'''$82,501-$157,500'''<br />
|-<br />
|'''32%'''<br />
|'''$157,501-$200,000'''<br />
|-<br />
|'''35%'''<br />
|'''$200,001-$500,000'''<br />
|-<br />
|'''37%'''<br />
|'''Over $500,000'''<br />
|} <br />
<br />
'''Progressive tax''' → progresses higher as income increases (i.e. federal income tax)<br />
<br />
'''Regressive tax''' → all pay the same, regardless of income (i.e. sales tax, flat tax in MA)<br />
<br />
'''Dead-weight loss''' → cost to implement law or provision outweighs the minimal amount of revenue it would raise. <br />
<br />
Four Pillars of Tax Law Analysis (steps to answer tax law questions):<br />
<br />
1) Sufficiency → does the provision raise enough revenue?<br />
<br />
2) Equity → does the provision treat everyone equally?<br />
<br />
3) Efficiency → don’t want to create too many market disturbances (don’t stifle a section of the market unless that’s a goal)<br />
<br />
4) Administrability → is the rule imposable, policable, practical to regulate and enforce? Is it administratively feasible? (the higher the cost, the less practical it is) <br />
<br />
Horizontal equity → same situation, same treatment<br />
<br />
Vertical equity → different situation, different treatment <br />
<br />
Types of Tax:<br />
<br />
● Capitation Tax: everyone pays the same dollar amount<br />
<br />
○ Problems: regressive, if different incomes, drastically different impacts (i.e. tax of $5,000 on income of $10,000 v. income of $100,000)<br />
<br />
○ Unlikely that much revenue could be generated under this method<br />
<br />
● Sales Tax → percentage cost of goods, levied against consumer<br />
<br />
○ States without income tax (TX, FL) use higher sales tax to create revenue<br />
<br />
● Value Added Tax (VAT) → percentage cost of goods, levied against the business, not the consumer<br />
<br />
○ By the time the consumer buys, tax has been paid, BUT cost of good generally higher<br />
<br />
● Real Estate Tax → tax imposed on real property (annually)<br />
<br />
● Estate Tax → currently imposed on the largest estates, only paid by a tiny portion of estates, exclusion amount doubled<br />
<br />
● Flat Tax → everyone pays the same percentage of their income <br />
<br />
'''tax = base x rate''' <br />
<br />
BASE → taxable income RATE → progressive tax bracket, calculated as income increases <br />
<br />
Tax Brackets<br />
<br />
● Even though marginal rates are going up, you don’t lose money<br />
<br />
● Each increment taxed at rate of bracket: First $9,000 taxed at 10%, of the next $10,000, $525 will be taxed at 10% and the remaining will be taxed at the next bracket of 12%<br />
<br />
● Taxpayer still benefit from lower rates regardless of income (fewer than 4% of the population makes it to the final tax bracket)<br />
<br />
● Tax brackets are updated annually → previously, they were linked to the consumer price index, now brackets are linked to chained CPI (effectively raising taxes) <br />
<br />
Filing Status → §1(a)-(c)<br />
<br />
1) Married filing jointly<br />
<br />
2) Surviving spouse<br />
<br />
3) Head of household<br />
<br />
4) Unmarried<br />
<br />
5) Married filing separately <br />
<br />
'''Taxable Income''' <br />
<br />
Taxable Income Defined → §63<br />
<br />
STEP ONE: GROSS INCOME <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 61 - Gross income defined''' <br />
<br />
'''(a) General definition. Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:'''<br />
<br />
''' (1) Compensation for services, including fees, commissions, fringe benefits, and similar items;'''<br />
<br />
''' (2) Gross income derived from business;'''<br />
<br />
''' (3) Gains derived from dealings in property;'''<br />
<br />
''' (4) Interest;'''<br />
<br />
''' (5) Rents;'''<br />
<br />
''' (6) Royalties;'''<br />
<br />
''' (7) Dividends;'''<br />
<br />
''' (8) [1] Alimony and separate maintenance payments;'''<br />
<br />
''' (9) Annuities;'''<br />
<br />
''' (10) Income from life insurance and endowment contracts;'''<br />
<br />
''' (11) Pensions;'''<br />
<br />
''' (12) Income from discharge of indebtedness;'''<br />
<br />
''' (13) Distributive share of partnership gross income;'''<br />
<br />
''' (14) Income in respect of a decedent; and'''<br />
<br />
''' (15) Income from an interest in an estate or trust.''' <br />
<br />
'''(b) Cross references. For items specifically included in gross income, see part II (sec. 71 and following). For items specifically excluded from gross income, see part III (sec. 101 and following).'''<br />
|} <br />
<br />
STEP TWO: DEDUCTIONS UNDER §62(a) <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 62 - Adjusted gross income defined''' <br />
<br />
'''(a) General rule. For purposes of this subtitle, the term “adjusted gross income” means, in the case of an individual, gross income minus the following deductions:'''<br />
<br />
''' (1) Trade and business deductions. The deductions allowed by this chapter (other than by part VII of this subchapter) which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee.'''<br />
<br />
''' (2) Certain trade and business deductions of employees'''<br />
<br />
''' (A) Reimbursed expenses of employees. The deductions allowed by part VI (section 161 and following) which consist of expenses paid or incurred by the taxpayer, in connection with the performance by him of services as an employee, under a reimbursement or other expense allowance arrangement with his employer. The fact that the reimbursement may be provided by a third party shall not be determinative of whether or not the preceding sentence applies.'''<br />
<br />
''' (B) Certain expenses of performing artists. The deductions allowed by section 162 which consist of expenses paid or incurred by a qualified performing artist in connection with the performances by him of services in the performing arts as an employee.'''<br />
<br />
''' (C) Certain expenses of officials. The deductions allowed by section 162 which consist of expenses paid or incurred with respect to services performed by an official as an employee of a State or a political subdivision thereof in a position compensated in whole or in part on a fee basis.'''<br />
<br />
''' (D) Certain expenses of elementary and secondary school teachers. The deductions allowed by section 162 which consist of expenses, not in excess of $250, paid or incurred by an eligible educator—'''<br />
<br />
''' (i) by reason of the participation of the educator in professional development courses related to the curriculum in which the educator provides instruction or to the students for which the educator provides instruction, and'''<br />
<br />
''' '''<br />
<br />
''' (ii) in connection with books, supplies (other than non athletic supplies for courses of instruction in health or physical education), computer equipment (including related software and services) and other equipment, and supplementary materials used by the eligible educator in the classroom.'''<br />
<br />
''' (E) Certain expenses of members of reserve components of the Armed Forces of the United States'''<br />
<br />
'''The deductions allowed by section 162 which consist of expenses, determined at a rate not in excess of the rates for travel expenses (including per diem in lieu of subsistence) authorized for employees of agencies under subchapter I of chapter 57 of title 5, United States Code, paid or incurred by the taxpayer in connection with the performance of services by such taxpayer as a member of a reserve component of the Armed Forces of the United States for any period during which such individual is more than 100 miles away from home in connection with such services.'''<br />
<br />
''' (3) Losses from sale or exchange of property. The deductions allowed by part VI (sec. 161 and following) as losses from the sale or exchange of property.'''<br />
<br />
''' (4) Deductions attributable to rents and royalties. The deductions allowed by part VI (sec. 161 and following), by section 212 (relating to expenses for production of income), and by section 611 (relating to depletion) which are attributable to property held for the production of rents or royalties.'''<br />
<br />
''' (5) Certain deductions of life tenants and income beneficiaries of property. In the case of a life tenant of property, or an income beneficiary of property held in trust, or an heir, legatee, or devisee of an estate, the deduction for depreciation allowed by section 167 and the deduction allowed by section 611.'''<br />
<br />
''' (6) Pension, profit-sharing, and annuity plans of self-employed individuals. In the case of an individual who is an employee within the meaning of section 401(c)(1), the deduction allowed by section 404.'''<br />
<br />
''' (7) Retirement savings. The deduction allowed by section 219 (relating to deduction of certain retirement savings).'''<br />
<br />
''' [(8) Repealed. Pub. L. 104–188, title I, § 1401(b)(4), Aug. 20, 1996, 110 Stat. 1788]'''<br />
<br />
''' (9) Penalties forfeited because of premature withdrawal of funds from time savings accounts or deposits. The deductions allowed by section 165 for losses incurred in any transaction entered into for profit, though not connected with a trade or business, to the extent that such losses include amounts forfeited to a bank, mutual savings bank, savings and loan association, building and loan association, cooperative bank or homestead association as a penalty for premature withdrawal of funds from a time savings account, certificate of deposit, or similar class of deposit.'''<br />
<br />
''' (10) Alimony. The deduction allowed by section 215.'''<br />
<br />
''' (11) Reforestation expenses. The deduction allowed by section 194.'''<br />
<br />
''' (12) Certain required repayments of supplemental unemployment compensation benefits. The deduction allowed by section 165 for the repayment to a trust described in paragraph (9) or (17) of section 501(c) of supplemental unemployment compensation benefits received from such trust if such repayment is required because of the receipt of trade readjustment allowances under section 231 or 232 of the Trade Act of 1974 (19 U.S.C. 2291 and 2292).'''<br />
<br />
''' (13) Jury duty pay remitted to employer. Any deduction allowable under this chapter by reason of an individual remitting any portion of any jury pay to such individual’s employer in exchange for payment by the employer of compensation for the period such individual was performing jury duty. For purposes of the preceding sentence, the term “jury pay” means any payment received by the individual for the discharge of jury duty.'''<br />
<br />
''' [(14) Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(34)(C), Dec. 19, 2014, 128 Stat. 4042]'''<br />
<br />
''' (15) Moving expenses. The deduction allowed by section 217.'''<br />
<br />
''' (16) Archer MSAs. The deduction allowed by section 220.'''<br />
<br />
''' (17) Interest on education loans. The deduction allowed by section 221.'''<br />
<br />
''' (18) Higher education expenses. The deduction allowed by section 222.'''<br />
<br />
''' (19) Health savings accounts. The deduction allowed by section 223.'''<br />
<br />
''' (20) Costs involving discrimination suits, etc. Any deduction allowable under this chapter for attorney fees and court costs paid by, or on behalf of, the taxpayer in connection with any action involving a claim of unlawful discrimination (as defined in subsection (e)) or a claim of a violation of subchapter III of chapter 37 of title 31, United States Code [2] or a claim made under section 1862(b)(3)(A) of the Social Security Act (42 U.S.C. 1395y(b)(3)(A)). The preceding sentence shall not apply to any deduction in excess of the amount includible in the taxpayer’s gross income for the taxable year on account of a judgment or settlement (whether by suit or agreement and whether as lump sum or periodic payments) resulting from such claim.'''<br />
<br />
''' (21) Attorneys’ fees relating to awards to whistleblowers'''<br />
<br />
''' (A) In general. Any deduction allowable under this chapter for attorney fees and court costs paid by, or on behalf of, the taxpayer in connection with any award under—'''<br />
<br />
''' (i) section 7623(b), or'''<br />
<br />
''' (ii) in the case of taxable years beginning after December 31, 2017, any action brought under—'''<br />
<br />
''' (I) section 21F of the Securities Exchange Act of 1934 (15 U.S.C. 78u–6),'''<br />
<br />
''' (II) a State false claims act, including a State false claims act with qui tam provisions, or'''<br />
<br />
''' (III) section 23 of the Commodity Exchange Act (7 U.S.C. 26).'''<br />
<br />
''' (B) May not exceed award. Subparagraph (A) shall not apply to any deduction in excess of the amount includible in the taxpayer’s gross income for the taxable year on account of such award.''' <br />
<br />
'''Nothing in this section shall permit the same item to be deducted more than once. The deduction allowed by section 199A shall not be treated as a deduction described in any of the preceding paragraphs of this subsection.''' <br />
<br />
'''(b) Qualified performing artist'''<br />
<br />
''' (1) In general. For purposes of subsection (a)(2)(B), the term “qualified performing artist” means, with respect to any taxable year, any individual if—'''<br />
<br />
''' (A) such individual performed services in the performing arts as an employee during the taxable year for at least 2 employers,'''<br />
<br />
''' (B) the aggregate amount allowable as a deduction under section 162 in connection with the performance of such services exceeds 10 percent of such individual’s gross income attributable to the performance of such services, and'''<br />
<br />
''' (C) the adjusted gross income of such individual for the taxable year (determined without regard to subsection (a)(2)(B)) does not exceed $16,000.'''<br />
<br />
''' (2) Nominal employer not taken into account. An individual shall not be treated as performing services in the performing arts as an employee for any employer during any taxable year unless the amount received by such individual from such employer for the performance of such services during the taxable year equals or exceeds $200.'''<br />
<br />
''' (3) Special rules for married couples'''<br />
<br />
''' (A) In general. Except in the case of a husband and wife who lived apart at all times during the taxable year, if the taxpayer is married at the close of the taxable year, subsection (a)(2)(B) shall apply only if the taxpayer and his spouse file a joint return for the taxable year.'''<br />
<br />
''' (B) Application of paragraph (1)In the case of a joint return—'''<br />
<br />
''' (i) paragraph (1) (other than subparagraph (C) thereof) shall be applied separately with respect to each spouse, but'''<br />
<br />
''' (ii) paragraph (1)(C) shall be applied with respect to their combined adjusted gross income.'''<br />
<br />
''' (C) Determination of marital status. For purposes of this subsection, marital status shall be determined under section 7703(a).'''<br />
<br />
''' (D) Joint return. For purposes of this subsection, the term “joint return” means the joint return of a husband and wife made under section 6013.'''<br />
<br />
'''(c) Certain arrangements not treated as reimbursement arrangements. For purposes of subsection (a)(2)(A), an arrangement shall in no event be treated as a reimbursement or other expense allowance arrangement if—'''<br />
<br />
''' (1) such arrangement does not require the employee to substantiate the expenses covered by the arrangement to the person providing the reimbursement, or'''<br />
<br />
''' (2) such arrangement provides the employee the right to retain any amount in excess of the substantiated expenses covered under the arrangement.''' <br />
<br />
'''The substantiation requirements of the preceding sentence shall not apply to any expense to the extent that substantiation is not required under section 274(d) for such expense by reason of the regulations prescribed under the 2nd sentence thereof.''' <br />
<br />
'''(d) Definition; special rules'''<br />
<br />
''' (1) Eligible educator'''<br />
<br />
''' (A) In general. For purposes of subsection (a)(2)(D), the term “eligible educator” means, with respect to any taxable year, an individual who is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide in a school for at least 900 hours during a school year.'''<br />
<br />
''' (B) School. The term “school” means any school which provides elementary education or secondary education (kindergarten through grade 12), as determined under State law.'''<br />
<br />
''' (2) Coordination with exclusions. A deduction shall be allowed under subsection (a)(2)(D) for expenses only to the extent the amount of such expenses exceeds the amount excludable under section 135, 529(c)(1), or 530(d)(2) for the taxable year.'''<br />
<br />
''' (3) Inflation adjustment. In the case of any taxable year beginning after 2015, the $250 amount in subsection (a)(2)(D) shall be increased by an amount equal to—'''<br />
<br />
''' (A) such dollar amount, multiplied by'''<br />
<br />
''' (B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 2014” for “calendar year 2016” in subparagraph (A)(ii) thereof.''' <br />
<br />
'''Any increase determined under the preceding sentence shall be rounded to the nearest multiple of $50.''' <br />
<br />
'''(e) Unlawful discrimination defined. For purposes of subsection (a)(20), the term “unlawful discrimination” means an act that is unlawful under any of the following:'''<br />
<br />
''' (1) Section 302 of the Civil Rights Act of 1991 (2 U.S.C. 1202).[3]'''<br />
<br />
''' (2) Section 201, 202, 203, 204, 205, 206, or 207 of the Congressional Accountability Act of 1995 (2 U.S.C. 1311, 1312, 1313, 1314, 1315, 1316, or 1317).'''<br />
<br />
''' (3) The National Labor Relations Act (29 U.S.C. 151 et seq.).'''<br />
<br />
''' (4) The Fair Labor Standards Act of 1938 (29 U.S.C. 201 et seq.).'''<br />
<br />
''' '''<br />
<br />
''' (5) Section 4 or 15 of the Age Discrimination in Employment Act of 1967 (29 U.S.C. 623 or 633a).'''<br />
<br />
''' (6) Section 501 or 504 of the Rehabilitation Act of 1973 (29 U.S.C. 791 or 794).'''<br />
<br />
''' (7) Section 510 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1140).'''<br />
<br />
''' (8) Title IX of the Education Amendments of 1972 (20 U.S.C. 1681 et seq.).'''<br />
<br />
''' (9) The Employee Polygraph Protection Act of 1988 (29 U.S.C. 2001 et seq.).'''<br />
<br />
''' (10) The Worker Adjustment and Retraining Notification Act (29 U.S.C. 2102 et seq.).'''<br />
<br />
''' (11) Section 105 of the Family and Medical Leave Act of 1993 (29 U.S.C. 2615).'''<br />
<br />
''' (12) Chapter 43 of title 38, United States Code (relating to employment and reemployment rights of members of the uniformed services).'''<br />
<br />
''' (13) Section 1977, 1979, or 1980 of the Revised Statutes (42 U.S.C. 1981, 1983, or 1985).'''<br />
<br />
''' (14) Section 703, 704, or 717 of the Civil Rights Act of 1964 (42 U.S.C. 2000e–2, 2000e–3, or 2000e–16).'''<br />
<br />
''' (15) Section 804, 805, 806, 808, or 818 of the Fair Housing Act (42 U.S.C. 3604, 3605, 3606, 3608, or 3617).'''<br />
<br />
''' (16) Section 102, 202, 302, or 503 of the Americans with Disabilities Act of 1990 (42 U.S.C. 12112, 12132, 12182, or 12203).'''<br />
<br />
''' (17) Any provision of Federal law (popularly known as whistleblower protection provisions) prohibiting the discharge of an employee, the discrimination against an employee, or any other form of retaliation or reprisal against an employee for asserting rights or taking other actions permitted under Federal law.'''<br />
<br />
''' (18) Any provision of Federal, State, or local law, or common law claims permitted under Federal, State, or local law—'''<br />
<br />
''' (i) providing for the enforcement of civil rights, or'''<br />
<br />
''' (ii) regulating any aspect of the employment relationship, including claims for wages, compensation, or benefits, or prohibiting the discharge of an employee, the discrimination against an employee, or any other form of retaliation or reprisal against an employee for asserting rights or taking other actions permitted by law.'''<br />
|} <br />
<br />
STEP THREE: LESS QUALIFIED BUSINESS INCOME UNDER 199A <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 199A - Qualified business income''' <br />
<br />
'''(a) In general. In the case of a taxpayer other than a corporation, there shall be allowed as a deduction for any taxable year an amount equal to the sum of—'''<br />
<br />
''' (1) the lesser of—'''<br />
<br />
''' (A) the combined qualified business income amount of the taxpayer, or'''<br />
<br />
''' (B) an amount equal to 20 percent of the excess (if any) of—'''<br />
<br />
''' (i) the taxable income of the taxpayer for the taxable year, over'''<br />
<br />
''' (ii) the sum of any net capital gain (as defined in section 1(h)), plus the aggregate amount of the qualified cooperative dividends, of the taxpayer for the taxable year, plus'''<br />
<br />
''' (2) the lesser of—'''<br />
<br />
''' (A) 20 percent of the aggregate amount of the qualified cooperative dividends of the taxpayer for the taxable year, or'''<br />
<br />
''' (B) taxable income (reduced by the net capital gain (as so defined)) of the taxpayer for the taxable year.''' <br />
<br />
'''The amount determined under the preceding sentence shall not exceed the taxable income (reduced by the net capital gain (as so defined)) of the taxpayer for the taxable year.''' <br />
<br />
'''(b) Combined qualified business income amount. For purposes of this section—'''<br />
<br />
''' (1) In general. The term “combined qualified business income amount” means, with respect to any taxable year, an amount equal to—'''<br />
<br />
''' (A) the sum of the amounts determined under paragraph (2) for each qualified trade or business carried on by the taxpayer, plus'''<br />
<br />
''' (B) 20 percent of the aggregate amount of the qualified REIT dividends and qualified publicly traded partnership income of the taxpayer for the taxable year.'''<br />
<br />
''' (2) Determination of deductible amount for each trade or business. The amount determined under this paragraph with respect to any qualified trade or business is the lesser of—'''<br />
<br />
''' (A) 20 percent of the taxpayer’s qualified business income with respect to the qualified trade or business, or'''<br />
<br />
''' (B) the greater of—'''<br />
<br />
''' (i) 50 percent of the W–2 wages with respect to the qualified trade or business, or'''<br />
<br />
''' (ii) the sum of 25 percent of the W–2 wages with respect to the qualified trade or business, plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property.'''<br />
<br />
''' (3) Modifications to limit based on taxable income'''<br />
<br />
''' (A) Exception from limit. In the case of any taxpayer whose taxable income for the taxable year does not exceed the threshold amount, paragraph (2) shall be applied without regard to subparagraph (B).'''<br />
<br />
''' (B) Phase-in of limit for certain taxpayers'''<br />
<br />
''' (i) In general. If—'''<br />
<br />
''' (I) the taxable income of a taxpayer for any taxable year exceeds the threshold amount, but does not exceed the sum of the threshold amount plus $50,000 ($100,000 in the case of a joint return), and'''<br />
<br />
''' (II) the amount determined under paragraph (2)(B) (determined without regard to this subparagraph) with respect to any qualified trade or business carried on by the taxpayer is less than the amount determined under paragraph (2)(A) with respect such trade or business, then paragraph (2) shall be applied with respect to such trade or business without regard to subparagraph (B) thereof and by reducing the amount determined under subparagraph (A) thereof by the amount determined under clause (ii).'''<br />
<br />
''' (ii) Amount of reduction. The amount determined under this subparagraph is the amount which bears the same ratio to the excess amount as—'''<br />
<br />
''' (I) the amount by which the taxpayer’s taxable income for the taxable year exceeds the threshold amount, bears to'''<br />
<br />
''' (II) $50,000 ($100,000 in the case of a joint return).'''<br />
<br />
''' (iii) Excess amount. For purposes of clause (ii), the excess amount is the excess of—'''<br />
<br />
''' (I) the amount determined under paragraph (2)(A) (determined without regard to this paragraph), over'''<br />
<br />
''' (II) the amount determined under paragraph (2)(B) (determined without regard to this paragraph).'''<br />
<br />
''' (4) Wages, etc'''<br />
<br />
''' (A) In general. The term “W–2 wages” means, with respect to any person for any taxable year of such person, the amounts described in paragraphs (3) and (8) of section 6051(a) paid by such person with respect to employment of employees by such person during the calendar year ending during such taxable year.'''<br />
<br />
''' (B) Limitation to wages attributable to qualified business income. Such term shall not include any amount which is not properly allocable to qualified business income for purposes of subsection (c)(1).'''<br />
<br />
''' (C) Return requirement. Such term shall not include any amount which is not properly included in a return filed with the Social Security Administration on or before the 60th day after the due date (including extensions) for such return.'''<br />
<br />
''' (5) Acquisitions, dispositions, and short taxable years. The Secretary shall provide for the application of this subsection in cases of a short taxable year or where the taxpayer acquires, or disposes of, the major portion of a trade or business or the major portion of a separate unit of a trade or business during the taxable year.'''<br />
<br />
''' (6) Qualified property. For purposes of this section:'''<br />
<br />
''' ''' <br />
<br />
''' (A) In general. The term “qualified property” means, with respect to any qualified trade or business for a taxable year, tangible property of a character subject to the allowance for depreciation under section 167—'''<br />
<br />
''' (i) which is held by, and available for use in, the qualified trade or business at the close of the taxable year,'''<br />
<br />
''' (ii) which is used at any point during the taxable year in the production of qualified business income, and'''<br />
<br />
''' (iii) the depreciable period for which has not ended before the close of the taxable year.'''<br />
<br />
''' (B) Depreciable period. The term “depreciable period” means, with respect to qualified property of a taxpayer, the period beginning on the date the property was first placed in service by the taxpayer and ending on the later of—'''<br />
<br />
''' (i) the date that is 10 years after such date, or'''<br />
<br />
''' (ii) the last day of the last full year in the applicable recovery period that would apply to the property under section 168 (determined without regard to subsection (g) thereof).''' <br />
<br />
'''(c) Qualified business income. For purposes of this section—'''<br />
<br />
''' (1) In general. The term “qualified business income” means, for any taxable year, the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer. Such term shall not include any qualified REIT dividends, qualified cooperative dividends, or qualified publicly traded partnership income.'''<br />
<br />
''' (2) Carryover of losses. If the net amount of qualified income, gain, deduction, and loss with respect to qualified trades or businesses of the taxpayer for any taxable year is less than zero, such amount shall be treated as a loss from a qualified trade or business in the succeeding taxable year.'''<br />
<br />
''' (3) Qualified items of income, gain, deduction, and loss. For purposes of this subsection—'''<br />
<br />
''' (A) In general. The term “qualified items of income, gain, deduction, and loss” means items of income, gain, deduction, and loss to the extent such items are—'''<br />
<br />
''' (i) effectively connected with the conduct of a trade or business within the United States (within the meaning of section 864(c), determined by substituting “qualified trade or business (within the meaning of section 199A)” for“nonresident alien individual or a foreign corporation” or for “a foreign corporation” each place it appears), and'''<br />
<br />
''' (ii) included or allowed in determining taxable income for the taxable year.'''<br />
<br />
''' (B) Exceptions. The following investment items shall not be taken into account as a qualified item of income, gain, deduction, or loss:'''<br />
<br />
''' (i) Any item of short-term capital gain, short-term capital loss, long-term capital gain, or long-term capital loss.'''<br />
<br />
''' (ii) Any dividend, income equivalent to a dividend, or payment in lieu of dividends described in section 954(c)(1)(G).'''<br />
<br />
''' (iii) Any interest income other than interest income which is properly allocable to a trade or business.'''<br />
<br />
''' (iv) Any item of gain or loss described in subparagraph (C) or (D) of section 954(c)(1) (applied by substituting “qualified trade or business” for “controlled foreign corporation”).'''<br />
<br />
''' (v) Any item of income, gain, deduction, or loss taken into account under section 954(c)(1)(F) (determined without regard to clause (ii) thereof and other than items attributable to notional principal contracts entered into in transactions qualifying under section 1221(a)(7)).'''<br />
<br />
''' (vi) Any amount received from an annuity which is not received in connection with the trade or business.'''<br />
<br />
''' (vii) Any item of deduction or loss properly allocable to an amount described in any of the preceding clauses.'''<br />
<br />
''' (4) Treatment of reasonable compensation and guaranteed payments. Qualified business income shall not include—'''<br />
<br />
''' (A) reasonable compensation paid to the taxpayer by any qualified trade or business of the taxpayer for services rendered with respect to the trade or business,'''<br />
<br />
''' (B) any guaranteed payment described in section 707(c) paid to a partner for services rendered with respect to the trade or business, and'''<br />
<br />
''' (C) to the extent provided in regulations, any payment described in section 707(a) to a partner for services rendered with respect to the trade or business.''' <br />
<br />
'''(d) Qualified trade or business. For purposes of this section—'''<br />
<br />
''' (1) In general. The term “qualified trade or business” means any trade or business other than—'''<br />
<br />
''' (A) a specified service trade or business, or'''<br />
<br />
''' (B) the trade or business of performing services as an employee.'''<br />
<br />
''' (2) Specified service trade or business. The term “specified service trade or business” means any trade or business—'''<br />
<br />
''' (A) which is described in section 1202(e)(3)(A) (applied without regard to the words “engineering, architecture,”) or which would be so described if the term “employees or owners” were substituted for “employees” therein, or'''<br />
<br />
''' (B) which involves the performance of services that consist of investing and investment management, trading, or dealing in securities (as defined in section 475(c)(2)), partnership interests, or commodities (as defined in section 475(e)(2)).'''<br />
<br />
''' (3) Exception for specified service businesses based on taxpayer’s income'''<br />
<br />
''' (A) In generalIf, for any taxable year, the taxable income of any taxpayer is less than the sum of the threshold amount plus $50,000 ($100,000 in the case of a joint return), then—'''<br />
<br />
''' (i) any specified service trade or business of the taxpayer shall not fail to be treated as a qualified trade or business due to paragraph (1)(A), but'''<br />
<br />
''' (ii) only the applicable percentage of qualified items of income, gain, deduction, or loss, and the W–2 wages and the unadjusted basis immediately after acquisition of qualified property, of the taxpayer allocable to such specified service trade or business shall be taken into account in computing the qualified business income, W–2 wages, and the unadjusted basis immediately after acquisition of qualified property of the taxpayer for the taxable year for purposes of applying this section.'''<br />
<br />
''' (B) Applicable percentage. For purposes of subparagraph (A), the term “applicable percentage” means, with respect to any taxable year, 100 percent reduced (not below zero) by the percentage equal to the ratio of—'''<br />
<br />
''' (i) the taxable income of the taxpayer for the taxable year in excess of the threshold amount, bears to'''<br />
<br />
''' (ii) $50,000 ($100,000 in the case of a joint return).''' <br />
<br />
'''(e) Other Definitions. For purposes of this section—'''<br />
<br />
''' (1) Taxable income. Taxable income shall be computed without regard to the deduction allowable under this section.'''<br />
<br />
''' (2) Threshold amount'''<br />
<br />
''' (A) In general. The term “threshold amount” means $157,500 (200 percent of such amount in the case of a joint return).'''<br />
<br />
''' (B) Inflation adjustment. In the case of any taxable year beginning after 2018, the dollar amount in subparagraph (A) shall be increased by an amount equal to—'''<br />
<br />
''' (i) such dollar amount, multiplied by'''<br />
<br />
''' (ii) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 2017” for “calendar year 2016” in subparagraph (A)(ii) thereof.''' <br />
<br />
'''The amount of any increase under the preceding sentence shall be rounded as provided in section 1(f)(7).'''<br />
<br />
''' (3) Qualified REIT dividend. The term “qualified REIT dividend” means any dividend from a real estate investment trust received during the taxable year which—'''<br />
<br />
''' (A) is not a capital gain dividend, as defined in section 857(b)(3), and'''<br />
<br />
''' (B) is not qualified dividend income, as defined in section 1(h)(11).'''<br />
<br />
''' (4) Qualified cooperative dividend. The term “qualified cooperative dividend” means any patronage dividend (as defined in section 1388(a)), any per-unit retain allocation (as defined in section 1388(f)), and any qualified written notice of allocation (as defined in section 1388(c)), or any similar amount received from an organization described in subparagraph (B)(ii), which—'''<br />
<br />
''' (A) is includible in gross income, and'''<br />
<br />
''' (B) is received from—'''<br />
<br />
''' (i) an organization or corporation described in section 501(c)(12) or 1381(a), or'''<br />
<br />
''' (ii) an organization which is governed under this title by the rules applicable to cooperatives under this title before the enactment of subchapter T.'''<br />
<br />
''' (5) Qualified publicly traded partnership income. The term “qualified publicly traded partnership income” means, with respect to any qualified trade or business of a taxpayer, the sum of—'''<br />
<br />
''' (A) the net amount of such taxpayer’s allocable share of each qualified item of income, gain, deduction, and loss (as defined in subsection (c)(3) and determined after the application of subsection (c)(4)) from a publicly traded partnership (as defined in section 7704(a)) [1] which is not treated as a corporation under section 7704(c), plus'''<br />
<br />
''' (B) any gain recognized by such taxpayer upon disposition of its interest in such partnership to the extent such gain is treated as an amount realized from the sale or exchange of property other than a capital asset under section 751(a).''' <br />
<br />
'''(f) Special rules'''<br />
<br />
''' (1) Application to partnerships and s corporations'''<br />
<br />
''' (A) In general. In the case of a partnership or S corporation—'''<br />
<br />
''' (i) this section shall be applied at the partner or shareholder level,'''<br />
<br />
''' (ii) each partner or shareholder shall take into account such person’s allocable share of each qualified item of income, gain, deduction, and loss, and'''<br />
<br />
''' (iii) each partner or shareholder shall be treated for purposes of subsection (b) as having W–2 wages and unadjusted basis immediately after acquisition of qualified property for the taxable year in an amount equal to such person’s allocable share of the W–2 wages and the unadjusted basis immediately after acquisition of qualified property of the partnership or S corporation for the taxable year (as determined under regulations prescribed by the Secretary).''' <br />
<br />
'''For purposes of clause (iii), a partner’s or shareholder’s allocable share of W–2 wages shall be determined in the same manner as the partner’s or shareholder’s allocable share of wage expenses. For purposes of such clause, partner’s or shareholder’s allocable share of the unadjusted basis immediately after acquisition of qualified property shall be determined in the same manner as the partner’s or shareholder’s allocable share of depreciation. For purposes of this subparagraph, in the case of an S corporation, an allocable share shall be the shareholder’s pro rata share of an item.'''<br />
<br />
''' (B) Application to trusts and estates. Rules similar to the rules under section 199(d)(1)(B)(i) (as in effect on December 1, 2017) for the apportionment of W–2 wages shall apply to the apportionment of W–2 wages and the apportionment of unadjusted basis immediately after acquisition of qualified property under this section.'''<br />
<br />
''' (C) Treatment of trades or business in Puerto Rico'''<br />
<br />
''' (i) In general. In the case of any taxpayer with qualified business income from sources within the commonwealth of Puerto Rico, if all such income is taxable under section 1 for such taxable year, then for purposes of determining the qualified business income of such taxpayer for such taxable year, the term “United States” shall include the Commonwealth of Puerto Rico.'''<br />
<br />
''' (ii) Special rule for applying limit. In the case of any taxpayer described in clause (i), the determination of W–2 wages of such taxpayer with respect to any qualified trade or business conducted in Puerto Rico shall be made without regard to any exclusion under section 3401(a)(8) for remuneration paid for services in Puerto Rico.'''<br />
<br />
''' (2) Coordination with minimum tax. For purposes of determining alternative minimum taxable income under section 55, qualified business income shall be determined without regard to any adjustments under sections 56 through 59.'''<br />
<br />
''' (3) Deduction limited to income taxes. The deduction under subsection (a) shall only be allowed for purposes of this chapter.'''<br />
<br />
''' (4) Regulations. The Secretary shall prescribe such regulations as are necessary to carry out the purposes of this section, including regulations—'''<br />
<br />
''' (A) for requiring or restricting the allocation of items and wages under this section and such reporting requirements as the Secretary determines appropriate, and'''<br />
<br />
''' (B) for the application of this section in the case of tiered entities.''' <br />
<br />
'''(g) Deduction allowed to specified agricultural or horticultural cooperatives'''<br />
<br />
''' (1) In general. In the case of any taxable year of a specified agricultural or horticultural cooperative beginning after December 31, 2017, there shall be allowed a deduction in an amount equal to the lesser of—'''<br />
<br />
''' (A) 20 percent of the excess (if any) of—'''<br />
<br />
''' (i) the gross income of a specified agricultural or horticultural cooperative, over'''<br />
<br />
''' (ii) the qualified cooperative dividends (as defined in subsection (e)(4)) paid during the taxable year for the taxable year, or'''<br />
<br />
''' (B) the greater of—'''<br />
<br />
''' (i) 50 percent of the W–2 wages of the cooperative with respect to its trade or business, or'''<br />
<br />
''' (ii) the sum of 25 percent of the W–2 wages of the cooperative with respect to its trade or business, plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property of the cooperative.'''<br />
<br />
''' (2) Limitation. The amount determined under paragraph (1) shall not exceed the taxable income of the specified agricultural or horticultural for the taxable year.'''<br />
<br />
''' (3) Specified agricultural or horticultural cooperative. For purposes of this subsection, the term “specified agricultural or horticultural cooperative” means an organization to which part I of subchapter T applies which is engaged in—'''<br />
<br />
''' (A) the manufacturing, production, growth, or extraction in whole or significant part of any agricultural or horticultural product,'''<br />
<br />
''' (B) the marketing of agricultural or horticultural products which its patrons have so manufactured, produced, grown, or extracted, or'''<br />
<br />
''' (C) the provision of supplies, equipment, or services to farmers or to organizations described in subparagraph (A) or (B).''' <br />
<br />
'''(h) Anti-abuse rules. The Secretary shall—'''<br />
<br />
''' (1) apply rules similar to the rules under section 179(d)(2) in order to prevent the manipulation of the depreciable period of qualified property using transactions between related parties, and'''<br />
<br />
''' (2) prescribe rules for determining the unadjusted basis immediately after acquisition of qualified property acquired in like-kind exchanges or involuntary conversions.''' <br />
<br />
'''(i) Termination. This section shall not apply to taxable years beginning after December 31, 2025.'''<br />
|} <br />
<br />
STEP FOUR A: LESS GENERAL DEDUCTION OR ITEMIZED DEDUCTIONS UNDER 63(c) and 63(d) <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 63 - Taxable income defined''' <br />
<br />
'''(a) In general. Except as provided in subsection (b), for purposes of this subtitle, the term “taxable income” means gross income minus the deductions allowed by this chapter (other than the standard deduction).'''<br />
<br />
'''(b) Individuals who do not itemize their deductions. In the case of an individual who does not elect to itemize his deductions for the taxable year, for purposes of this subtitle, the term “taxable income” means adjusted gross income, minus—'''<br />
<br />
''' (1) the standard deduction,'''<br />
<br />
''' (2) the deduction for personal exemptions provided in section 151, and'''<br />
<br />
''' (3) the deduction provided in section 199A.''' <br />
<br />
'''(c) Standard deduction. For purposes of this subtitle—'''<br />
<br />
''' (1) In general. Except as otherwise provided in this subsection, the term “standard deduction” means the sum of—'''<br />
<br />
''' (A) the basic standard deduction, and'''<br />
<br />
''' (B) the additional standard deduction.'''<br />
<br />
''' (2) Basic standard deduction. For purposes of paragraph (1), the basic standard deduction is—'''<br />
<br />
''' (A) 200 percent of the dollar amount in effect under subparagraph (C) for the taxable year in the case of—'''<br />
<br />
''' (i) a joint return, or'''<br />
<br />
''' (ii) a surviving spouse (as defined in section 2(a)),'''<br />
<br />
''' (B) $4,400 in the case of a head of household (as defined in section 2(b)), or'''<br />
<br />
''' (C) $3,000 in any other case.'''<br />
<br />
''' (3) Additional standard deduction for aged and blind. For purposes of paragraph (1), the additional standard deduction is the sum of each additional amount to which the taxpayer is entitled under subsection (f).'''<br />
<br />
''' (4) Adjustments for inflation. In the case of any taxable year beginning in a calendar year after 1988, each dollar amount contained in paragraph (2)(B), (2)(C), or (5) or subsection (f) shall be increased by an amount equal to—'''<br />
<br />
''' (A) such dollar amount, multiplied by'''<br />
<br />
''' (B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting for “calendar year 2016” in subparagraph (A)(ii) thereof—'''<br />
<br />
''' (i) “calendar year 1987” in the case of the dollar amounts contained in paragraph (2)(B), (2)(C), or (5)(A) or subsection (f), and'''<br />
<br />
''' (ii) “calendar year 1997” in the case of the dollar amount contained in paragraph (5)(B).'''<br />
<br />
''' (5) Limitation on basic standard deduction in the case of certain dependents. In the case of an individual with respect to whom a deduction under section 151 is allowable to another taxpayer for a taxable year beginning in the calendar year in which the individual’s taxable year begins, the basic standard deduction applicable to such individual for such individual’s taxable year shall not exceed the greater of—'''<br />
<br />
''' (A) $500, or'''<br />
<br />
''' (B) the sum of $250 and such individual’s earned income.'''<br />
<br />
''' (6) Certain individuals, etc., not eligible for standard deduction. In the case of—'''<br />
<br />
''' (A) a married individual filing a separate return where either spouse itemizes deductions,'''<br />
<br />
''' (B) a nonresident alien individual,'''<br />
<br />
''' (C) an individual making a return under section 443(a)(1) for a period of less than 12 months on account of a change in his annual accounting period, or'''<br />
<br />
''' (D) an estate or trust, common trust fund, or partnership, the standard deduction shall be zero.''' <br />
<br />
'''(7) Special rules for taxable years 2018 through 2025. In the case of a taxable year beginning after December 31, 2017, and before January 1, 2026—'''<br />
<br />
''' (A) Increase in standard deduction. Paragraph (2) shall be applied—'''<br />
<br />
''' (i) by substituting “$18,000” for “$4,400” in subparagraph (B), and'''<br />
<br />
''' (ii) by substituting “$12,000” for “$3,000” in subparagraph (C).'''<br />
<br />
''' (B) Adjustment for inflation'''<br />
<br />
''' (i) In general. Paragraph (4) shall not apply to the dollar amounts contained in paragraphs (2)(B) and (2)(C).'''<br />
<br />
''' (ii) Adjustment of increased amounts. In the case of a taxable year beginning after 2018, the $18,000 and $12,000 amounts in subparagraph (A) shall each be increased by an amount equal to—'''<br />
<br />
''' (I) such dollar amount, multiplied by'''<br />
<br />
''' (II) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “2017” for “2016” in subparagraph (A)(ii) thereof.''' <br />
<br />
'''If any increase under this clause is not a multiple of $50, such increase shall be rounded to the next lowest multiple of $50.''' <br />
<br />
'''(d) Itemized deductions. For purposes of this subtitle, the term “itemized deductions” means the deductions allowable under this chapter other than—'''<br />
<br />
''' (1) the deductions allowable in arriving at adjusted gross income,'''<br />
<br />
''' (2) the deduction for personal exemptions provided by section 151, and'''<br />
<br />
''' (3) the deduction provided in section 199A.''' <br />
<br />
'''(e) Election to itemize'''<br />
<br />
''' (1) In general. Unless an individual makes an election under this subsection for the taxable year, no itemized deduction shall be allowed for the taxable year. For purposes of this subtitle, the determination of whether a deduction is allowable under this chapter shall be made without regard to the preceding sentence.'''<br />
<br />
''' (2) Time and manner of election. Any election under this subsection shall be made on the taxpayer’s return, and the Secretary shall prescribe the manner of signifying such election on the return.'''<br />
<br />
''' (3) Change of election.Under regulations prescribed by the Secretary, a change of election with respect to itemized deductions for any taxable year may be made after the filing of the return for such year. If the spouse of the taxpayer filed a separate return for any taxable year corresponding to the taxable year of the taxpayer, the change shall not be allowed unless, in accordance with such regulations—'''<br />
<br />
''' (A) the spouse makes a change of election with respect to itemized deductions, for the taxable year covered in such separate return, consistent with the change of treatment sought by the taxpayer, and'''<br />
<br />
''' (B) the taxpayer and his spouse consent in writing to the assessment (within such period as may be agreed on with the Secretary) of any deficiency, to the extent attributable to such change of election, even though at the time of the filing of such consent the assessment of such deficiency would otherwise be prevented by the operation of any law or rule of law.''' <br />
<br />
'''This paragraph shall not apply if the tax liability of the taxpayer’s spouse for the taxable year corresponding to the taxable year of the taxpayer has been compromised under section 7122.''' <br />
<br />
'''(f) Aged or blind additional amounts'''<br />
<br />
''' (1) Additional amounts for the aged. The taxpayer shall be entitled to an additional amount of $600—'''<br />
<br />
''' (A) for himself if he has attained age 65 before the close of his taxable year, and'''<br />
<br />
''' (B) for the spouse of the taxpayer if the spouse has attained age 65 before the close of the taxable year and an additional exemption is allowable to the taxpayer for such spouse under section 151(b).'''<br />
<br />
''' (2) Additional amount for blind. The taxpayer shall be entitled to an additional amount of $600—'''<br />
<br />
''' (A) for himself if he is blind at the close of the taxable year, and'''<br />
<br />
''' (B) for the spouse of the taxpayer if the spouse is blind as of the close of the taxable year and an additional exemption is allowable to the taxpayer for such spouse under section 151(b).''' <br />
<br />
'''For purposes of subparagraph (B), if the spouse dies during the taxable year the determination of whether such spouse is blind shall be made as of the time of such death.'''<br />
<br />
''' (3) Higher amount for certain unmarried individuals. In the case of an individual who is not married and is not a surviving spouse, paragraphs (1) and (2) shall be applied by substituting “$750” for “$600”.'''<br />
<br />
''' (4) Blindness defined. For purposes of this subsection, an individual is blind only if his central visual acuity does not exceed 20/200 in the better eye with correcting lenses, or if his visual acuity is greater than 20/200 but is accompanied by a limitation in the fields of vision such that the widest diameter of the visual field subtends an angle no greater than 20 degrees.'''<br />
<br />
'''(g) Marital status. For purposes of this section, marital status shall be determined under section 7703.'''<br />
|} <br />
<br />
STEP FOUR B: ITEMIZED DEDUCTIONS §67 <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 67 - 2-percent floor on miscellaneous itemized deductions''' <br />
<br />
'''(a) General rule. In the case of an individual, the miscellaneous itemized deductions for any taxable year shall be allowed only to the extent that the aggregate of such deductions exceeds 2 percent of adjusted gross income.'''<br />
<br />
'''(b) Miscellaneous itemized deductions. For purposes of this section, the term “miscellaneous itemized deductions” means the itemized deductions other than—'''<br />
<br />
''' (1) the deduction under section 163 (relating to interest),'''<br />
<br />
''' (2) the deduction under section 164 (relating to taxes),'''<br />
<br />
''' (3) the deduction under section 165(a) for casualty or theft losses described in paragraph (2) or (3) of section 165(c) or for losses described in section 165(d),'''<br />
<br />
''' (4) the deductions under section 170 (relating to charitable, etc., contributions and gifts) and section 642(c) (relating to deduction for amounts paid or permanently set aside for a charitable purpose),'''<br />
<br />
''' (5) the deduction under section 213 (relating to medical, dental, etc., expenses),'''<br />
<br />
''' (6) any deduction allowable for impairment-related work expenses,'''<br />
<br />
''' (7) the deduction under section 691(c) (relating to deduction for estate tax in case of income in respect of the decedent),'''<br />
<br />
''' (8) any deduction allowable in connection with personal property used in a short sale,'''<br />
<br />
''' (9) the deduction under section 1341 (relating to computation of tax where taxpayer restores substantial amount held under claim of right),'''<br />
<br />
''' (10) the deduction under section 72(b)(3) (relating to deduction where annuity payments cease before investment recovered),'''<br />
<br />
''' (11) the deduction under section 171 (relating to deduction for amortizable bond premium), and'''<br />
<br />
''' (12) the deduction under section 216 (relating to deductions in connection with cooperative housing corporations).''' <br />
<br />
'''(c) Disallowance of indirect deduction through pass-thru entity'''<br />
<br />
''' (1) In general. The Secretary shall prescribe regulations which prohibit the indirect deduction through pass-thru entities of amounts which are not allowable as a deduction if paid or incurred directly by an individual and which contain such reporting requirements as may be necessary to carry out the purposes of this subsection.'''<br />
<br />
''' (2) Treatment of publicly offered regulated investment companies'''<br />
<br />
''' (A) In general. Paragraph (1) shall not apply with respect to any publicly offered regulated investment company.'''<br />
<br />
''' (B) Publicly offered regulated investment companies. For purposes of this subsection—'''<br />
<br />
''' (i) In general. The term “publicly offered regulated investment company” means a regulated investment company the shares of which are—'''<br />
<br />
''' (I) continuously offered pursuant to a public offering (within the meaning of section 4 of the Securities Act of 1933, as amended (15 U.S.C. 77a to 77aa)),'''<br />
<br />
''' (II) regularly traded on an established securities market, or'''<br />
<br />
''' (III) held by or for no fewer than 500 persons at all times during the taxable year.'''<br />
<br />
''' (ii) Secretary may reduce 500 person requirement. The Secretary may by regulation decrease the minimum shareholder requirement of clause (i)(III) in the case of regulated investment companies which experience a loss of shareholders through net redemptions of their shares.'''<br />
<br />
''' (3) Treatment of certain other entities. Paragraph (1) shall not apply—'''<br />
<br />
''' (A) with respect to cooperatives and real estate investment trusts, and'''<br />
<br />
''' (B) except as provided in regulations, with respect to estates and trusts.''' <br />
<br />
'''(d) Impairment-related work expenses. For purposes of this section, the term “impairment-related work expenses” means expenses—'''<br />
<br />
''' (1) of a handicapped individual (as defined in section 190(b)(3)) for attendant care services at the individual’s place of employment and other expenses in connection with such place of employment which are necessary for such individual to be able to work, and'''<br />
<br />
''' (2) with respect to which a deduction is allowable under section 162 (determined without regard to this section).''' <br />
<br />
'''(e) Determination of adjusted gross income in case of estates and trusts. For purposes of this section, the adjusted gross income of an estate or trust shall be computed in the same manner as in the case of an individual, except that—'''<br />
<br />
''' (1) the deductions for costs which are paid or incurred in connection with the administration of the estate or trust and which would not have been incurred if the property were not held in such trust or estate, and'''<br />
<br />
''' (2) the deductions allowable under sections 642(b), 651, and 661,'''<br />
<br />
'''shall be treated as allowable in arriving at adjusted gross income. Under regulations, appropriate adjustments shall be made in the application of part I of subchapter J of this chapter to take into account the provisions of this section.''' <br />
<br />
'''(f) Coordination with other limitation. This section shall be applied before the application of the dollar limitation of the second sentence of section 162(a) (relating to trade or business expenses).'''<br />
<br />
'''(g) Suspension for taxable years 2018 through 2025. Notwithstanding subsection (a), no miscellaneous itemized deduction shall be allowed for any taxable year beginning after December 31, 2017, and before January 1, 2026.'''<br />
|} <br />
<br />
'''EXAMPLE''' → Calculating Taxable Income <br />
<br />
Problem: John and Jane Doe; married with no children; both work at ACME Corp.; additional income: rent out basement apartment to law student. <br />
<br />
{| class="wikitable"<br />
| colspan="2" |'''2018 Income and Expenses for John and Jane Doe'''<br />
|-<br />
|'''Combined Salaries --- $95,000'''<br />
|Mortgage Interest (§163) --- $16,000<br />
|-<br />
|'''Rental Income --- $5,000'''<br />
|'''Rental Expenses (§212) --- $2,000'''<br />
|-<br />
|'''Education Loan Interest (§221) --- $8,000'''<br />
|Charitable Contributions (§170) --- $500<br />
|-<br />
|Medical Expenses (§213) --- $2,000<br />
|Unreimbursed Work Expenses (§162) --- $1,000<br />
|-<br />
|Tax Preparation Fee (§212) --- $1,000<br />
| <br />
|} <br />
<br />
STEP ONE: '''Gross Income''' → $100,000 (combined salaries + rental income) <br />
<br />
STEP TWO: '''Deductions''' Under §62(a) → Education Loan Interest §62(a)(4) ABOVE THE LINE!<br />
<br />
Rental Expenses §62(a)(17)<br />
<br />
$10,000 <br />
<br />
ADJUSTED GROSS INCOME = $90,000 (gross income less deductions under §62(a)). <br />
<br />
STEP THREE: Less Qualified Business Income → N/A, not a qualified business under §199A <br />
<br />
STEP FOUR: Less Standard Deduction OR<br />
<br />
Less Itemized Deductions <br />
<br />
{| class="wikitable"<br />
|'''Standard Deduction'''<br />
|'''Itemized Deductions'''<br />
|-<br />
|Look to §63(c) → Basic Standard Deduction §63(c)(2) <br />
<br />
If married filing jointly, 200% of $3,000 §63(c)(2)(A)-(C) <br />
<br />
BUT look to '''SPECIAL RULES''':<br />
<br />
§63(c)(7)(A)(ii) → Special rules for 2018 <br />
<br />
Replace $3,000 with $12,000 above <br />
<br />
$12,000 x 200% = TOTAL STANDARD → '''<u>$24,000</u>'''<br />
|Regular v. Miscellaneous <br />
<br />
Regular → on the list in §67(b) <br />
<br />
Miscellaneous → anything not on list in §67(b) <br />
<br />
<u>Regular</u><br />
<br />
Mortgage Interest --- §67(b)(1) → $16, 000<br />
<br />
Charitable Contributions --- §67(b)(4) → $500<br />
<br />
Medical Expenses --- §67(b)(5) → $2,000 <br />
<br />
<u>Miscellaneous</u><br />
<br />
Accountant/Tax Prep. Fees → $1,000<br />
<br />
Unreimbursed Work Expenses → $1,000 <br />
<br />
''*normally, you’d add up misc. and reg. to get total itemized, but due to §67(g), no misc. at this time.'' <br />
<br />
''2% floor on miscellaneous, but currently inactive'' <br />
<br />
TOTAL ITEMIZED → '''<u>$18,500</u>'''<br />
|} <br />
<br />
'''STEP FIVE: TOTAL TAXABLE INCOME → $66,000''' (AGI less standard deduction) <br />
<br />
'''Tax Credits''' <br />
<br />
Tax credit → dollar for dollar reduction in the tax bill that you owe; typically, cannot bring tax owed below $0 (cannot cause a refund), but there are a few exceptions:<br />
<br />
● Credit for taxes withheld: money you already paid the government (anything in excess of actual tax owed will go back to the taxpayer<br />
<br />
● Earned income tax credit: to help low-income families with cash; you must be working and earning income to benefit from this tax credit <br />
<br />
Taxpayer preference for tax-reducing strategies:<br />
<br />
1) Tax credits (BEST, actual dollar for dollar reduction)<br />
<br />
2) Above the line deductions (preferred because percentage reduction in AGI)<br />
<br />
3) Below the line deductions (comes after AGI, least preferable, but still good!) <br />
<br />
Child Tax Credit → most subject to change currently; expanded with 2018 tax plan, used to replace eliminated personal exemption deduction<br />
<br />
● Changes “phase out” → you can make more before being phased out<br />
<br />
● Currently, only goes up to including 16 year olds<br />
<br />
● Expanded credit → neediest families are benefitting the least<br />
<br />
● You need an SSN to get the credit (children too), so no mixed-immigrant status families (must be a citizen, TINs are not enough)<br />
<br />
<br />
'''What is “Income”?''' <br />
<br />
Haig-Simons (NOT GOOD LAW) → Income = change in wealth + consumption<br />
<br />
Issues: no realization, phantom income, NOT THE CALCULATION WE USE <br />
<br />
Phantom income → cancellation of debt, loan forgiveness (increase in tax bill, no money to pay it) <br />
<br />
<u>Eisner v. Macomber (1920)</u> - SCOTUS [π owned stock that increased when company experienced growth]<br />
<br />
RULE: Under the 16th Amendment a stock dividend paid as additional shares of stock is not taxable income. <br />
<br />
Case Notes: '''no income until sale and realization of actual $'''<br />
<br />
● Income is payment, labor, or a combination of both<br />
<br />
● A stock dividend paid as additional shares is an adjustment to the taxpayer’s invested capital<br />
<br />
● A pro rate stock dividend paid by a corporation is not taxable if:<br />
<br />
1) Shareholders receive no cash;<br />
<br />
2) Proportionate ownership is not altered; and<br />
<br />
3) Shareholders do not realize income by sale of shares <br />
<br />
{| class="wikitable"<br />
|'''Recognition'''<br />
|'''Realization'''<br />
|-<br />
|A particular situation in the tax code exists; “we are putting it on a tax return” <br />
<br />
Realization is a prerequisite to recognition. If you have realization, then you have recognition.<br />
|realization requirement → where the taxpayer must receive or lose something of monetary value <br />
<br />
If you are engaged in the marketplace, you likely will have a realization event.<br />
|} <br />
<br />
'''Punitive Damages''' <br />
<br />
<u>Commissioner v. Glenshaw Glass (1955)</u> - SCOTUS [Ds collected punitive damages for fed. antitrust action]<br />
<br />
RULE: punitive damages are taxable as gross income. <br />
<br />
Case Notes: JUDICIAL DEFINITION: “income derived from any source whatsoever”<br />
<br />
● Congress implied no intent to exclude punitive damages<br />
<br />
● Section 22 of the 1939 Code describes gross income as “income derived from any source whatsoever” <br />
<br />
{| class="wikitable"<br />
|'''<u>Glenshaw Glass</u> Test (to determine “income”)''' <br />
<br />
# '''ASSESSED WEALTH'''<br />
# '''CLEARLY REALIZED'''<br />
# '''COMPLETE DOMINION'''<br />
|} <br />
<br />
'''Treasure Trove''' <br />
<br />
Cesarini v. United States (1969) - USDC [πs found cash in used piano purchased at auction]<br />
<br />
RULE: all income is subject to tax unless an express exemption applies. <br />
<br />
Case Notes: '''money is taxable when it is discovered, not when the treasure chest was purchased'''<br />
<br />
● REALIZATION EVENT is the finding of the treasure<br />
<br />
● Treas. Reg. §1.61-14 → treasure trove is gross income, tax code does not exempt found money from gross income<br />
<br />
● §61(a) → gross income is “all income from whatever source derived”<br />
<br />
● Treasure trove can be cash or items and is taxable income <br />
<br />
{| class="wikitable"<br />
|'''§ 1.61-14 Miscellaneous items of gross income.'''<br />
<br />
(a) In general. In addition to the items enumerated in section 61(a), there are many other kinds of gross income. <br />
<br />
For example, '''punitive damages''' such as treble damages under the antitrust laws and exemplary damages for fraud are gross income. Another person's payment of the taxpayer's income taxes constitutes gross income to the taxpayer unless excluded by law. '''Illegal gains''' constitute gross income. '''Treasure trove''', to the extent of its value in United States currency, constitutes gross income for the taxable year in which it is reduced to undisputed possession.<br />
<br />
(b) Cross references.<br />
<br />
(1) Prizes and awards, see section 74 and regulations thereunder;<br />
<br />
(2) Damages for personal injury or sickness, see section 104 and the regulations thereunder;<br />
<br />
(3) Income taxes paid by lessee corporation, see section 110 and regulations thereunder;<br />
<br />
(4) Scholarships and fellowship grants, see section 117 and regulations thereunder;<br />
<br />
(5) Miscellaneous exemptions under other acts of Congress, see section 122;<br />
<br />
(6) Tax-free covenant bonds, see section 1451 and regulations thereunder.<br />
<br />
(7) Notional principal contracts, see § 1.446-3.<br />
|} <br />
<br />
'''Circular 230''' → when giving legal advice, you must have substantial authority on anything you put on a tax return and chance of audit is <u>not</u> a factor in determining “substantial authority”; not putting something (omitting) on a tax return '''is''' taking a position. <br />
<br />
If client finds…<br />
<br />
● $500 → must report $500 of gross income<br />
<br />
● A diamond ring → must report gross income <br />
<br />
'''Bargain Purchase''' → if you buy a house, that includes anything in the home, and find a valuable painting, you got a painting and a house for the price of a house, but the value of the painting is '''<u>not</u>''' now taxable income to you. (i.e. bite into an oyster and find a pearl). <br />
<br />
'''Illegal Income''' <br />
<br />
<u>James v. United States (1961)</u> - SCOTUS [D acquired $738k through embezzlement, did not declare]<br />
<br />
RULE: Embezzlement gains and other illegal income are taxable under federal law. <br />
<br />
Case Notes: distinguishes <u>Wilcox</u>, which held that no claim of right = no taxable income.<br />
<br />
● A federal taxpayer must report illegally acquired income, including embezzled money, as taxable income<br />
<br />
● Statutorily, the recent Code includes all income however obtained, most case law treats all income as taxable, even if another person is legally entitled to recover the income from the recipient. <br />
<br />
'''Compensation for Services - Payments to Third Parties''' <br />
<br />
{| class="wikitable"<br />
|26 U.S. Code § 61 - Gross income defined<br />
<br />
(a) General definition. Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:<br />
<br />
(1) Compensation for services, including fees, commissions, fringe benefits, and similar items;<br />
|} <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 74 - Prizes and awards'''<br />
<br />
'''(a) General rule. Except as otherwise provided in this section or in section 117 (relating to qualified scholarships), gross income includes amounts received as prizes and awards.'''<br />
<br />
'''(b) Exception for certain prizes and awards transferred to charities. Gross income does not include amounts received as prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement, but only if—'''<br />
<br />
''' (1) the recipient was selected without any action on his part to enter the contest or proceeding;'''<br />
<br />
''' (2) the recipient is not required to render substantial future services as a condition to receiving the prize or award; and'''<br />
<br />
''' (3) the prize or award is transferred by the payor to a governmental unit or organization described in paragraph (1) or (2) of section 170(c) pursuant to a designation made by the recipient.''' <br />
<br />
'''(c) Exception for certain employee achievement awards'''<br />
<br />
''' (1) In general. Gross income shall not include the value of an employee achievement award (as defined in section 274(j)) received by the taxpayer if the cost to the employer of the employee achievement award does not exceed the amount allowable as a deduction to the employer for the cost of the employee achievement award.'''<br />
<br />
''' (2) Excess deduction award. If the cost to the employer of the employee achievement award received by the taxpayer exceeds the amount allowable as a deduction to the employer, then gross income includes the greater of—'''<br />
<br />
''' (A) an amount equal to the portion of the cost to the employer of the award that is not allowable as a deduction to the employer (but not in excess of the value of the award), or'''<br />
<br />
''' (B) the amount by which the value of the award exceeds the amount allowable as a deduction to the employer.''' <br />
<br />
'''The remaining portion of the value of such award shall not be included in the gross income of the recipient.'''<br />
<br />
'''(3) Treatment of tax-exempt employers''' <br />
<br />
'''In the case of an employer exempt from taxation under this subtitle, any reference in this subsection to the amount allowable as a deduction to the employer shall be treated as a reference to the amount which would be allowable as a deduction to the employer if the employer were not exempt from taxation under this subtitle.'''<br />
<br />
''' (4) Cross reference. For provisions excluding certain de minimis fringes from gross income, see section 132(e).'''<br />
<br />
'''(d) Exception for Olympic and Paralympic medals and prizes'''<br />
<br />
''' (1) In general. Gross income shall not include the value of any medal awarded in, or any prize money received from the United States Olympic Committee on account of, competition in the Olympic Games or Paralympic Games.'''<br />
<br />
''' (2) Limitation based on adjusted gross income'''<br />
<br />
''' (A) In general. Paragraph (1) shall not apply to any taxpayer for any taxable year if the adjusted gross income (determined without regard to this subsection) of such taxpayer for such taxable year exceeds $1,000,000 (half of such amount in the case of a married individual filing a separate return).'''<br />
<br />
''' (B) Coordination with other limitations. For purposes of sections 86, 135, 137, 219, 221, 222, and 469, adjusted gross income shall be determined after the application of paragraph (1) and before the application of subparagraph (A).'''<br />
|} <br />
<br />
<u>Old Colony Trust Co. v. Commissioner (1929)</u> - SCOTUS [D was president, resolution to pay officers income tax]<br />
<br />
RULE: Payment by an employer of an employee’s income taxes constitutes taxable gain to the employee <br />
<br />
Case Notes: discharging financial obligations is financial gain to the employee, and taxable<br />
<br />
● Any payment made for services rendered by an employee constitutes taxable income to the employee.<br />
<br />
● Whether the employer makes the payment directly to the employee or to a third party on behalf of the employee is inconsequential.<br />
<br />
● Taxes paid in consideration of employee services do not constitute a tax-free gift. <br />
<br />
<u>McCann v. United States (1981)</u> - Court of Claims [π qualified for all expenses trip based on sales numbers]<br />
<br />
RULE: Gross income includes all-expenses-paid trips rewarded to employees for exceptional services rendered. <br />
<br />
Case Notes: despite not being money, the trip was a financial benefit to the employee, and taxable<br />
<br />
● §74(a) provides that gross income includes prizes and awards<br />
<br />
● Fair market value of an all-expenses-paid trip should be included in gross income <br />
<br />
UNDER TCJA: Entertainment expenses are '''<u>not</u>''' deductible from 2018-2025; conferences included but tours and shows excluded <br />
<br />
<u>United States v. Gotcher (1968)</u> - 5th Cir. [π & wife went to Germany on biz trip to tour facilities and improve sales]<br />
<br />
RULE: If an employer sends and employee on an expenses-paid trip primarily so that the employee can better promote the employer’s business, the value of the trip is excluded from the employee’s gross income for federal tax purposes. <br />
<br />
Case Notes: P went for '''dominant purpose''' of employer; wife is gross income<br />
<br />
● Under §61 of the 1954 Code, the trip’s value is included in the employee’s gross income only if the employee gains economically from the trip by receiving a benefit without having to pay for it, and only if the trip is '''primarily for the employee’s benefit'''. <br />
<br />
● '''DOMINANT PURPOSE TEST''' → if the trip is for the employer, it is not taxable income<br />
<br />
● '''Primary purpose''' → incidental enjoyment by employee is OK so long as the primary benefit is to employer <br />
<br />
'''Meals and Lodging - Furnished on an Employer’s Premises''' <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 119 - Meals or lodging furnished for the convenience of the employer'''<br />
<br />
'''(a) Meals and lodging furnished to employee, his spouse, and his dependents, pursuant to employment. There shall be excluded from gross income of an employee the value of any meals or lodging furnished to him, his spouse, or any of his dependents by or on behalf of his employer for the convenience of the employer, but only if—'''<br />
<br />
''' (1) in the case of meals, the meals are furnished on the business premises of the employer, or'''<br />
<br />
''' (2) in the case of lodging, the employee is required to accept such lodging on the business premises of his employer as a condition of his employment.''' <br />
<br />
'''(b) Special rules. For purposes of subsection (a)—'''<br />
<br />
''' (1) Provisions of employment contract or State statute not to be determinative'''<br />
<br />
'''In determining whether meals or lodging are furnished for the convenience of the employer, the provisions of an employment contract or of a State statute fixing terms of employment shall not be determinative of whether the meals or lodging are intended as compensation.'''<br />
<br />
''' (2) Certain factors not taken into account with respect to meals'''<br />
<br />
'''In determining whether meals are furnished for the convenience of the employer, the fact that a charge is made for such meals, and the fact that the employee may accept or decline such meals, shall not be taken into account.'''<br />
<br />
''' (3) Certain fixed charges for meals'''<br />
<br />
''' (A) In general. If—'''<br />
<br />
''' (i) an employee is required to pay on a periodic basis a fixed charge for his meals, and'''<br />
<br />
''' (ii) such meals are furnished by the employer for the convenience of the employer,'''<br />
<br />
'''there shall be excluded from the employee’s gross income an amount equal to such fixed charge.'''<br />
<br />
''' (B) Application of subparagraph (A)Subparagraph (A) shall apply—'''<br />
<br />
''' (i) whether the employee pays the fixed charge out of his stated compensation or out of his own funds, and'''<br />
<br />
''' (ii) only if the employee is required to make the payment whether he accepts or declines the meals.'''<br />
<br />
''' (4) Meals furnished to employees on business premises where meals of most employees are otherwise excludable. All meals furnished on the business premises of an employer to such employer’s employees shall be treated as furnished for the convenience of the employer if, without regard to this paragraph, more than half of the employees to whom such meals are furnished on such premises are furnished such meals for the convenience of the employer.'''<br />
<br />
'''(c) Employees living in certain camps'''<br />
<br />
''' (1) In general. In the case of an individual who is furnished lodging in a camp located in a foreign country by or on behalf of his employer, such camp shall be considered to be part of the business premises of the employer.'''<br />
<br />
''' (2) Camp. For purposes of this section, a camp constitutes lodging which is—'''<br />
<br />
''' (A) provided by or on behalf of the employer for the convenience of the employer because the place at which such individual renders services is in a remote area where satisfactory housing is not available on the open market,'''<br />
<br />
''' (B) located, as near as practicable, in the vicinity of the place at which such individual renders services, and'''<br />
<br />
''' (C) furnished in a common area (or enclave) which is not available to the public and which normally accommodates 10 or more employees.''' <br />
<br />
'''(d) Lodging furnished by certain educational institutions to employees'''<br />
<br />
''' (1) In general. In the case of an employee of an educational institution, gross income shall not include the value of qualified campus lodging furnished to such employee during the taxable year.'''<br />
<br />
''' (2) Exception in cases of inadequate rent. Paragraph (1) shall not apply to the extent of the excess of—'''<br />
<br />
''' (A) the lesser of—'''<br />
<br />
''' (i) 5 percent of the appraised value of the qualified campus lodging, or'''<br />
<br />
''' (ii) the average of the rentals paid by individuals (other than employees or students of the educational institution) during such calendar year for lodging provided by the educational institution which is comparable to the qualified campus lodging provided to the employee, over'''<br />
<br />
''' (B) the rent paid by the employee for the qualified campus lodging during such calendar year.'''<br />
<br />
'''The appraised value under subparagraph (A)(i) shall be determined as of the close of the calendar year in which the taxable year begins, or, in the case of a rental period not greater than 1 year, at any time during the calendar year in which such period begins.'''<br />
<br />
''' (3) Qualified campus lodging. For purposes of this subsection, the term “qualified campus lodging” means lodging to which subsection (a) does not apply and which is—'''<br />
<br />
''' (A) located on, or in the proximity of, a campus of the educational institution, and'''<br />
<br />
''' (B) furnished to the employee, his spouse, and any of his dependents by or on behalf of such institution for use as a residence.'''<br />
<br />
''' (4) Educational institution, etc.For purposes of this subsection—'''<br />
<br />
''' (A) In general. The term “educational institution” means—'''<br />
<br />
''' (i) an institution described in section 170(b)(1)(A)(ii) (or an entity organized under State law and composed of public institutions so described), or'''<br />
<br />
''' (ii) an academic health center.'''<br />
<br />
''' (B) Academic health center. For purposes of subparagraph (A), the term “academic health center” means an entity—'''<br />
<br />
''' (i) which is described in section 170(b)(1)(A)(iii),'''<br />
<br />
''' (ii) which receives (during the calendar year in which the taxable year of the taxpayer begins) payments under subsection (d)(5)(B) or (h) of section 1886 of the Social Security Act (relating to graduate medical education), and'''<br />
<br />
''' (iii) which has as one of its principal purposes or functions the providing and teaching of basic and clinical medical science and research with the entity’s own faculty.'''<br />
|} <br />
<br />
Meals and Lodging - §119(a) <br />
<br />
{| class="wikitable"<br />
| <u>Meals</u><br />
| <u>Lodging</u><br />
|-<br />
|● Furnished by employer<br />
<br />
● For convenience of employer<br />
<br />
● On business premises of employer<br />
|● Furnished by employer<br />
<br />
● For convenience of employer<br />
<br />
● On business premises of employer<br />
<br />
● Employee required to accept as a condition of employment<br />
|} <br />
<br />
Dominant purpose → first ask, is the main purpose business or pleasure? <br />
<br />
Employee morale is '''<u>not</u>''' a valid reason for “employer convenience” <br />
<br />
<u>Commissioner v. Kowalski (1977)</u> - SCOTUS [state troopers given cash meal allowances when out on duty]<br />
<br />
RULE: Under federal tax law, cash meal allowances are included in gross income. <br />
<br />
Case Notes: Only §119 can be used to find an exception<br />
<br />
● Cash meal allowances are not excluded under §119 or the common-law convenience-of-the-employer doctrine (which did not survive the recent codification of federal law anyways)<br />
<br />
● §119 excludes meals provided by the employer directly, but not cash reimbursements, which must be included in gross income. <br />
<br />
<u>Adams v. United States (1978)</u> - Claims Court [π CEO in Japan req. to live in company-provided housing]<br />
<br />
RULE: Employer-provided housing is excludable from a taxpayer’s gross income if: (1) the employment is conditioned upon acceptance of the housing, (2) the housing is for the employer’s convenience, and (3) the housing is on the employer’s business premises. <br />
<br />
Case Notes: Japanese housing should be completely excluded from income<br />
<br />
● There must be a strong link between the residence and business interest to find “convenience of the employer” <br />
<br />
'''Statutory Fringe Benefits''' <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 132 - Certain fringe benefits'''<br />
<br />
'''(a) Exclusion from gross income. Gross income shall not include any fringe benefit which qualifies as a—'''<br />
<br />
''' (1) no-additional-cost service,'''<br />
<br />
''' (2) qualified employee discount,'''<br />
<br />
''' (3) working condition fringe,'''<br />
<br />
''' (4) de minimis fringe,'''<br />
<br />
''' (5) qualified transportation fringe,'''<br />
<br />
''' (6) qualified moving expense reimbursement,'''<br />
<br />
''' (7) qualified retirement planning services, or'''<br />
<br />
''' (8) qualified military base realignment and closure fringe.''' <br />
<br />
'''(b) No-additional-cost service defined. For purposes of this section, the term “no-additional-cost service” means any service provided by an employer to an employee for use by such employee if—'''<br />
<br />
''' (1) such service is offered for sale to customers in the ordinary course of the line of business of the employer in which the employee is performing services, and'''<br />
<br />
''' (2) the employer incurs no substantial additional cost (including forgone revenue) in providing such service to the employee (determined without regard to any amount paid by the employee for such service).''' <br />
<br />
'''(c) Qualified employee discount defined. For purposes of this section—'''<br />
<br />
''' (1) Qualified employee discount. The term “qualified employee discount” means any employee discount with respect to qualified property or services to the extent such discount does not exceed—'''<br />
<br />
''' (A) in the case of property, the gross profit percentage of the price at which the property is being offered by the employer to customers, or'''<br />
<br />
''' (B) in the case of services, 20 percent of the price at which the services are being offered by the employer to customers.'''<br />
<br />
''' (2) Gross profit percentage'''<br />
<br />
''' (A) In general. The term “gross profit percentage” means the percent which—'''<br />
<br />
''' (i) the excess of the aggregate sales price of property sold by the employer to customers over the aggregate cost of such property to the employer, is of'''<br />
<br />
''' (ii) the aggregate sale price of such property.'''<br />
<br />
''' (B) Determination of gross profit percentage. Gross profit percentage shall be determined on the basis of—'''<br />
<br />
''' (i) all property offered to customers in the ordinary course of the line of business of the employer in which the employee is performing services (or a reasonable classification of property selected by the employer), and'''<br />
<br />
''' (ii) the employer’s experience during a representative period.'''<br />
<br />
''' (3) Employee discount defined. The term “employee discount” means the amount by which—'''<br />
<br />
''' (A) the price at which the property or services are provided by the employer to an employee for use by such employee, is less than'''<br />
<br />
''' (B) the price at which such property or services are being offered by the employer to customers.'''<br />
<br />
''' (4) Qualified property or services. The term “qualified property or services” means any property (other than real property and other than personal property of a kind held for investment) or services which are offered for sale to customers in the ordinary course of the line of business of the employer in which the employee is performing services.'''<br />
<br />
'''(d) Working condition fringe defined. For purposes of this section, the term “working condition fringe” means any property or services provided to an employee of the employer to the extent that, if the employee paid for such property or services, such payment would be allowable as a deduction under section 162 or 167.'''<br />
<br />
'''(e) De minimis fringe defined. For purposes of this section—'''<br />
<br />
''' (1) In general. The term “de minimis fringe” means any property or service the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer’s employees) so small as to make accounting for it unreasonable or administratively impracticable.'''<br />
<br />
''' (2) Treatment of certain eating facilities. The operation by an employer of any eating facility for employees shall be treated as a de minimis fringe if—'''<br />
<br />
''' (A) such facility is located on or near the business premises of the employer, and'''<br />
<br />
''' (B) revenue derived from such facility normally equals or exceeds the direct operating costs of such facility.''' <br />
<br />
'''The preceding sentence shall apply with respect to any highly compensated employee only if access to the facility is available on substantially the same terms to each member of a group of employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of highly compensated employees. For purposes of subparagraph (B), an employee entitled under section 119 to exclude the value of a meal provided at such facility shall be treated as having paid an amount for such meal equal to the direct operating costs of the facility attributable to such meal.''' <br />
<br />
'''(f) Qualified transportation fringe'''<br />
<br />
''' (1) In general. For purposes of this section, the term “qualified transportation fringe” means any of the following provided by an employer to an employee:'''<br />
<br />
''' (A) Transportation in a commuter highway vehicle if such transportation is in connection with travel between the employee’s residence and place of employment.'''<br />
<br />
''' (B) Any transit pass.'''<br />
<br />
''' (C) Qualified parking.'''<br />
<br />
''' (D) Any qualified bicycle commuting reimbursement.'''<br />
<br />
''' (2) Limitation on exclusion. The amount of the fringe benefits which are provided by an employer to any employee and which may be excluded from gross income under subsection (a)(5) shall not exceed—'''<br />
<br />
''' (A) $175 per month in the case of the aggregate of the benefits described in subparagraphs (A) and (B) of paragraph (1),'''<br />
<br />
''' (B) $175 per month in the case of qualified parking, and'''<br />
<br />
''' (C) the applicable annual limitation in the case of any qualified bicycle commuting reimbursement.'''<br />
<br />
''' (3) Cash reimbursements. For purposes of this subsection, the term “qualified transportation fringe” includes a cash reimbursement by an employer to an employee for a benefit described in paragraph (1). The preceding sentence shall apply to a cash reimbursement for any transit pass only if a voucher or similar item which may be exchanged only for a transit pass is not readily available for direct distribution by the employer to the employee.'''<br />
<br />
''' (4) No constructive receipt. No amount shall be included in the gross income of an employee solely because the employee may choose between any qualified transportation fringe (other than a qualified bicycle commuting reimbursement) and compensation which would otherwise be includible in gross income of such employee.'''<br />
<br />
''' (5) Definitions. For purposes of this subsection—'''<br />
<br />
''' (A) Transit pass. The term “transit pass” means any pass, token, farecard, voucher, or similar item entitling a person to transportation (or transportation at a reduced price) if such transportation is—'''<br />
<br />
''' (i) on mass transit facilities (whether or not publicly owned), or'''<br />
<br />
''' (ii) provided by any person in the business of transporting persons for compensation or hire if such transportation is provided in a vehicle meeting the requirements of subparagraph (B)(i).'''<br />
<br />
''' (B) Commuter highway vehicle. The term “commuter highway vehicle” means any highway vehicle—'''<br />
<br />
''' (i) the seating capacity of which is at least 6 adults (not including the driver), and'''<br />
<br />
''' (ii) at least 80 percent of the mileage use of which can reasonably be expected to be—'''<br />
<br />
''' (I) for purposes of transporting employees in connection with travel between their residences and their place of employment, and'''<br />
<br />
''' (II) on trips during which the number of employees transported for such purposes is at least ½ of the adult seating capacity of such vehicle (not including the driver).'''<br />
<br />
''' (C) Qualified parking. The term “qualified parking” means parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work by transportation described in subparagraph (A), in a commuter highway vehicle, or by carpool. Such term shall not include any parking on or near property used by the employee for residential purposes.'''<br />
<br />
''' (D) Transportation provided by employer'''<br />
<br />
'''Transportation referred to in paragraph (1)(A) shall be considered to be provided by an employer if such transportation is furnished in a commuter highway vehicle operated by or for the employer.'''<br />
<br />
''' (E) Employee'''<br />
<br />
'''For purposes of this subsection, the term “employee” does not include an individual who is an employee within the meaning of section 401(c)(1).'''<br />
<br />
''' (F) Definitions related to bicycle commuting reimbursement'''<br />
<br />
''' (i) Qualified bicycle commuting reimbursement. The term “qualified bicycle commuting reimbursement” means, with respect to any calendar year, any employer reimbursement during the 15-month period beginning with the first day of such calendar year for reasonable expenses incurred by the employee during such calendar year for the purchase of a bicycle and bicycle improvements, repair, and storage, if such bicycle is regularly used for travel between the employee’s residence and place of employment.'''<br />
<br />
''' (ii) Applicable annual limitation. The term “applicable annual limitation” means, with respect to any employee for any calendar year, the product of $20 multiplied by the number of qualified bicycle commuting months during such year.'''<br />
<br />
''' (iii) Qualified bicycle commuting month. The term “qualified bicycle commuting month” means, with respect to any employee, any month during which such employee—'''<br />
<br />
''' (I) regularly uses the bicycle for a substantial portion of the travel between the employee’s residence and place of employment, and'''<br />
<br />
''' (II) does not receive any benefit described in subparagraph (A), (B), or (C) of paragraph (1).'''<br />
<br />
''' (6) Inflation adjustment'''<br />
<br />
''' (A) In general. In the case of any taxable year beginning in a calendar year after 1999, the dollar amounts contained in subparagraphs (A) and (B) of paragraph (2) shall be increased by an amount equal to—'''<br />
<br />
''' (i) such dollar amount, multiplied by'''<br />
<br />
''' (ii) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting “calendar year 1998” for “calendar year 2016” in subparagraph (A)(ii) thereof.''' <br />
<br />
'''In the case of any taxable year beginning in a calendar year after 2002, clause (ii) shall be applied by substituting “calendar year 2001” for “calendar year 1998” for purposes of adjusting the dollar amount contained in paragraph (2)(A).'''<br />
<br />
''' (B) Rounding. If any increase determined under subparagraph (A) is not a multiple of $5, such increase shall be rounded to the next lowest multiple of $5.'''<br />
<br />
''' (7) Coordination with other provisions. For purposes of this section, the terms “working condition fringe” and “de minimis fringe” shall not include any qualified transportation fringe (determined without regard to paragraph (2)).'''<br />
<br />
''' (8) Suspension of qualified bicycle commuting reimbursement exclusion. Paragraph (1)(D) shall not apply to any taxable year beginning after December 31, 2017, and before January 1, 2026.'''<br />
<br />
'''(g) Qualified moving expense reimbursement. For purposes of this section—'''<br />
<br />
''' (1) In general. The term “qualified moving expense reimbursement” means any amount received (directly or indirectly) by an individual from an employer as a payment for (or a reimbursement of) expenses which would be deductible as moving expenses under section 217 if directly paid or incurred by the individual. Such term shall not include any payment for (or reimbursement of) an expense actually deducted by the individual in a prior taxable year.'''<br />
<br />
''' (2) Suspension for taxable years 2018 through 2025. Except in the case of a member of the Armed Forces of the United States on active duty who moves pursuant to a military order and incident to a permanent change of station, subsection (a)(6) shall not apply to any taxable year beginning after December 31, 2017, and before January 1, 2026.'''<br />
<br />
'''(h) Certain individuals treated as employees for purposes of subsections (a)(1) and (2)For purposes of paragraphs (1) and (2) of subsection (a)—'''<br />
<br />
''' (1) Retired and disabled employees and surviving spouse of employee treated as employee. With respect to a line of business of an employer, the term “employee” includes—'''<br />
<br />
''' (A) any individual who was formerly employed by such employer in such line of business and who separated from service with such employer in such line of business by reason of retirement or disability, and'''<br />
<br />
''' (B) any widow or widower of any individual who died while employed by such employer in such line of business or while an employee within the meaning of subparagraph (A).'''<br />
<br />
''' (2) Spouse and dependent children'''<br />
<br />
''' (A) In general. Any use by the spouse or a dependent child of the employee shall be treated as use by the employee.'''<br />
<br />
''' (B) Dependent child. For purposes of subparagraph (A), the term “dependent child” means any child (as defined in section 152(f)(1)) of the employee—'''<br />
<br />
''' (i) who is a dependent of the employee, or'''<br />
<br />
''' (ii) both of whose parents are deceased and who has not attained age 25.''' <br />
<br />
'''For purposes of the preceding sentence, any child to whom section 152(e) applies shall be treated as the dependent of both parents.'''<br />
<br />
''' (3) Special rule for parents in the case of air transportation. Any use of air transportation by a parent of an employee (determined without regard to paragraph (1)(B)) shall be treated as use by the employee.'''<br />
<br />
'''(i) Reciprocal agreements. For purposes of paragraph (1) of subsection (a), any service provided by an employer to an employee of another employer shall be treated as provided by the employer of such employee if—'''<br />
<br />
''' (1) such service is provided pursuant to a written agreement between such employers, and'''<br />
<br />
''' (2) neither of such employers incurs any substantial additional costs (including foregone revenue) in providing such service or pursuant to such agreement.''' <br />
<br />
'''(j) Special rules'''<br />
<br />
''' (1) Exclusions under subsection (a)(1) and (2) apply to highly compensated employees only if no discrimination. Paragraphs (1) and (2) of subsection (a) shall apply with respect to any fringe benefit described therein provided with respect to any highly compensated employee only if such fringe benefit is available on substantially the same terms to each member of a group of employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of highly compensated employees.'''<br />
<br />
''' (2) Special rule for leased sections of department stores'''<br />
<br />
''' (A) In general. For purposes of paragraph (2) of subsection (a), in the case of a leased section of a department store—'''<br />
<br />
''' (i) such section shall be treated as part of the line of business of the person operating the department store, and'''<br />
<br />
''' (ii) employees in the leased section shall be treated as employees of the person operating the department store.'''<br />
<br />
''' (B) Leased section of department store. For purposes of subparagraph (A), a leased section of a department store is any part of a department store where over-the-counter sales of property are made under a lease or similar arrangement where it appears to the general public that individuals making such sales are employed by the person operating the department store.'''<br />
<br />
''' (3) Auto salesmen'''<br />
<br />
''' (A) In general. For purposes of subsection (a)(3), qualified automobile demonstration use shall be treated as a working condition fringe.'''<br />
<br />
''' (B) Qualified automobile demonstration use. For purposes of subparagraph (A), the term “qualified automobile demonstration use” means any use of an automobile by a full-time automobile salesman in the sales area in which the automobile dealer’s sales office is located if—'''<br />
<br />
''' (i) such use is provided primarily to facilitate the salesman’s performance of services for the employer, and'''<br />
<br />
''' (ii) there are substantial restrictions on the personal use of such automobile by such salesman.'''<br />
<br />
''' (4) On-premises gyms and other athletic facilities'''<br />
<br />
''' (A) In general. Gross income shall not include the value of any on-premises athletic facility provided by an employer to his employees.'''<br />
<br />
''' (B) On-premises athletic facility. For purposes of this paragraph, the term “on-premises athletic facility” means any gym or other athletic facility—'''<br />
<br />
''' (i) which is located on the premises of the employer,'''<br />
<br />
''' (ii) which is operated by the employer, and'''<br />
<br />
''' (iii) substantially all the use of which is by employees of the employer, their spouses, and their dependent children (within the meaning of subsection (h)).'''<br />
<br />
''' (5) Special rule for affiliates of airlines'''<br />
<br />
''' (A) In general. If—'''<br />
<br />
''' (i) a qualified affiliate is a member of an affiliated group another member of which operates an airline, and'''<br />
<br />
''' (ii) employees of the qualified affiliate who are directly engaged in providing airline-related services are entitled to no-additional-cost service with respect to air transportation provided by such other member, then, for purposes of applying paragraph (1) of subsection (a) to such no-additional-cost service provided to such employees, such qualified affiliate shall be treated as engaged in the same line of business as such other member.'''<br />
<br />
''' (B) Qualified affiliate. For purposes of this paragraph, the term “qualified affiliate” means any corporation which is predominantly engaged in airline-related services.'''<br />
<br />
''' (C) Airline-related services. For purposes of this paragraph, the term “airline-related services” means any of the following services provided in connection with air transportation:'''<br />
<br />
''' (i) Catering.'''<br />
<br />
''' (ii) Baggage handling.'''<br />
<br />
''' (iii) Ticketing and reservations.'''<br />
<br />
''' (iv) Flight planning and weather analysis.'''<br />
<br />
''' (v) Restaurants and gift shops located at an airport.'''<br />
<br />
''' (vi) Such other similar services provided to the airline as the Secretary may prescribe.'''<br />
<br />
''' (D) Affiliated group. For purposes of this paragraph, the term “affiliated group” has the meaning given such term by section 1504(a).'''<br />
<br />
''' (6) Highly compensated employee. For purposes of this section, the term “highly compensated employee” has the meaning given such term by section 414(q).'''<br />
<br />
''' (7) Air cargo. For purposes of subsection (b), the transportation of cargo by air and the transportation of passengers by air shall be treated as the same service.'''<br />
<br />
''' (8) Application of section to otherwise taxable educational or training benefits. Amounts paid or expenses incurred by the employer for education or training provided to the employee which are not excludable from gross income under section 127 shall be excluded from gross income under this section if (and only if) such amounts or expenses are a working condition fringe.'''<br />
<br />
'''(k) Customers not to include employees. For purposes of this section (other than subsection (c)(2)), the term “customers” shall only include customers who are not employees.'''<br />
<br />
'''(l) Section not to apply to fringe benefits expressly provided for elsewhere. This section (other than subsections (e) and (g)) shall not apply to any fringe benefits of a type the tax treatment of which is expressly provided for in any other section of this chapter.'''<br />
<br />
'''(m) Qualified retirement planning services'''<br />
<br />
''' (1) In general. For purposes of this section, the term “qualified retirement planning services” means any retirement planning advice or information provided to an employee and his spouse by an employer maintaining a qualified employer plan.'''<br />
<br />
''' (2) Nondiscrimination rule. Subsection (a)(7) shall apply in the case of highly compensated employees only if such services are available on substantially the same terms to each member of the group of employees normally provided education and information regarding the employer’s qualified employer plan.'''<br />
<br />
''' (3) Qualified employer plan. For purposes of this subsection, the term “qualified employer plan” means a plan, contract, pension, or account described in section 219(g)(5).'''<br />
<br />
'''(n) Qualified military base realignment and closure fringe. For purposes of this section—'''<br />
<br />
''' (1) In general. The term “qualified military base realignment and closure fringe” means 1 or more payments under the authority of section 1013 of the Demonstration Cities and Metropolitan Development Act of 1966 (42 U.S.C. 3374) (as in effect on the date of the enactment of the American Recovery and Reinvestment Tax Act of 2009).'''<br />
<br />
''' (2) Limitation. With respect to any property, such term shall not include any payment referred to in paragraph (1) to the extent that the sum of all of such payments related to such property exceeds the maximum amount described in subsection (c) of such section (as in effect on such date).'''<br />
<br />
'''(o) Regulations. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.'''<br />
|} <br />
<br />
Statutory Fringe Benefits → §132(a) lists eight types of employee fringe benefits specifically excluded from gross income:<br />
<br />
1) No-additional-cost service → space available; business is already offering something, no customer took it (i.e. airline tickets for employees, unbooked hotel rooms available to employee for a night for free); '''no substantial additional cost to employer'''<br />
<br />
2) Qualified employee discount → gross profit % or 20% cap on services; qualified property or services: offered for sale to customers in the '''ordinary course or line of business''' in which the employee is performing the services (i.e. can’t offer discounted massage to retail employee)<br />
<br />
3) Working condition fringe → normally deductible under §162 or §167; does not include transportation costs<br />
<br />
4) De minimis fringe (holiday gifts) → infrequent, small value, administratively not feasible/impractical to claim; does not include transportation costs<br />
<br />
5) Qualified transportation fringe → limitation on qualified transportation expenses, typically $175 <br />
<br />
6) Qualified moving expense reimbursement<br />
<br />
7) Qualified retirement planning services<br />
<br />
8) Qualified military base realignment and closure fringe<br />
<br />
**Other sections of the Code provide other fringe benefit exclusions as well.<br />
<br />
<br />
'''Property Received for Services''' <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 83 - Property transferred in connection with performance of services'''<br />
<br />
'''(a) General rule If, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the excess of—'''<br />
<br />
''' (1) the fair market value of such property (determined without regard to any restriction other than a restriction which by its terms will never lapse) at the first time the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, over'''<br />
<br />
''' (2) the amount (if any) paid for such property, shall be included in the gross income of the person who performed such services in the first taxable year in which the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever is applicable. The preceding sentence shall not apply if such person sells or otherwise disposes of such property in an arm’s length transaction before his rights in such property become transferable or not subject to a substantial risk of forfeiture.''' <br />
<br />
'''(b) Election to include in gross income in year of transfer'''<br />
<br />
''' (1) In general. Any person who performs services in connection with which property is transferred to any person may elect to include in his gross income for the taxable year in which such property is transferred, the excess of—'''<br />
<br />
''' (A) the fair market value of such property at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse), over'''<br />
<br />
''' (B) the amount (if any) paid for such property. If such election is made, subsection (a) shall not apply with respect to the transfer of such property, and if such property is subsequently forfeited, no deduction shall be allowed in respect of such forfeiture.'''<br />
<br />
''' (2) Election An election under paragraph (1) with respect to any transfer of property shall be made in such manner as the Secretary prescribes and shall be made not later than 30 days after the date of such transfer. Such election may not be revoked except with the consent of the Secretary.'''<br />
<br />
'''(c) Special rules. For purposes of this section—'''<br />
<br />
''' (1) Substantial risk of forfeiture. The rights of a person in property are subject to a substantial risk of forfeiture if such person’s rights to full enjoyment of such property are conditioned upon the future performance of substantial services by any individual.'''<br />
<br />
''' (2) Transferability of property. The rights of a person in property are transferable only if the rights in such property of any transferee are not subject to a substantial risk of forfeiture.'''<br />
<br />
''' (3) Sales which may give rise to suit under section 16(b) of the Securities Exchange Act of 1934. So long as the sale of property at a profit could subject a person to suit under section 16(b) of the Securities Exchange Act of 1934, such person’s rights in such property are—'''<br />
<br />
''' (A) subject to a substantial risk of forfeiture, and'''<br />
<br />
''' (B) not transferable.'''<br />
<br />
''' (4) For purposes of determining an individual’s basis in property transferred in connection with the performance of services, rules similar to the rules of section 72(w) shall apply.''' <br />
<br />
'''(d) Certain restrictions which will never lapse'''<br />
<br />
''' (1) Valuation. In the case of property subject to a restriction which by its terms will never lapse, and which allows the transferee to sell such property only at a price determined under a formula, the price so determined shall be deemed to be the fair market value of the property unless established to the contrary by the Secretary, and the burden of proof shall be on the Secretary with respect to such value.'''<br />
<br />
''' (2) Cancellation If, in the case of property subject to a restriction which by its terms will never lapse, the restriction is canceled, then, unless the taxpayer establishes—'''<br />
<br />
''' (A) that such cancellation was not compensatory, and'''<br />
<br />
''' (B) that the person, if any, who would be allowed a deduction if the cancellation were treated as compensatory, will treat the transaction as not compensatory, as evidenced in such manner as the Secretary shall prescribe by regulations, the excess of the fair market value of the property (computed without regard to the restrictions) at the time of cancellation over the sum of—'''<br />
<br />
''' (C) the fair market value of such property (computed by taking the restriction into account) immediately before the cancellation, and'''<br />
<br />
''' (D) the amount, if any, paid for the cancellation, shall be treated as compensation for the taxable year in which such cancellation occurs.''' <br />
<br />
'''(e) Applicability of section. This section shall not apply to—'''<br />
<br />
''' (1) a transaction to which section 421 applies,'''<br />
<br />
''' (2) a transfer to or from a trust described in section 401(a) or a transfer under an annuity plan which meets the requirements of section 404(a)(2),'''<br />
<br />
''' (3) the transfer of an option without a readily ascertainable fair market value,'''<br />
<br />
''' (4) the transfer of property pursuant to the exercise of an option with a readily ascertainable fair market value at the date of grant, or'''<br />
<br />
''' (5) group-term life insurance to which section 79 applies.''' <br />
<br />
'''(f) Holding period. In determining the period for which the taxpayer has held property to which subsection (a) applies, there shall be included only the period beginning at the first time his rights in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier.'''<br />
<br />
'''(g) Certain exchanges. If property to which subsection (a) applies is exchanged for property subject to restrictions and conditions substantially similar to those to which the property given in such exchange was subject, and if section 354, 355, 356, or 1036 (or so much of section 1031 as relates to section 1036) applied to such exchange, or if such exchange was pursuant to the exercise of a conversion privilege—'''<br />
<br />
''' (1) such exchange shall be disregarded for purposes of subsection (a), and'''<br />
<br />
''' (2) the property received shall be treated as property to which subsection (a) applies.''' <br />
<br />
'''(h) Deduction by employer. In the case of a transfer of property to which this section applies or a cancellation of a restriction described in subsection (d), there shall be allowed as a deduction under section 162, to the person for whom were performed the services in connection with which such property was transferred, an amount equal to the amount included under subsection (a), (b), or (d)(2) in the gross income of the person who performed such services. Such deduction shall be allowed for the taxable year of such person in which or with which ends the taxable year in which such amount is included in the gross income of the person who performed such services.'''<br />
<br />
'''(i) Qualified equity grants'''<br />
<br />
''' (1) In general. For purposes of this subtitle—'''<br />
<br />
''' (A) Timing of inclusion. If qualified stock is transferred to a qualified employee who makes an election with respect to such stock under this subsection, subsection (a) shall be applied by including the amount determined under such subsection with respect to such stock in income of the employee in the taxable year determined under subparagraph (B) in lieu of the taxable year described in subsection (a).'''<br />
<br />
''' (B) Taxable year determined. The taxable year determined under this subparagraph is the taxable year of the employee which includes the earliest of—'''<br />
<br />
''' (i) the first date such qualified stock becomes transferable (including, solely for purposes of this clause, becoming transferable to the employer),'''<br />
<br />
''' (ii) the date the employee first becomes an excluded employee,'''<br />
<br />
''' (iii) the first date on which any stock of the corporation which issued the qualified stock becomes readily tradable on an established securities market (as determined by the Secretary, but not including any market unless such market is recognized as an established securities market by the Secretary for purposes of a provision of this title other than this subsection),'''<br />
<br />
''' (iv) the date that is 5 years after the first date the rights of the employee in such stock are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, or'''<br />
<br />
''' (v) the date on which the employee revokes (at such time and in such manner as the Secretary provides) the election under this subsection with respect to such stock.'''<br />
<br />
''' (2) Qualified stock'''<br />
<br />
''' (A) In general. For purposes of this subsection, the term “qualified stock” means, with respect to any qualified employee, any stock in a corporation which is the employer of such employee, if—'''<br />
<br />
''' (i) such stock is received—'''<br />
<br />
''' (I) in connection with the exercise of an option, or'''<br />
<br />
''' (II) in settlement of a restricted stock unit, and'''<br />
<br />
''' (ii) such option or restricted stock unit was granted by the corporation—'''<br />
<br />
''' (I) in connection with the performance of services as an employee, and'''<br />
<br />
''' (II) during a calendar year in which such corporation was an eligible corporation.'''<br />
<br />
''' (B) Limitation. The term “qualified stock” shall not include any stock if the employee may sell such stock to, or otherwise receive cash in lieu of stock from, the corporation at the time that the rights of the employee in such stock first become transferable or not subject to a substantial risk of forfeiture.'''<br />
<br />
''' (C) Eligible corporation. For purposes of subparagraph (A)(ii)(II)—'''<br />
<br />
''' (i) In general. The term “eligible corporation” means, with respect to any calendar year, any corporation if—'''<br />
<br />
''' (I) no stock of such corporation (or any predecessor of such corporation) is readily tradable on an established securities market (as determined under paragraph (1)(B)(iii)) during any preceding calendar year, and'''<br />
<br />
''' (II) such corporation has a written plan under which, in such calendar year, not less than 80 percent of all employees who provide services to such corporation in the United States (or any possession of the United States) are granted stock options, or are granted restricted stock units, with the same rights and privileges to receive qualified stock.'''<br />
<br />
''' (ii) Same rights and privileges. For purposes of clause (i)(II)—'''<br />
<br />
''' (I) except as provided in subclauses (II) and (III), the determination of rights and privileges with respect to stock shall be made in a similar manner as under section 423(b)(5),'''<br />
<br />
''' (II) employees shall not fail to be treated as having the same rights and privileges to receive qualified stock solely because the number of shares available to all employees is not equal in amount, so long as the number of shares available to each employee is more than a de minimis amount, and'''<br />
<br />
''' (III) rights and privileges with respect to the exercise of an option shall not be treated as the same as rights and privileges with respect to the settlement of a restricted stock unit.'''<br />
<br />
''' (iii) Employee. For purposes of clause (i)(II), the term “employee” shall not include any employee described in section 4980E(d)(4) or any excluded employee.'''<br />
<br />
''' (iv) Special rule for calendar years before 2018. In the case of any calendar year beginning before January 1, 2018, clause (i)(II) shall be applied without regard to whether the rights and privileges with respect to the qualified stock are the same.'''<br />
<br />
''' (3) Qualified employee; excluded employee. For purposes of this subsection—'''<br />
<br />
''' '''<br />
<br />
''' (A) In general. The term “qualified employee” means any individual who—'''<br />
<br />
''' (i) is not an excluded employee, and'''<br />
<br />
''' (ii) agrees in the election made under this subsection to meet such requirements as are determined by the Secretary to be necessary to ensure that the withholding requirements of the corporation under chapter 24 with respect to the qualified stock are met.'''<br />
<br />
''' (B) Excluded employee. The term “excluded employee” means, with respect to any corporation, any individual—'''<br />
<br />
''' (i) who is a 1-percent owner (within the meaning of section 416(i)(1)(B)(ii)) at any time during the calendar year or who was such a 1 percent owner at any time during the 10 preceding calendar years,'''<br />
<br />
''' (ii) who is or has been at any prior time—'''<br />
<br />
''' (I) the chief executive officer of such corporation or an individual acting in such a capacity, or'''<br />
<br />
''' (II) the chief financial officer of such corporation or an individual acting in such a capacity,'''<br />
<br />
'''(iii) who bears a relationship described in section 318(a)(1) to any individual described in subclause (I) or (II) of clause (ii), or'''<br />
<br />
''' (iv) who is one of the 4 highest compensated officers of such corporation for the taxable year, or was one of the 4 highest compensated officers of such corporation for any of the 10 preceding taxable years, determined with respect to each such taxable year on the basis of the shareholder disclosure rules for compensation under the Securities Exchange Act of 1934 (as if such rules applied to such corporation).'''<br />
<br />
''' (4) Election'''<br />
<br />
''' (A) Time for making election. An election with respect to qualified stock shall be made under this subsection no later than 30 days after the first date the rights of the employee in such stock are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, and shall be made in a manner similar to the manner in which an election is made under subsection (b).'''<br />
<br />
''' (B) Limitations. No election may be made under this section with respect to any qualified stock if—'''<br />
<br />
''' (i) the qualified employee has made an election under subsection (b) with respect to such qualified stock,'''<br />
<br />
''' (ii) any stock of the corporation which issued the qualified stock is readily tradable on an established securities market (as determined under paragraph (1)(B)(iii)) at any time before the election is made, or'''<br />
<br />
''' (iii) such corporation purchased any of its outstanding stock in the calendar year preceding the calendar year which includes the first date the rights of the employee in such stock are transferable or are not subject to a substantial risk of forfeiture, unless—'''<br />
<br />
''' (I) not less than 25 percent of the total dollar amount of the stock so purchased is deferral stock, and'''<br />
<br />
''' (II) the determination of which individuals from whom deferral stock is purchased is made on a reasonable basis.'''<br />
<br />
''' (C) Definitions and special rules related to limitation on stock redemptions'''<br />
<br />
''' (i) Deferral stock. For purposes of this paragraph, the term “deferral stock” means stock with respect to which an election is in effect under this subsection.'''<br />
<br />
''' (ii) Deferral stock with respect to any individual not taken into account if individual holds deferral stock with longer deferral period. Stock purchased by a corporation from any individual shall not be treated as deferral stock for purposes of subparagraph (B)(iii) if such individual (immediately after such purchase) holds any deferral stock with respect to which an election has been in effect under this subsection for a longer period than the election with respect to the stock so purchased.'''<br />
<br />
''' (iii) Purchase of all outstanding deferral stock. The requirements of subclauses (I) and (II) of subparagraph (B)(iii) shall be treated as met if the stock so purchased includes all of the corporation’s outstanding deferral stock.'''<br />
<br />
''' (iv) Reporting. Any corporation which has outstanding deferral stock as of the beginning of any calendar year and which purchases any of its outstanding stock during such calendar year shall include on its return of tax for the taxable year in which, or with which, such calendar year ends the total dollar amount of its outstanding stock so purchased during such calendar year and such other information as the Secretary requires for purposes of administering this paragraph.'''<br />
<br />
''' (5) Controlled groups. For purposes of this subsection, all persons treated as a single employer under section 414(b) shall be treated as 1 corporation.'''<br />
<br />
''' (6) Notice requirement. Any corporation which transfers qualified stock to a qualified employee shall, at the time that (or a reasonable period before) an amount attributable to such stock would (but for this subsection) first be includible in the gross income of such employee—'''<br />
<br />
''' (A) certify to such employee that such stock is qualified stock, and'''<br />
<br />
''' (B) notify such employee—'''<br />
<br />
''' (i) that the employee may be eligible to elect to defer income on such stock under this subsection, and'''<br />
<br />
''' (ii) that, if the employee makes such an election—'''<br />
<br />
''' (I) the amount of income recognized at the end of the deferral period will be based on the value of the stock at the time at which the rights of the employee in such stock first become transferable or not subject to substantial risk of forfeiture, notwithstanding whether the value of the stock has declined during the deferral period,'''<br />
<br />
''' (II) the amount of such income recognized at the end of the deferral period will be subject to withholding under section 3401(i) at the rate determined under section 3402(t), and'''<br />
<br />
''' (III) the responsibilities of the employee (as determined by the Secretary under paragraph (3)(A)(ii)) with respect to such withholding.'''<br />
<br />
''' (7) Restricted stock units. This section (other than this subsection), including any election under subsection (b), shall not apply to restricted stock units.'''<br />
|} <br />
<br />
'''Contingent Compensation''' → “golden handcuffs”; consideration, the full enjoyment of which is conditioned upon performance of additional services in the future; frequently come in the form of stock or equity interest. <br />
<br />
Deferred Compensation →<br />
<br />
● 401K/403B plans<br />
<br />
● Incentive stock options → restrictive stock agreement<br />
<br />
● Pension plans <br />
<br />
§83 Election is '''irrevocable''' - must be made within 30 days of the stock grant. <br />
<br />
Substantial risk of forfeiture → voluntary term → yes; “for cause” termination → no (involuntary) <br />
<br />
'''Gifts and Bequests''' <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 102 - Gifts and inheritances'''<br />
<br />
'''(a) General rule. Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.'''<br />
<br />
'''(b) Income. Subsection (a) shall not exclude from gross income—'''<br />
<br />
''' (1) the income from any property referred to in subsection (a); or'''<br />
<br />
''' (2) where the gift, bequest, devise, or inheritance is of income from property, the amount of such income.'''<br />
<br />
'''Where, under the terms of the gift, bequest, devise, or inheritance, the payment, crediting, or distribution thereof is to be made at intervals, then, to the extent that it is paid or credited or to be distributed out of income from property, it shall be treated for purposes of paragraph (2) as a gift, bequest, devise, or inheritance of income from property. Any amount included in the gross income of a beneficiary under subchapter J shall be treated for purposes of paragraph (2) as a gift, bequest, devise, or inheritance of income from property.''' <br />
<br />
'''(c) Employee gifts'''<br />
<br />
''' (1) In general. Subsection (a) shall not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, an employee.'''<br />
<br />
''' (2) Cross references. For provisions excluding certain employee achievement awards from gross income, see section 74(c).'''<br />
<br />
'''For provisions excluding certain de minimis fringes from gross income, see section 132(e).'''<br />
|} <br />
<br />
Gifts and Bequests - §102(a) → gross income does not include the value of property acquired by gift, bequest, devise, or inheritance <br />
<br />
A → $50,000 wages → federal income tax on wages '''VIOLATES HORIZONTAL'''<br />
<br />
B → $50,000 gift → no taxes '''EQUITY''' <br />
<br />
Reasoning for gift exclusion:<br />
<br />
● Administrative convenience - hard to track, imposes into family affairs, difficult to determine value<br />
<br />
● Federal wealth transfer taxes - gifted amounts already subject to tax at the hands of the donor, excessive taxation<br />
<br />
● Encourage generosity - donors are more willing to give if no tax <br />
<br />
'''Tax consequences to the donor''' → the transfer of property by gift is seen as personal consumption by the donor, so there is no deduction; appreciated property will '''not''' result in any tax consequences for the donor (current value higher than what donor paid originally) <br />
<br />
Gifts of Income - §102(b) <br />
<br />
What is a “gift”? Code and Regulations are unclear - look to case law. <br />
<br />
<u>Commissioner v. Duberstein (1960)</u> - SCOTUS [D got car after helping biz; Δ left church and got “pension”]<br />
<br />
RULE: A transfer is not a gift if made out of obligation or anticipation of future benefits <br />
<br />
Case Notes: '''<u>DUBERSTEIN</u> STANDARD → detached and disinterested generosity''' (determines if “gift”)<br />
<br />
● The transfer must be entirely voluntary, but the transferor must lack any ulterior motive or desire to secure a benefit<br />
<br />
● Transferor’s mere characterization of a transfer as a gift is insufficient<br />
<br />
● Controlling factor is transferor’s intent - courts must look to the transferor's “dominant purpose” when determining the intent; case by case determination, great deference to the factfinder. <br />
<br />
{| class="wikitable"<br />
|'''<u>DUBERSTEIN</u> STANDARD'''<br />
<br />
'''“Detached and disinterested generosity”''' <br />
<br />
● Donors intent to gift contemplated,, but more than just an intent to give, many factors considered<br />
<br />
● There cannot be a legal or moral obligation for the gift<br />
<br />
● Gift is not taxable income to recipient but also cannot be claimed as a deduction by the giver, either<br />
|} <br />
<br />
Employee Gifts - §102(c) <br />
<br />
<u>Olk v. United States (1976)</u> - 9th Cir. [π craps dealer rec’d tokes from players]<br />
<br />
RULE: A federal taxpayer receives taxable gross income when a donor voluntarily gives the taxpayer money for the taxpayer’s personal service to the donor.<br />
<br />
Case Notes: Considered commercial gratuity - taxable if:<br />
<br />
# Service included some personal or functional conduct<br />
# Gratuity conformed to local practices<br />
# Gratuity is easily valued <br />
<br />
§102(a) Exclusion → applies to both '''inter vivos transfers''' and '''transfers made at death'''. <br />
<br />
<u>Wolder v. Commissioner (1974)</u> - 2nd Cir. [D promised legal services for life in exch. for securities from merger]<br />
<br />
RULE: A bequest made in return for lifetime legal services constitutes taxable income <br />
<br />
Case Notes: if the purpose of the bequest is to compensate for services, then it is taxable<br />
<br />
● Property acquired by bequest does not constitute taxable income, but where a bequest is made in return for services rendered, that bequest should constitute taxable gain. <br />
<br />
'''Revenue Ruling 67-375 (1967)''' → a distribution of property under the terms of a will in satisfaction of a written agreement under which the taxpayers were required to perform services for the testator is compensation for services, includable in their gross income in the taxable year of receipt.<br />
'''Loans and the Cancellation of Debt''' <br />
<br />
Basic rules of loans:<br />
<br />
(1) A loan is '''not''' gross income to the borrower<br />
<br />
(2) The lender may not deduct the amount of the loan<br />
<br />
(3) The amount paid to satisfy the loan obligation is not deductive by the borrower<br />
<br />
(4) Repayment of the loan is '''not''' gross income to the lender<br />
<br />
(5) Interest paid to the lender '''is included''' in the lender’s gross income<br />
<br />
(6) Interest paid to the lender '''may be deductible''' by the borrower <br />
<br />
Cancellation of Debt → if a lender forgives or cancels an outstanding debt, there may be income tax consequences to the borrower. <br />
<br />
<u>United States v. Kirby Lumber Co. (1931)</u> - SCOTUS [π issued bonds but bought them back that year for less]<br />
<br />
RULE: A corporation that buys back a bond at less than its issuing price realizes taxable income <br />
<br />
Case Notes: π did not experience any loss, only gain<br />
<br />
● This practice essentially discharges a portion of the outstanding debt. <br />
<br />
{| class="wikitable"<br />
|26 U.S. Code § 61 - Gross income defined<br />
<br />
(a) General definition. Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:<br />
<br />
(12) Income from discharge of indebtedness;<br />
|} <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 108 - Income from discharge of indebtedness'''<br />
<br />
'''(a) Exclusion from gross income'''<br />
<br />
''' (1) In general. Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if—'''<br />
<br />
''' (A) the discharge occurs in a title 11 case,'''<br />
<br />
''' (B) the discharge occurs when the taxpayer is insolvent,'''<br />
<br />
''' (C) the indebtedness discharged is qualified farm indebtedness,'''<br />
<br />
''' (D) in the case of a taxpayer other than a C corporation, the indebtedness discharged is qualified real property business indebtedness, or'''<br />
<br />
''' (E) the indebtedness discharged is qualified principal residence indebtedness which is discharged—'''<br />
<br />
''' (i) before January 1, 2018, or'''<br />
<br />
''' (ii) subject to an arrangement that is entered into and evidenced in writing before January 1, 2018.''' <br />
<br />
'''…..''' <br />
<br />
'''(d) Meaning of terms; special rules relating to certain provisions'''<br />
<br />
''' (1) Indebtedness of taxpayer For purposes of this section, the term “indebtedness of the taxpayer” means any indebtedness—'''<br />
<br />
''' (A) for which the taxpayer is liable, or'''<br />
<br />
''' (B) subject to which the taxpayer holds property.'''<br />
|} <br />
<br />
Example: B owes A $50,000 loan repayment; A agrees to accept $45,000 from various sources: compensation for services income of 10k, gain on property of 15k - basis of 20k, discharge of indebtedness income 5k<br />
<br />
Gain on transfer of property → 15k COUNTS AS INCOME<br />
<br />
Discharge of indebtedness → 5k<br />
<br />
Services → 10k<br />
<br />
IF YOU WORK OFF DEBT - it counts as income <br />
<br />
'''Contested Liability Theory''' <br />
<br />
<u>Zarin v. Commissioner (1990)</u> - 3rd Cir. [π got credit line at casino, after lawsuit, owed less]<br />
<br />
RULE: The discharge of indebtedness resulting from a settlement fixing the amount of a disputed debt is not taxable as income.<br />
<br />
Case Notes: Where a taxpayer contests his amount of debt in good faith, the resulting settlement is regarded as the amount of the debt, with no other tax consequences for the taxpayer<br />
<br />
● Under §108 and §61(a)(12), a taxpayer who is discharged from indebtedness realizes income in that amount where:<br />
<br />
(1) Taxpayer is liable for the indebtedness; or<br />
<br />
(2) Taxpayer has an indebtedness by which he holds property <br />
<br />
Contested Liability Doctrine → if a taxpayer, in good faith, disputed the amount of debt, a subsequent settlement would be treated as the amount of debt cognizable for tax purposes. <br />
<br />
'''Gains from Dealing in Property''' <br />
<br />
A got stock worth 10k, by end of year was worth 18k<br />
<br />
No gain on appreciation of stock unless there is a SALE - $10,000 FMV is the INCOME and the BASIS. <br />
<br />
{| class="wikitable"<br />
|26 U.S. Code § 61 - Gross income defined<br />
<br />
(a) General definition. Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:<br />
<br />
(3) Gains derived from dealings in property;<br />
|} <br />
<br />
<u>Doyle v. Mitchell</u> → no gross income until recovery of capital investment<br />
<br />
● In order to determine whether there has been a '''gain''' or '''loss''', and the amount of the gain or loss, withdraw from the gross proceeds an amount sufficient to restore the capital value that existed at the start <br />
<br />
'''Computation of Gain or Loss''' <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 1001 - Determination of amount of and recognition of gain or loss'''<br />
<br />
'''(a) Computation of gain or loss. The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 1011 for determining gain, and the loss shall be the excess of the adjusted basis provided in such section for determining loss over the amount realized.'''<br />
<br />
'''(b) Amount realized. The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received. In determining the amount realized—'''<br />
<br />
''' (1) there shall not be taken into account any amount received as reimbursement for real property taxes which are treated under section 164(d) as imposed on the purchaser, and'''<br />
<br />
''' (2) there shall be taken into account amounts representing real property taxes which are treated under section 164(d) as imposed on the taxpayer if such taxes are to be paid by the purchaser.''' <br />
<br />
'''(c) Recognition of gain or loss. Except as otherwise provided in this subtitle, the entire amount of the gain or loss, determined under this section, on the sale or exchange of property shall be recognized.'''<br />
<br />
'''(d) Installment sales. Nothing in this section shall be construed to prevent (in the case of property sold under contract providing for payment in installments) the taxation of that portion of any installment payment representing gain or profit in the year in which such payment is received.'''<br />
<br />
'''(e) Certain term interests'''<br />
<br />
''' (1) In general. In determining gain or loss from the sale or other disposition of a term interest in property, that portion of the adjusted basis of such interest which is determined pursuant to section 1014, 1015, or 1041 (to the extent that such adjusted basis is a portion of the entire adjusted basis of the property) shall be disregarded.'''<br />
<br />
''' (2) Term interest in property defined. For purposes of paragraph (1), the term “term interest in property” means—'''<br />
<br />
''' (A) a life interest in property,'''<br />
<br />
''' (B) an interest in property for a term of years, or'''<br />
<br />
''' (C) an income interest in a trust.'''<br />
<br />
''' (3) Exception. Paragraph (1) shall not apply to a sale or other disposition which is a part of a transaction in which the entire interest in property is transferred to any person or persons.'''<br />
|} <br />
<br />
<u>GAIN</u><br />
<br />
excess of '''amount realized''' over '''adjusted basis''' in the property exchanged <br />
<br />
<u>LOSS</u><br />
<br />
excess of '''adjusted basis''' over '''amount realized''' in the property exchanged <br />
<br />
Adjusted basis → the cost of what the taxpayer gives up in exchange<br />
<br />
Amount realized → value of what the taxpayer receives in the exchange <br />
<br />
{| class="wikitable"<br />
|'''Realized Gain (RG)'''<br />
|'''Realized Loss (RL)'''<br />
|-<br />
|Amount Realized (AR) - Adjusted Basis (AB)<br />
|Adjusted Basis (AB) - Amount Realized (AR)<br />
|} <br />
<br />
Examples: AR is 300K, anything in excess of AB is a '''gain'''<br />
<br />
● Taxpayer sells building for $300K cash<br />
<br />
● Taxpayer sells building for $250K and car for $50k<br />
<br />
● Taxpayer sells building for $100K, another for $100K, and securities for $100K <br />
<br />
Realization event → creates an opportunity to tax a gain (or take a loss); can be a death, sale or exchange, or statutory event like the end of a taxable year; '''RECOGNIZE WHEN AN EXCHANGE HAS OCCURRED''' <br />
<br />
'''EXAMPLES:'''<br />
<br />
<u>Helvering v. Bruun (1940)</u> - SCOTUS [tenant built improvements on landlord P’s property, evicted]<br />
<br />
RULE: Under federal tax law, a taxpayer realizes a taxable gain from land improvements at the end of a lease agreement. <br />
<br />
Case Notes: just because P’s gain was in the form of property received, doesn’t exclude it as a gain<br />
<br />
● Realization does not have to occur as a cash gain from the sale of an asset, it can also occur from profit obtained at the end of a transaction<br />
<br />
● A lease agreement is a transaction <br />
<br />
{| class="wikitable"<br />
| <u>Bruun</u> Realization Triggering Events →<br />
<br />
(1) A property exchange (surrender interest)<br />
<br />
(2) Relief of a legal obligation owed to a third party (<u>Old Colony</u>)<br />
<br />
(3) Relief of a legal obligation owed to the party receiving property (<u>Kirby Lumber</u>)<br />
<br />
(4) “other “ profit transactions (<u>Bruun</u>)<br />
|} <br />
<br />
BRUUN is now '''<u>OVERRULED</u>''' by §109 and §1019 <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 109 - Improvements by lessee on lessor’s property'''<br />
<br />
'''Gross income does not include income (other than rent) derived by a lessor of real property on the termination of a lease, representing the value of such property attributable to buildings erected or other improvements made by the lessee.'''<br />
|} <br />
{| class="wikitable"<br />
|'''26 U.S. Code § 1019 - Property on which lessee has made improvements'''<br />
<br />
'''Neither the basis nor the adjusted basis of any portion of real property shall, in the case of the lessor of such property, be increased or diminished on account of income derived by the lessor in respect of such property and excludable from gross income under section 109 (relating to improvements by lessee on lessor’s property).'''<br />
|} <br />
<br />
BUT, still good law from <u>Bruun</u> → the repossession of an asset with an enhanced value from a transaction with another party '''<u>is</u>''' gross income. <br />
<br />
'''Adjusted Basis''' <br />
<br />
Adjusted basis → per §1011(a), adjusted basis is a taxpayer’s basis, as adjusted <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 1011 - Adjusted basis for determining gain or loss'''<br />
<br />
'''(a) General rule. The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis (determined under section 1012 or other applicable sections of this subchapter and subchapters C (relating to corporate distributions and adjustments), K (relating to partners and partnerships), and P (relating to capital gains and losses)), adjusted as provided in section 1016.'''<br />
<br />
'''(b) Bargain sale to a charitable organization. If a deduction is allowable under section 170 (relating to charitable contributions) by reason of a sale, then the adjusted basis for determining the gain from such sale shall be that portion of the adjusted basis which bears the same ratio to the adjusted basis as the amount realized bears to the fair market value of the property.'''<br />
|} <br />
<br />
STEP ONE: §1012 - what is “basis”? <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 1012 - Basis of property—cost'''<br />
<br />
'''(a) In general. The basis of property shall be the cost of such property, except as otherwise provided in this subchapter and subchapters C (relating to corporate distributions and adjustments), K (relating to partners and partnerships), and P (relating to capital gains and losses).'''<br />
<br />
'''(b) Special rule for apportioned real estate taxes. The cost of real property shall not include any amount in respect of real property taxes which are treated under section 164(d) as imposed on the taxpayer.'''<br />
<br />
'''(c) Determinations by account'''<br />
<br />
''' (1) In general. In the case of the sale, exchange, or other disposition of a specified security on or after the applicable date, the conventions prescribed by regulations under this section shall be applied on an account by account basis.'''<br />
<br />
''' (2) Application to certain regulated investment companies'''<br />
<br />
''' (A) In general. Except as provided in subparagraph (B), any stock for which an average basis method is permissible under this section which is acquired before January 1, 2012, shall be treated as a separate account from any such stock acquired on or after such date.'''<br />
<br />
''' (B) Election for treatment as single account. If a regulated investment company described in subparagraph (A) elects to have this subparagraph apply with respect to one or more of its stockholders—'''<br />
<br />
''' (i) subparagraph (A) shall not apply with respect to any stock in such regulated investment company held by such stockholders, and'''<br />
<br />
''' (ii) all stock in such regulated investment company which is held by such stockholders shall be treated as covered securities described in section 6045(g)(3) without regard to the date of the acquisition of such stock.'''<br />
<br />
'''A rule similar to the rule of the preceding sentence shall apply with respect to a broker holding such stock as a nominee.'''<br />
<br />
''' (3) Definitions. For purposes of this section, the terms “specified security” and “applicable date” shall have the meaning given such terms in section 6045(g).'''<br />
<br />
'''(d) Average basis for stock acquired pursuant to a dividend reinvestment plan'''<br />
<br />
''' (1) In general. In the case of any stock acquired after December 31, 2011, in connection with a dividend reinvestment plan, the basis of such stock while held as part of such plan shall be determined using one of the methods which may be used for determining the basis of stock in a regulated investment company.'''<br />
<br />
''' (2) Treatment after transfer. In the case of the transfer to another account of stock to which paragraph (1) applies, such stock shall have a cost basis in such other account equal to its basis in the dividend reinvestment plan immediately before such transfer (properly adjusted for any fees or other charges taken into account in connection with such transfer).'''<br />
<br />
''' (3) Separate accounts; election for treatment as single account'''<br />
<br />
''' (A) In general. Rules similar to the rules of subsection (c)(2) shall apply for purposes of this subsection.'''<br />
<br />
''' (B) Average basis method. Notwithstanding paragraph (1), in the case of an election under rules similar to the rules of subsection (c)(2)(B) with respect to stock held in connection with a dividend reinvestment plan, the average basis method is permissible with respect to all such stock without regard to the date of the acquisition of such stock.'''<br />
<br />
''' (4) Dividend reinvestment plan. For purposes of this subsection—'''<br />
<br />
''' (A) In general. The term “dividend reinvestment plan” means any arrangement under which dividends on any stock are reinvested in stock identical to the stock with respect to which the dividends are paid.'''<br />
<br />
''' (B) Initial stock acquisition treated as acquired in connection with plan. Stock shall be treated as acquired in connection with a dividend reinvestment plan if such stock is acquired pursuant to such plan or if the dividends paid on such stock are subject to such plan.'''<br />
|} <br />
<br />
STEP TWO: Taxpayer’s cost basis is then adjusted under §1016 <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 1016 - Adjustments to basis'''<br />
<br />
'''(a) General rule. Proper adjustment in respect of the property shall in all cases be made—'''<br />
<br />
''' (1) for expenditures, receipts, losses, or other items, properly chargeable to capital account, but no such adjustment shall be made—'''<br />
<br />
''' (A) for—'''<br />
<br />
''' (i) taxes or other carrying charges described in section 266; or'''<br />
<br />
''' (ii) expenditures described in section 173 (relating to circulation expenditures),'''<br />
<br />
'''for which deductions have been taken by the taxpayer in determining taxable income for the taxable year or prior taxable years; or'''<br />
<br />
''' (B) for mortality, expense, or other reasonable charges incurred under an annuity or life insurance contract;'''<br />
<br />
''' (2) in respect of any period since February 28, 1913, for exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent of the amount—'''<br />
<br />
''' (A) allowed as deductions in computing taxable income under this subtitle or prior income tax laws, and'''<br />
<br />
''' (B) resulting (by reason of the deductions so allowed) in a reduction for any taxable year of the taxpayer’s taxes under this subtitle (other than chapter 2, relating to tax on self-employment income), or prior income, war-profits, or excess-profits tax laws, but not less than the amount allowable under this subtitle or prior income tax laws. Where no method has been adopted under section 167 (relating to depreciation deduction), the amount allowable shall be determined under the straight line method. Subparagraph (B) of this paragraph shall not apply in respect of any period since February 28, 1913, and before January 1, 1952, unless an election has been made under section 1020 (as in effect before the date of the enactment of the Tax Reform Act of 1976). Where for any taxable year before the taxable year 1932 the depletion allowance was based on discovery value or a percentage of income, then the adjustment for depletion for such year shall be based on the depletion which would have been allowable for such year if computed without reference to discovery value or a percentage of income;'''<br />
<br />
''' (3) in respect of any period—'''<br />
<br />
''' (A) before March 1, 1913,'''<br />
<br />
''' (B) since February 28, 1913, during which such property was held by a person or an organization not subject to income taxation under this chapter or prior income tax laws,'''<br />
<br />
''' (C) since February 28, 1913, and before January 1, 1958, during which such property was held by a person subject to tax under part I of subchapter L (or the corresponding provisions of prior income tax laws), to the extent that paragraph (2) does not apply, and'''<br />
<br />
''' (D) since February 28, 1913, during which such property was held by a person subject to tax under part II [1] of subchapter L (or the corresponding provisions of prior income tax laws), to the extent that paragraph (2) does not apply,'''<br />
<br />
'''for exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent sustained;'''<br />
<br />
''' (4) in the case of stock (to the extent not provided for in the foregoing paragraphs) for the amount of distributions previously made which, under the law applicable to the year in which the distribution was made, either were tax-free or were applicable in reduction of basis (not including distributions made by a corporation which was classified as a personal service corporation under the provisions of the Revenue Act of 1918 (40 Stat. 1057), or the Revenue Act of 1921 (42 Stat. 227), out of its earnings or profits which were taxable in accordance with the provisions of section 218 of the Revenue Act of 1918 or 1921);'''<br />
<br />
''' (5) in the case of any bond (as defined in section 171(d)) the interest on which is wholly exempt from the tax imposed by this subtitle, to the extent of the amortizable bond premium disallowable as a deduction pursuant to section 171(a)(2), and in the case of any other bond (as defined in section 171(d)) to the extent of the deductions allowable pursuant to section 171(a)(1) (or the amount applied to reduce interest payments under section 171(e)(2)) with respect thereto;'''<br />
<br />
''' (6) in the case of any municipal bond (as defined in section 75(b)), to the extent provided in section 75(a)(2);'''<br />
<br />
''' (7) in the case of a residence the acquisition of which resulted, under section 1034 (as in effect on the day before the date of the enactment of the Taxpayer Relief Act of 1997), in the nonrecognition of any part of the gain realized on the sale, exchange, or involuntary conversion of another residence, to the extent provided in section 1034(e) (as so in effect);'''<br />
<br />
''' (8) in the case of property pledged to the Commodity Credit Corporation, to the extent of the amount received as a loan from the Commodity Credit Corporation and treated by the taxpayer as income for the year in which received pursuant to section 77, and to the extent of any deficiency on such loan with respect to which the taxpayer has been relieved from liability;'''<br />
<br />
''' '''<br />
<br />
''' (9) for amounts allowed as deductions as deferred expenses under section 616(b) (relating to certain expenditures in the development of mines) and resulting in a reduction of the taxpayer’s taxes under this subtitle, but not less than the amounts allowable under such section for the taxable year and prior years;'''<br />
<br />
''' [(10) Repealed. Pub. L. 94–455, title XIX, § 1901(b)(21)(G), Oct. 4, 1976, 90 Stat. 1798]'''<br />
<br />
''' (11) for deductions to the extent disallowed under section 268 (relating to sale of land with unharvested crops), notwithstanding the provisions of any other paragraph of this subsection;'''<br />
<br />
''' [(12) Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(75), Dec. 19, 2014, 128 Stat. 4049]'''<br />
<br />
''' [(13) Repealed. Pub. L. 108–357, title IV, § 413(c)(19), Oct. 22, 2004, 118 Stat. 1509]'''<br />
<br />
''' (14) for amounts allowed as deductions as deferred expenses under section 174(b)(1) 1 (relating to research and experimental expenditures) and resulting in a reduction of the taxpayers’ taxes under this subtitle, but not less than the amounts allowable under such section for the taxable year and prior years;'''<br />
<br />
''' (15) for deductions to the extent disallowed under section 272 (relating to disposal of coal or domestic iron ore), notwithstanding the provisions of any other paragraph of this subsection;'''<br />
<br />
''' (16) in the case of any evidence of indebtedness referred to in section 811(b) (relating to amortization of premium and accrual of discount in the case of life insurance companies), to the extent of the adjustments required under section 811(b) (or the corresponding provisions of prior income tax laws) for the taxable year and all prior taxable years;'''<br />
<br />
''' (17) to the extent provided in section 1367 in the case of stock of, and indebtedness owed to, shareholders of an S corporation;'''<br />
<br />
''' (18) to the extent provided in section 961 in the case of stock in controlled foreign corporations (or foreign corporations which were controlled foreign corporations) and of property by reason of which a person is considered as owning such stock;'''<br />
<br />
''' (19) to the extent provided in section 50(c), in the case of expenditures with respect to which a credit has been allowed under section 38;'''<br />
<br />
''' (20) for amounts allowed as deductions under section 59(e) (relating to optional 10-year writeoff of certain tax preferences);'''<br />
<br />
''' (21) to the extent provided in section 1059 (relating to reduction in basis for extraordinary dividends);'''<br />
<br />
''' (22) in the case of qualified replacement property the acquisition of which resulted under section 1042 in the nonrecognition of any part of the gain realized on the sale or exchange of any property, to the extent provided in section 1042(d),[2]'''<br />
<br />
''' (23) in the case of property the acquisition of which resulted under section 1043, 1045, or 1397B in the nonrecognition of any part of the gain realized on the sale of other property, to the extent provided in section 1043(c), 1045(b)(3), or 1397B(b)(4), as the case may be,2'''<br />
<br />
''' [(24) Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(34)(G), Dec. 19, 2014, 128 Stat. 4042]'''<br />
<br />
''' [(25) Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(2)(D), Dec. 19, 2014, 128 Stat. 4037]'''<br />
<br />
''' (26) to the extent provided in sections 23(g) and 137(e),2'''<br />
<br />
''' (27) in the case of a residence with respect to which a credit was allowed under section 1400C, to the extent provided in section 1400C(h),2'''<br />
<br />
''' (28) in the case of a facility with respect to which a credit was allowed under section 45F, to the extent provided in section 45F(f)(1),2'''<br />
<br />
''' (29) in the case of railroad track with respect to which a credit was allowed under section 45G, to the extent provided in section 45G(e)(3),2'''<br />
<br />
''' (30) to the extent provided in section 179B(c),2'''<br />
<br />
''' (31) to the extent provided in section 179D(e),2'''<br />
<br />
''' (32) to the extent provided in section 45L(e), in the case of amounts with respect to which a credit has been allowed under section 45L,2'''<br />
<br />
''' (33) to the extent provided in section 25C(f), in the case of amounts with respect to which a credit has been allowed under section 25C,2'''<br />
<br />
''' (34) to the extent provided in section 25D(f), in the case of amounts with respect to which a credit has been allowed under section 25D,2'''<br />
<br />
''' (35) to the extent provided in section 30B(h)(4),2'''<br />
<br />
''' (36) to the extent provided in section 30C(e)(1),2'''<br />
<br />
''' (37) to the extent provided in section 30D(f)(1),2 and'''<br />
<br />
''' (38) to the extent provided in subsections (b)(2) and (c) of section 1400Z–2.''' <br />
<br />
'''(b) Substituted basis. Whenever it appears that the basis of property in the hands of the taxpayer is a substituted basis, then the adjustments provided in subsection (a) shall be made after first making in respect of such substituted basis proper adjustments of a similar nature in respect of the period during which the property was held by the transferor, donor, or grantor, or during which the other property was held by the person for whom the basis is to be determined. A similar rule shall be applied in the case of a series of substituted bases.'''<br />
<br />
'''(c) Increase in basis of property on which additional estate tax is imposed'''<br />
<br />
''' (1) Tax imposed with respect to entire interest. If an additional estate tax is imposed under section 2032A(c)(1) with respect to any interest in property and the qualified heir makes an election under this subsection with respect to the imposition of such tax, the adjusted basis of such interest shall be increased by an amount equal to the excess of—'''<br />
<br />
''' (A) the fair market value of such interest on the date of the decedent’s death (or the alternate valuation date under section 2032, if the executor of the decedent’s estate elected the application of such section), over'''<br />
<br />
''' (B) the value of such interest determined under section 2032A(a).'''<br />
<br />
''' (2) Partial dispositions'''<br />
<br />
''' (A) In general. In the case of any partial disposition for which an election under this subsection is made, the increase in basis under paragraph (1) shall be an amount—'''<br />
<br />
''' (i) which bears the same ratio to the increase which would be determined under paragraph (1) (without regard to this paragraph) with respect to the entire interest, as'''<br />
<br />
''' (ii) the amount of the tax imposed under section 2032A(c)(1) with respect to such disposition bears to the adjusted tax difference attributable to the entire interest (as determined under section 2032A(c)(2)(B)).'''<br />
<br />
''' (B) Partial disposition. For purposes of subparagraph (A), the term “partial disposition” means any disposition or cessation to which subsection (c)(2)(D), (h)(1)(B), or (i)(1)(B) of section 2032A applies.'''<br />
<br />
''' (3) Time adjustment made. Any increase in basis under this subsection shall be deemed to have occurred immediately before the disposition or cessation resulting in the imposition of the tax under section 2032A(c)(1).'''<br />
<br />
''' (4) Special rule in the case of substituted property. If the tax under section 2032A(c)(1) is imposed with respect to qualified replacement property (as defined in section 2032A(h)(3)(B)) or qualified exchange property (as defined in section 2032A(i)(3)), the increase in basis under paragraph (1) shall be made by reference to the property involuntarily converted or exchanged (as the case may be).'''<br />
<br />
''' (5) Election'''<br />
<br />
''' (A) In general. An election under this subsection shall be made at such time and in such manner as the Secretary shall by regulations prescribe. Such an election, once made, shall be irrevocable.'''<br />
<br />
''' (B) Interest on recaptured amount. If an election is made under this subsection with respect to any additional estate tax imposed under section 2032A(c)(1), for purposes of section 6601 (relating to interest on underpayments), the last date prescribed for payment of such tax shall be deemed to be the last date prescribed for payment of the tax imposed by section 2001 with respect to the estate of the decedent (as determined for purposes of section 6601).'''<br />
<br />
'''(d) Reduction in basis of automobile on which gas guzzler tax was imposed. If—'''<br />
<br />
''' (1) the taxpayer acquires any automobile with respect to which a tax was imposed by section 4064, and'''<br />
<br />
''' (2) the use of such automobile by the taxpayer begins not more than 1 year after the date of the first sale for ultimate use of such automobile, the basis of such automobile shall be reduced by the amount of the tax imposed by section 4064 with respect to such automobile. In the case of importation, if the date of entry or withdrawal from warehouse for consumption is later than the date of the first sale for ultimate use, such later date shall be substituted for the date of such first sale in the preceding sentence.''' <br />
<br />
'''(e) Cross reference. For treatment of separate mineral interests as one property, see section 614.'''<br />
|} <br />
<br />
'''Depreciation''' → the amount a taxpayer can take as a deduction for the wear and tear of an asset in a particular year; not based on “actual” or “economic” but instead on statutorily created schedules. <br />
<br />
Example → taxpayer owns personal residence originally acquired for $200,000<br />
<br />
● Taxpayer constructs attached deck, cost of improvement is added to taxpayer’s basis in the residence (now $225,000)<br />
<br />
● Taxpayer cannot deduct the $25,000 used for materials <br />
<br />
Example → taxpayer spends $10,000 for business copier with a useful life of 5 years<br />
<br />
● Can taxpayer deduct entire amount up front, or must they depreciate the cost over the expected life of the property?<br />
<br />
● If they must '''depreciate''' → they are entitled to deduct a portion of the cost over the 5 year period; as this is done, basis should be reduced each year by the amount of the depreciation deduction (total cost divided by usable life = $2,000 per year). This allows taxpayer to gradually get their money back in the form of a deduction. <br />
<br />
'''Adjusted Basis''' → reflects the taxpayer’s ongoing investment in an asset from a tax perspective; when the asset is sold or exchanged, the adjusted basis tells us how much unrecovered “cost” the taxpayer continues to have in the property; only to the extent the amount realized exceeds the unrecovered cost should the taxpayer have taxable gain. <br />
<br />
'''TP generally cannot deduct the cost in year one because the copier will provide a benefit beyond the taxable year (so depreciation deduction).''' <br />
<br />
Example (copier cont.) → depreciation schedule <br />
<br />
{| class="wikitable"<br />
|'''Year 1'''<br />
|$10,000 FMV<br />
|-<br />
|'''Year 2'''<br />
|$8,000 adjusted basis<br />
|-<br />
|'''Year 3'''<br />
|$6,000 adjusted basis<br />
|-<br />
|'''Year 4'''<br />
|$4,000 adjusted basis<br />
|-<br />
|'''Year 5'''<br />
|$2,000 adjusted basis<br />
|-<br />
|'''Value after 5 Years'''<br />
|$0 ($2,000 depreciation deduction each year)<br />
|} <br />
<br />
If business sold copier in year 6 for $1,000, the taxpayer would be taxed on $1,000 of gain (the amount realized of $1,000 less the adjusted basis of $0). <br />
<br />
{| class="wikitable"<br />
|26 U.S. Code § 1001 - Determination of amount of and recognition of gain or loss <br />
<br />
(c) Recognition of gain or loss. Except as otherwise provided in this subtitle, the entire amount of the gain or loss, determined under this section, on the sale or exchange of property shall be recognized.<br />
|} <br />
<br />
Per §1012 → taxpayer’s basis in the property is their “cost” <br />
<br />
<u>Philadelphia Park Amusement Co. v. United States (1954)</u> - Claims [50 year franchise in exch. for bridge built]<br />
<br />
RULE: The cost basis of property received in a taxable exchange is the fair market value of the property received. <br />
<br />
Case Notes: in order to prevent distorted assessments of liability against taxpayers, cost basis of property received should be the fair market value of property received<br />
<br />
● Taxpayer’s basis in the property received is equal to the property’s FMV<br />
<br />
● Each taxable year stands alone<br />
<br />
● If the value of property received is hard to value, taxpayer can look to the value of the property surrendered <br />
<br />
# Following a taxable exchange, the taxpayer’s basis in property received in the exchange is always equal to the FMV of the property received<br />
## Any gain recognized in the exchange is part of the “cost” to acquire the property received in the exchange<br />
## Example: TP sells $20 painting in exchange for $100 rug → TP '''realizes''' and '''recognizes''' $80 gain (rug cost minus painting value - basis); IF TP sells rug for $100 the next day, do they realize another gain? '''NO'''; TP’s “cost” is giving up the $20 painting and the tax-cost of an $80 gain. <br />
<br />
# Each taxable year stands alone<br />
## Base current year tax consequences on what should have happened in the prior year<br />
## Example: <u>Philadelphia Park</u>; exchange of bridge and franchise occurred the year prior to the year where the depreciation deduction was sought -- TP should have recognized gain in prior year; TP had FMV basis in franchise received in exchange; they did not include in gross income but treated as though they did <br />
<br />
# Determining value of difficult property <br />
## If unclear or hard to determine, assume the value is equal to the value of the property you gave in exchange<br />
## Assume all transactions were at arm’s length, absent facts to the contrary <br />
<br />
'''Special Basis Rules''' <br />
<br />
'''Basis of Property Received by Gift, Bequest, Devise, or Inheritance''' <br />
<br />
Inter Vivos gifts →<br />
<br />
● Donee takes the donor’s adjusted basis in the property<br />
<br />
● A gives B asset worth $5,000 in which A has a basis of $3,000<br />
<br />
● B will include nothing in gross income and have basis of $3,000<br />
<br />
● Transferred basis, carryover basis <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 1015 - Basis of property acquired by gifts and transfers in trust'''<br />
<br />
'''(a) Gifts after December 31, 1920. If the property was acquired by gift after December 31, 1920, the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift, except that if such basis (adjusted for the period before the date of the gift as provided in section 1016) is greater than the fair market value of the property at the time of the gift, then for the purpose of determining loss the basis shall be such fair market value. If the facts necessary to determine the basis in the hands of the donor or the last preceding owner are unknown to the donee, the Secretary shall, if possible, obtain such facts from such donor or last preceding owner, or any other person cognizant thereof. If the Secretary finds it impossible to obtain such facts, the basis in the hands of such donor or last preceding owner shall be the fair market value of such property as found by the Secretary as of the date or approximate date at which, according to the best information that the Secretary is able to obtain, such property was acquired by such donor or last preceding owner.'''<br />
<br />
'''(b) Transfer in trust after December 31, 1920. If the property was acquired after December 31, 1920, by a transfer in trust (other than by a transfer in trust by a gift, bequest, or devise), the basis shall be the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on such transfer under the law applicable to the year in which the transfer was made.'''<br />
<br />
'''(c) Gift or transfer in trust before January 1, 1921. If the property was acquired by gift or transfer in trust on or before December 31, 1920, the basis shall be the fair market value of such property at the time of such acquisition.'''<br />
<br />
'''(d) Increased basis for gift tax paid'''<br />
<br />
''' (1) In general. If—'''<br />
<br />
''' (A) the property is acquired by gift on or after September 2, 1958, the basis shall be the basis determined under subsection (a), increased (but not above the fair market value of the property at the time of the gift) by the amount of gift tax paid with respect to such gift, or'''<br />
<br />
''' (B) the property was acquired by gift before September 2, 1958, and has not been sold, exchanged, or otherwise disposed of before such date, the basis of the property shall be increased on such date by the amount of gift tax paid with respect to such gift, but such increase shall not exceed an amount equal to the amount by which the fair market value of the property at the time of the gift exceeded the basis of the property in the hands of the donor at the time of the gift.'''<br />
<br />
''' (2) Amount of tax paid with respect to gift. For purposes of paragraph (1), the amount of gift tax paid with respect to any gift is an amount which bears the same ratio to the amount of gift tax paid under chapter 12 with respect to all gifts made by the donor for the calendar year (or preceding calendar period) in which such gift is made as the amount of such gift bears to the taxable gifts (as defined in section 2503(a) but computed without the deduction allowed by section 2521) made by the donor during such calendar year or period. For purposes of the preceding sentence, the amount of any gift shall be the amount included with respect to such gift in determining (for the purposes of section 2503(a)) the total amount of gifts made during the calendar year or period, reduced by the amount of any deduction allowed with respect to such gift under section 2522 (relating to charitable deduction) or under section 2523 (relating to marital deduction).'''<br />
<br />
''' (3) Gifts treated as made one-half by each spouse. For purposes of paragraph (1), where the donor and his spouse elected, under section 2513 to have the gift considered as made one-half by each, the amount of gift tax paid with respect to such gift under chapter 12 shall be the sum of the amounts of tax paid with respect to each half of such gift (computed in the manner provided in paragraph (2)).'''<br />
<br />
''' (4) Treatment as adjustment to basis. For purposes of section 1016(b), an increase in basis under paragraph (1) shall be treated as an adjustment under section 1016(a).'''<br />
<br />
''' (5) Application to gifts before 1955. With respect to any property acquired by gift before 1955, references in this subsection to any provision of this title shall be deemed to refer to the corresponding provision of the Internal Revenue Code of 1939 or prior revenue laws which was effective for the year in which such gift was made.'''<br />
<br />
''' (6) Special rule for gifts made after December 31, 1976'''<br />
<br />
''' (A) In general. In the case of any gift made after December 31, 1976, the increase in basis provided by this subsection with respect to any gift for the gift tax paid under chapter 12 shall be an amount (not in excess of the amount of tax so paid) which bears the same ratio to the amount of tax so paid as—'''<br />
<br />
''' (i) the net appreciation in value of the gift, bears to'''<br />
<br />
''' (ii) the amount of the gift.'''<br />
<br />
''' (B) Net appreciation. For purposes of paragraph (1), the net appreciation in value of any gift is the amount by which the fair market value of the gift exceeds the donor’s adjusted basis immediately before the gift.'''<br />
<br />
'''(e) Gifts between spouses. In the case of any property acquired by gift in a transfer described in section 1041(a), the basis of such property in the hands of the transferee shall be determined under section 1041(b)(2) and not this section.'''<br />
|} <br />
<br />
Applicable Basis rules under §1015(a) → <br />
<br />
{| class="wikitable"<br />
| <br />
|Donee Basis for computing '''GAIN'''<br />
|Donee basis for computing '''LOSS'''<br />
|-<br />
|FMV <u>></u> donor’s adjusted basis at the time of the gift<br />
|Donor’s adjusted basis<br />
|Donor’s adjusted basis<br />
|-<br />
|FMV < donor’s adjusted basis at the time of gift<br />
|Donor’s adjusted basis<br />
|FMV (loss does not carry over<br />
|}<br />
Property acquired from a decedent → §1014 <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 1014 - Basis of property acquired from a decedent'''<br />
<br />
'''(a) In general. Except as otherwise provided in this section, the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall, if not sold, exchanged, or otherwise disposed of before the decedent’s death by such person, be—'''<br />
<br />
''' (1) the fair market value of the property at the date of the decedent’s death,'''<br />
<br />
''' (2) in the case of an election under section 2032, its value at the applicable valuation date prescribed by such section,'''<br />
<br />
''' (3) in the case of an election under section 2032A, its value determined under such section, or'''<br />
<br />
''' (4) to the extent of the applicability of the exclusion described in section 2031(c), the basis in the hands of the decedent.''' <br />
<br />
'''(b) Property acquired from the decedent. For purposes of subsection (a), the following property shall be considered to have been acquired from or to have passed from the decedent:'''<br />
<br />
''' (1) Property acquired by bequest, devise, or inheritance, or by the decedent’s estate from the decedent;'''<br />
<br />
''' (2) Property transferred by the decedent during his lifetime in trust to pay the income for life to or on the order or direction of the decedent, with the right reserved to the decedent at all times before his death to revoke the trust;'''<br />
<br />
''' (3) In the case of decedents dying after December 31, 1951, property transferred by the decedent during his lifetime in trust to pay the income for life to or on the order or direction of the decedent with the right reserved to the decedent at all times before his death to make any change in the enjoyment thereof through the exercise of a power to alter, amend, or terminate the trust;'''<br />
<br />
''' (4) Property passing without full and adequate consideration under a general power of appointment exercised by the decedent by will;'''<br />
<br />
''' (5) In the case of decedents dying after August 26, 1937, and before January 1, 2005, property acquired by bequest, devise, or inheritance or by the decedent’s estate from the decedent, if the property consists of stock or securities of a foreign corporation, which with respect to its taxable year next preceding the date of the decedent’s death was, under the law applicable to such year, a foreign personal holding company. In such case, the basis shall be the fair market value of such property at the date of the decedent’s death or the basis in the hands of the decedent, whichever is lower;'''<br />
<br />
''' (6) In the case of decedents dying after December 31, 1947, property which represents the surviving spouse’s one-half share of community property held by the decedent and the surviving spouse under the community property laws of any State, or possession of the United States or any foreign country, if at least one-half of the whole of the community interest in such property was includible in determining the value of the decedent’s gross estate under chapter 11 of subtitle B (section 2001 and following, relating to estate tax) or section 811 of the Internal Revenue Code of 1939;'''<br />
<br />
''' [(7) , (8) Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(74)(B), Dec. 19, 2014, 128 Stat. 4049]'''<br />
<br />
''' (9) In the case of decedents dying after December 31, 1953, property acquired from the decedent by reason of death, form of ownership, or other conditions (including property acquired through the exercise or non-exercise of a power of appointment), if by reason thereof the property is required to be included in determining the value of the decedent’s gross estate under chapter 11 of subtitle B or under the Internal Revenue Code of 1939. In such case, if the property is acquired before the death of the decedent, the basis shall be the amount determined under subsection (a) reduced by the amount allowed to the taxpayer as deductions in computing taxable income under this subtitle or prior income tax laws for exhaustion, wear and tear, obsolescence, amortization, and depletion on such property before the death of the decedent. Such basis shall be applicable to the property commencing on the death of the decedent. This paragraph shall not apply to—'''<br />
<br />
''' (A) annuities described in section 72;'''<br />
<br />
''' (B) property to which paragraph (5) would apply if the property had been acquired by bequest; and'''<br />
<br />
''' (C) property described in any other paragraph of this subsection.'''<br />
<br />
''' (10) Property includible in the gross estate of the decedent under section 2044 (relating to certain property for which marital deduction was previously allowed). In any such case, the last 3 sentences of paragraph (9) shall apply as if such property were described in the first sentence of paragraph (9).''' <br />
<br />
'''(c) Property representing income in respect of a decedent. This section shall not apply to property which constitutes a right to receive an item of income in respect of a decedent under section 691.'''<br />
<br />
'''(d) Special rule with respect to DISC stock. If stock owned by a decedent in a DISC or former DISC (as defined in section 992(a)) acquires a new basis under subsection (a), such basis (determined before the application of this subsection) shall be reduced by the amount (if any) which would have been included in gross income under section 995(c) as a dividend if the decedent had lived and sold the stock at its fair market value on the estate tax valuation date. In computing the gain the decedent would have had if he had lived and sold the stock, his basis shall be determined without regard to the last sentence of section 996(e)(2) (relating to reductions of basis of DISC stock). For purposes of this subsection, the estate tax valuation date is the date of the decedent’s death or, in the case of an election under section 2032, the applicable valuation date prescribed by that section.'''<br />
<br />
'''(e) Appreciated property acquired by decedent by gift within 1 year of death'''<br />
<br />
''' (1) In general. In the case of a decedent dying after December 31, 1981, if—'''<br />
<br />
''' (A) appreciated property was acquired by the decedent by gift during the 1-year period ending on the date of the decedent’s death, and'''<br />
<br />
''' (B) such property is acquired from the decedent by (or passes from the decedent to) the donor of such property (or the spouse of such donor), the basis of such property in the hands of such donor (or spouse) shall be the adjusted basis of such property in the hands of the decedent immediately before the death of the decedent.'''<br />
<br />
''' (2) Definitions. For purposes of paragraph (1)—'''<br />
<br />
''' (A) Appreciated property. The term “appreciated property” means any property if the fair market value of such property on the day it was transferred to the decedent by gift exceeds its adjusted basis.'''<br />
<br />
''' (B) Treatment of certain property sold by estate. In the case of any appreciated property described in subparagraph (A) of paragraph (1) sold by the estate of the decedent or by a trust of which the decedent was the grantor, rules similar to the rules of paragraph (1) shall apply to the extent the donor of such property (or the spouse of such donor) is entitled to the proceeds from such sale.'''<br />
<br />
'''(f) Basis must be consistent with estate tax return. For purposes of this section—'''<br />
<br />
''' (1) In general. The basis of any property to which subsection (a) applies shall not exceed—'''<br />
<br />
''' (A) in the case of property the final value of which has been determined for purposes of the tax imposed by chapter 11 on the estate of such decedent, such value, and'''<br />
<br />
''' (B) in the case of property not described in subparagraph (A) and with respect to which a statement has been furnished under section 6035(a) identifying the value of such property, such value.'''<br />
<br />
''' (2) Exception. Paragraph (1) shall only apply to any property whose inclusion in the decedent’s estate increased the liability for the tax imposed by chapter 11 (reduced by credits allowable against such tax) on such estate.'''<br />
<br />
''' (3) Determination. For purposes of paragraph (1), the basis of property has been determined for purposes of the tax imposed by chapter 11 if—'''<br />
<br />
''' (A) the value of such property is shown on a return under section 6018 and such value is not contested by the Secretary before the expiration of the time for assessing a tax under chapter 11,'''<br />
<br />
''' (B) in a case not described in subparagraph (A), the value is specified by the Secretary and such value is not timely contested by the executor of the estate, or'''<br />
<br />
''' (C) the value is determined by a court or pursuant to a settlement agreement with the Secretary.'''<br />
<br />
''' '''<br />
<br />
''' (4) Regulations. The Secretary may by regulations provide exceptions to the application of this subsection.'''<br />
|} <br />
<br />
“Stepped-up” basis → <br />
<br />
● Basis is stepped-down to fair market value<br />
<br />
● A dies holding asset worth $20,000, B’s basis is $20,000 regardless of A’s adjusted basis in asset<br />
<br />
● §1014(a) → such property shall have a basis to the recipient equal to the value of the property at the date of the decedent’s death<br />
<br />
● §1014(f) → limits if an estate tax return is required <br />
<br />
Transfers in satisfaction of an obligation - other “accessions to wealth” can constitute part of an “amount realized” → <u>Kenan v. Commissioner</u> - trustee transferred appreciated stock; trust had a real and recognized gain. <br />
<br />
<u>United States v. Davis (1962)</u> - SCOTUS [π transf. appreciated shares to ex wife purs. to div. agmt]<br />
<br />
RULE: for purpose of federal tax law, a transfer of property incident to a divorce is a taxable event <br />
<br />
Case Notes: taxable gain should be equal to the value of the stock on the date of transfer<br />
<br />
● A transfer of property between spouses pursuant to a divorce agreement is a taxable event.<br />
<br />
● In common-law property states, spouses typically have inchoate statutory rights in one another’s separate property in the event of death or divorce<br />
<br />
● When one spouse transfers property to the other spouse in exchange for a release from his statutory obligations, the property transfer is an income-realization event<br />
<br />
● The transferring spouse is released from the personal liability associated with his former marital obligations and realizes a difficult-to-ascertain gain<br />
<br />
● Because a divorce is an arm’s length transaction, the value of the release of liability is presumably equal to the amount the transferring spouse paid to obtain it <br />
<br />
Flavor of Income<br />
<br />
● Capital gains → receive favorable tax treatment (wealthy: 15-20%, less affluent: 0%)<br />
<br />
● “Capital gain” → gain from the sale or exchange of “capital assets” held for '''more than one year'''. <br />
<br />
“Capital asset” → property held for investment or for personal use; §1221(a) provides '''negative definitions''' (what is NOT a capital asset):<br />
<br />
(1) Stock in trade of taxpayer, held primarily for sale in course of business<br />
<br />
(2) Property used in trade or business<br />
<br />
(3) Intellectual property by taxpayer’s personal efforts<br />
<br />
(4) Accounts or notes receivable acquired in ordinary course of business for services or property<br />
<br />
(5) Publication of US government<br />
<br />
(6) Any commodities derivative financial instrument held by a dealer of commodities<br />
<br />
(7) Hedging transactions<br />
<br />
(8) Supplies regularly used by taxpayer in the ordinary course of business <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 1221 - Capital asset defined'''<br />
<br />
'''(a) In general. For purposes of this subtitle, the term “capital asset” means property held by the taxpayer (whether or not connected with his trade or business), but does not include—'''<br />
<br />
''' (1) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;'''<br />
<br />
''' (2) property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in section 167, or real property used in his trade or business;'''<br />
<br />
''' (3) a patent, invention, model or design (whether or not patented), a secret formula or process, a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by—'''<br />
<br />
''' (A) a taxpayer whose personal efforts created such property,'''<br />
<br />
''' (B) in the case of a letter, memorandum, or similar property, a taxpayer for whom such property was prepared or produced, or'''<br />
<br />
''' (C) a taxpayer in whose hands the basis of such property is determined, for purposes of determining gain from a sale or exchange, in whole or part by reference to the basis of such property in the hands of a taxpayer described in subparagraph (A) or (B);'''<br />
<br />
''' (4) accounts or notes receivable acquired in the ordinary course of trade or business for services rendered or from the sale of property described in paragraph (1);'''<br />
<br />
''' (5) a publication of the United States Government (including the Congressional Record) which is received from the United States Government or any agency thereof, other than by purchase at the price at which it is offered for sale to the public, and which is held by—'''<br />
<br />
''' (A) a taxpayer who so received such publication, or'''<br />
<br />
''' (B) a taxpayer in whose hands the basis of such publication is determined, for purposes of determining gain from a sale or exchange, in whole or in part by reference to the basis of such publication in the hands of a taxpayer described in subparagraph (A);'''<br />
<br />
''' (6) any commodities derivative financial instrument held by a commodities derivatives dealer, unless—'''<br />
<br />
''' (A) it is established to the satisfaction of the Secretary that such instrument has no connection to the activities of such dealer as a dealer, and'''<br />
<br />
''' (B) such instrument is clearly identified in such dealer’s records as being described in subparagraph (A) before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe);'''<br />
<br />
''' (7) any hedging transaction which is clearly identified as such before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe); or'''<br />
<br />
''' (8) supplies of a type regularly used or consumed by the taxpayer in the ordinary course of a trade or business of the taxpayer.''' <br />
<br />
'''(b) Definitions and special rules'''<br />
<br />
''' (1) Commodities derivative financial instruments. For purposes of subsection (a)(6)—'''<br />
<br />
''' (A) Commodities derivatives dealer. The term “commodities derivatives dealer” means a person which [1] regularly offers to enter into, assume, offset, assign, or terminate positions in commodities derivative financial instruments with customers in the ordinary course of a trade or business.'''<br />
<br />
''' (B) Commodities derivative financial instrument'''<br />
<br />
''' (i) In general. The term “commodities derivative financial instrument” means any contract or financial instrument with respect to commodities (other than a share of stock in a corporation, a beneficial interest in a partnership or trust, a note, bond, debenture, or other evidence of indebtedness, or a section 1256 contract (as defined in section 1256(b))), the value or settlement price of which is calculated by or determined by reference to a specified index.'''<br />
<br />
''' (ii) Specified index. The term “specified index” means any one or more or any combination of—'''<br />
<br />
''' (I) a fixed rate, price, or amount, or'''<br />
<br />
''' (II) a variable rate, price, or amount, which is based on any current, objectively determinable financial or economic information with respect to commodities which is not within the control of any of the parties to the contract or instrument and is not unique to any of the parties’ circumstances.'''<br />
<br />
''' (2) Hedging transaction'''<br />
<br />
''' (A) In general. For purposes of this section, the term “hedging transaction” means any transaction entered into by the taxpayer in the normal course of the taxpayer’s trade or business primarily—'''<br />
<br />
''' (i) to manage risk of price changes or currency fluctuations with respect to ordinary property which is held or to be held by the taxpayer,'''<br />
<br />
''' (ii) to manage risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, by the taxpayer, or'''<br />
<br />
''' (iii) to manage such other risks as the Secretary may prescribe in regulations.'''<br />
<br />
''' (B) Treatment of nonidentification or improper identification of hedging transactions. Notwithstanding subsection (a)(7), the Secretary shall prescribe regulations to properly characterize any income, gain, expense, or loss arising from a transaction—'''<br />
<br />
''' (i) which is a hedging transaction but which was not identified as such in accordance with subsection (a)(7), or'''<br />
<br />
''' (ii) which was so identified but is not a hedging transaction.'''<br />
<br />
''' (3) Sale or exchange of self-created musical works. At the election of the taxpayer, paragraphs (1) and (3) of subsection (a) shall not apply to musical compositions or copyrights in musical works sold or exchanged by a taxpayer described in subsection (a)(3).'''<br />
<br />
''' (4) Regulations. The Secretary shall prescribe such regulations as are appropriate to carry out the purposes of paragraph (6) and (7) of subsection (a) in the case of transactions involving related parties.'''<br />
|} <br />
<br />
Personal property → if not used for business, usually qualifies as a capital asset<br />
<br />
Rationale for preferential treatment of capital gains:<br />
<br />
● Inflation → necessary to account for taxing gains due to inflation<br />
<br />
● Bunching → all gains from asset bunched into year of sale<br />
<br />
● Stimulate savings and investment activities<br />
<br />
● Cure lock-up problem → encourages sale rather than holding until ones death <br />
<br />
American Taxpayer Relief Act of 2012 (ATRA) - extended preferential rates to “qualified dividend income” → aiming to alleviate corporate double taxation (corporations are individuals, and thus taxed at the business level and again at the shareholder level); double taxation justifiable because tax is paid by two different “people”. <br />
<br />
'''Qualified dividend income''' → most dividends from domestic corporations; no requirement that dividends come from earnings that were previously subject to tax or attributable to dates prior to enactment. <br />
<br />
'''Timing of Income''' <br />
<br />
Timing → Preference is to put off or defer paying tax on gross income for as long as possible. <br />
<br />
{| class="wikitable"<br />
|'''Claim of right doctrine''' → causes a taxpayer to recognize income if they receive the income even if they do not have a fixed right to the income<br />
|} <br />
<br />
<u>North American Oil Consolidated v. Burnet (1932)</u> - SCOTUS [π oil land appointed to rec’vr; won case, got profits]<br />
<br />
RULE: Net profits earned on a property held in receivership are taxable to the taxpayer (and not the received) in the year the taxpayer unconditionally receives the earnings. <br />
<br />
Case Notes: receiver only controlled portion of property; don’t want double filing.<br />
<br />
● When a receiver holds only <u>part</u> of a company’s property, the net income on that property will be taxable to the company in the year it is unconditionally received<br />
<br />
● Rev. Act of 1916 §13(c) - receivers who operate property on behalf of a company must file returns for taxable income just as the company ordinarily would<br />
<br />
● This statute only applies where the receiver operates '''<u>all</u>''' of the company’s property and essentially takes the place of the corporation<br />
<br />
● Companies are not required to file returns for income they may never receive - filing is only required for income a company has actually or constructively received <br />
<br />
● Income is taxable in the year that the taxpayer receives it '''without restriction''' <br />
<br />
{| class="wikitable"<br />
|Rev. Act of 1916 §13(c) - RETURNS <br />
<br />
(c) In cases wherein receivers, trustees in bankruptcy, or assignees are operating the property or business of corporations, joint-stock signees, companies or associations, or insurance companies, subject to tax imposed by this title, such receivers, trustees, or assignees shall make returns of net income as and for such corporations, joint stock companies or associations, and insurance companies, in the same manner and form as such organizations are hereinbefore required to make returns, and any income tax due on the basis of such returns made by receivers, trustees, or assingees shall be assessed and collected in the same manner as if assessed directly against the organizations of whose businesses or properties they have custody and control;<br />
|} <br />
<br />
'''Advance Payments and the Issue of Deposits''' <br />
<br />
<u>Commissioner v. Indianapolis Power & Light Company (1990)</u> - SCOTUS [π collected deposit from customers]<br />
<br />
RULE: a federal taxpayer has complete dominion over a deposit which subjects the deposit to income tax as an advance payment, if a taxpayer has a '''guaranteed right''' to keep the money. <br />
<br />
Case Notes: without a guaranteed right to keep the money, no advanced payment and no income tax<br />
<br />
● Advance payments are taxable in the year of receipt; loans and security deposits are not taxable income<br />
<br />
● The key distinction is whether the taxpayer had complete dominion over the money <br />
<br />
● Complete dominion exists where the taxpayer has a guaranteed right to keep the money <br />
<br />
'''Assignment of Income''' <br />
<br />
'''Income from services''' → income from services is generally taxed to the party who performed the services (<u>Lucas</u>). <br />
<br />
<u>Lucas v. Earl (1930)</u> - SCOTUS [π and wife agreed any income held as joint-tenants; wife didn’t have income]<br />
<br />
RULE: a taxpayer cannot anticipatorily divert earned income to another individual, so as to avoid tax liability <br />
<br />
Case Notes: the Rev. Act taxes the income of the individual who '''earns it'''. <br />
<br />
Teschner v. Commissioner (1962) - Tax Court [π entered education annuity contest for daughter and won]<br />
<br />
RULE: Under federal tax law, a taxpayer does not earn income if he never had a right to the income despite performing services to acquire it for another. <br />
<br />
Case Notes: if the taxpayer is ineligible for the prize, they never had a right to it; here, taxable to daughter. <br />
<br />
'''Income from Property''' <br />
<br />
<u>Helvering v. Horst (1940)</u> - SCOTUS [π gifted coupons of negotiable bonds to son before they were due]<br />
<br />
RULE: a gift of interest coupons detached from bonds amounts to realized income to the donor. <br />
<br />
Case Notes: the one who determines how the money is used is the one who realizes the income<br />
<br />
● Coupons → bearer bonds, presented to debtor for payment<br />
<br />
● Securing the right to receive income is not a taxable event because income is not taxed until it is realized - realization occurs upon receipt or when taxpayer has control over how it is used<br />
<br />
● Whether taxpayer gives income before or after receipt, the income is realized because taxpayer exercises control over it<br />
<br />
● Interest from property is distinguished from interest from earnings and coupons → <br />
<br />
○ Property: interest due to property owner and tax liability follows the owner<br />
<br />
○ Earnings and coupons: interest due to the earner or bond holders personally <br />
<br />
Transferring trees with ripe fruit → <u>Horst</u>: transfers of fruit may not be effective to shift the tax on such fruit to another, but transfers of the entire tree may. <br />
<br />
<u>Salvatore v. Commissioner (1970)</u> - Tax Court [π inherited biz, let sons run]<br />
<br />
RULE: The federal tax consequences of a property sale are determined by the substance, not the form, of the transaction <br />
<br />
Case Notes: substance over form → Court Holding Co.: substance depends not only on the legal means of transferring title but also every step of sale from negotiations to transfer.<br />
<br />
● When π accepted offer to sell biz, she was sole owner<br />
<br />
● Transfer to children without consideration was an “artificial and intermediate step”<br />
<br />
● $ determined not on interest but on need <br />
<br />
'''Tax Planning and Tax Avoidance''' <br />
<br />
<u>Estate of Stranahan v. Commissioner (1973)</u> - 6th Cir. [π exchanged stock to son to take full adv. of int. deduction]<br />
<br />
RULE: a taxpayer may escape tax liability for future income from property if he assigns the future income in a bonafide sale for valuable consideration <br />
<br />
Case Notes: a bona fide sale for current stock value and consideration existed, π is not liable for the dividends paid out to son.<br />
<br />
● <u>Horst</u> → typically, cannot avoid tax liability by transferring or assigning income <br />
<br />
<u>Commissioner v. Banks Commissioner v. Banaitis (2005)</u> - SCOTUS [π rec’d settle, claimed amt after atty fees]<br />
<br />
RULE: the portion of a money judgment or settlement paid to a P’s attorney under a contingent fee agreement is income to the P. <br />
<br />
Case Notes: A contingent fee agreement is essentially an anticipatory assignment of a plaintiff’s income, and any income transferred as a result of the agreement remains taxable to the plaintiff.<br />
<br />
● Income is taxed to the one who earns it. Thus, a taxpayer cannot avoid income tax by anticipatorily assigning his income to another. <br />
<br />
● Tax liability attaches to the one who has dominion or control over the source of the income. <br />
<br />
● In the litigation context, the plaintiff might realize income in the form of a money judgment or settlement. <br />
<br />
● The income-producing asset is the lawsuit itself, and a plaintiff exercises complete dominion and control over this asset throughout the course of litigation. <br />
<br />
● Any income derived from the lawsuit, therefore, is taxable to the plaintiff. <br />
<br />
'''Tax Treatment of Taxpayer Costs''' <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code §161 - Allowance of deductions'''<br />
<br />
'''In computing taxable income under section 63, there shall be allowed as deductions the items specified in this part, subject to the exceptions provided in part IX (sec. 261 and following, relating to items not deductible).'''<br />
|} <br />
<br />
Deductibility Factors:<br />
<br />
1) Depends on the ''nature'' of the cost: “capital expenditure” or an “expense”<br />
<br />
2) Depends on the type of ''activity'' to which that cost related: business, investment, personal <br />
<br />
Capital expenditure → those costs that provide a long-term benefit to the taxpayer, either because they are incurred to acquire a new asset or because they materially add to the value or useful life of some pre-existing asset (costs that should be “capitalized”); generally '''ADD''' to or '''CREATE''' basis. <br />
<br />
Expense → costs that do not acquire, improve, or prolong the life of an asset; generally spent on items that last for a short period of time (less than a year); taxpayers may be able to deduct. <br />
<br />
Nature of Activity:<br />
<br />
● Expenses paid or incurred with respect to business and investment are generally deductible (§§162 and 212)<br />
<br />
● Expenses related to personal activities are generally not deductible (§262) <br />
<br />
Handling Capital Expenditures → if a taxpayer must capitalize a cost, they can recover ultimately upon the sale or disposition of the asset (capitalized cost makes up all or part of the adjusted basis in the underlying asset); taxpayer doesn’t always have to wait to recover, and the cost can be recovered over a period of years roughly equivalent to the useful life of the asset:<br />
<br />
● '''Depreciation''' → tangible property; the property must (among other things) be subject to wear and tear in the hands of the taxpayer (§§617 and 168)<br />
<br />
● '''Amortization''' → intangible property; statutory requirements in §197. <br />
<br />
{| class="wikitable"<br />
| <br />
|'''Personal'''<br />
|'''Business'''<br />
|'''Investment'''<br />
|-<br />
|Capital Expenditures<br />
<br />
(those that: (1) are used to acquire an asset or some other long-lasting benefit; or (2) permanently improve or extend the useful life of that asset or benefit)<br />
|NO DEDUCTION<br />
<br />
§263(a)<br />
<br />
(taxpayer gets basis)<br />
|NO DEDUCTION<br />
<br />
§263(a)<br />
<br />
(taxpayer gets basis) <br />
<br />
But the taxpayer may be able to recover the cost up front or over time <br />
<br />
§§167(a); 168; 179; 197<br />
|NO DEDUCTION<br />
<br />
§263(a)<br />
<br />
(taxpayer gets basis) <br />
<br />
But taxpayer may be able to recover the cost up front or over time <br />
<br />
§§167(a); 168; 197<br />
|-<br />
|Expenses (outlays that are not capital expenditures)<br />
|Generally, NO DEDUCTION<br />
<br />
§262<br />
<br />
[But see Chapter 9]<br />
|DEDUCTION<br />
<br />
§162(a)<br />
|DEDUCTION<br />
<br />
§212<br />
|-<br />
|Realized Losses (loss recognized upon the sale, exchange, or other disposition of an asset)<br />
|Generally, NO DEDUCTION<br />
<br />
§262<br />
<br />
[But see §165(c)(3)]<br />
|DEDUCTION<br />
<br />
§165(c)(1)<br />
|DEDUCTION<br />
<br />
§165(c)(2)<br />
|}<br />
<br />
<br />
'''EXAMPLE OF DEPRECIATION'''<br />
<br />
Building → Basis of $100,000 with a 20 year useful life <br />
<br />
$100,000/20 = $5k depreciation per year <br />
<br />
<u>Commissioner v. Idaho Power Co. (1974)</u> - SCOTUS<br />
<br />
RULE: A federal taxpayer is not entitled to a deduction from gross income for depreciation on equipment that the taxpayer owns and uses in the construction of his own capital facilities. <br />
<br />
Case Notes: <br />
<br />
● The depreciation cost of using an asset must be attributed to the tax periods that are benefitted by the use.<br />
<br />
● If a taxpayer uses an asset for one year to produce income for the same year, the asset’s one-year depreciation is a business expense under § 167(a), for which the taxpayer can take a depreciation deduction in the same tax year to help replace the asset when it wears out.<br />
<br />
● However, if an asset is used in one year to make a capital improvement that will produce income over many years, the accounting focus shifts from the depreciation of the asset to the cost of replacing the capital improvement itself.<br />
<br />
● Under general accounting principles, capital-improvement costs are computed, or capitalized, over the useful life of the capital improvement.<br />
<br />
● Section 263(a)(1) requires “amounts paid out” for capital improvements to be capitalized, and this section takes precedence over the business-expense deduction provisions of § 167(a).<br />
<br />
● Treasury Regulations §§ 1.263(a) and 2(a) and longstanding Internal Revenue Service policy treat capital-construction-related depreciation as one of the amounts paid out for capital improvements. <br />
<br />
'''UNICAP Rules → § 263A (DIFFERENT FROM 263(a))''': rules require the capitalization of all direct costs and certain indirect costs allocable to real property and tangible personal property produced by the taxpayer. For purposes of the uniform capitalization rules, to “produce” means to construct, build, install, manufacture, develop, improve, create, raise or grow. Self-constructed assets and property built under contract are treated as property “produced” by the taxpayer and the rules under § 263A(a) govern.<br />
<br />
● If you fall under § 263A, capitalize everything <br />
<br />
● Exception: small business exception in § 263A(i) - any taxpayer who meets the test will be exempt from § 263A. ($25M gross receipts).<br />
<br />
● § 263A requires everything to be recovered over time, not deducted NOW. <br />
<br />
STEP ONE: Does § 263A apply? If so, capitalize everything (taxpayers don’t want this). Do we fit into an exception?<br />
<br />
Improvement = capitalized, capitalized = don’t recover cost right away <br />
<br />
'''Improvements to Tangible Property''' <br />
<br />
Taxpayers must capitalize costs to improve tangible property if the costs “better” the property, restore the property to a “like-new” condition, or adapt the property to a new or different use. <br />
<br />
{| class="wikitable"<br />
|'''Reg. § 1.263(a)-3 Amounts paid to improve tangible property.''' <br />
<br />
'''(d) Requirement to capitalize amounts paid for improvements.''' <br />
<br />
'''Except as provided in paragraph (h) or paragraph (n) of this section or under § 1.263(a)-1(f), a taxpayer generally must capitalize the related amounts (as defined in paragraph (g)(3) of this section) paid to improve a unit of property owned by the taxpayer. However, paragraph (f) of this section applies to the treatment of amounts paid to improve leased property. Section 263A provides the requirement to capitalize the direct and allocable indirect costs of property produced by the taxpayer and property acquired for resale. Section 1016 provides for the addition of capitalized amounts to the basis of the property, and section 168 governs the treatment of additions or improvements for depreciation purposes. For purposes of this section, a unit of property is improved if the amounts paid for activities performed after the property is placed in service by the taxpayer -'''<br />
<br />
''' (1) Are for a betterment to the unit of property (see paragraph (j) of this section);'''<br />
<br />
''' (2) Restore the unit of property (see paragraph (k) of this section); or'''<br />
<br />
''' (3) Adapt the unit of property to a new or different use (see paragraph (l) of this section).'''<br />
|} <br />
<br />
<u>Fedex Corp. v. United States (2003)</u> - Tennessee [engine shop visit to repair engine, deducted]<br />
<br />
RULE: Under federal tax law, a taxpayer must capitalize expenses used to materially add value to property or restore property to a like-new condition. <br />
<br />
Case Notes:<br />
<br />
● Expenses that materially add value to property or return property to a like-new condition must be capitalized on tax returns.<br />
<br />
● For material valuation purposes, the unit of property in question must be determined by looking at four factors: <br />
<br />
○ (1) whether the smaller unit is treated as part of a larger unit, <br />
<br />
○ (2) whether the economic life of the smaller property is essential for the economic life of the larger property, <br />
<br />
○ (3) whether the larger and smaller units can function separately, and <br />
<br />
○ (4) whether the smaller unit can be maintained without removal from the larger unit. <br />
<br />
'''Betterments (Additions to Value)''' → taxpayers must capitalize costs of betterments, which generally includes costs that materially increase the value of property.<br />
<br />
(1) PRE EXISTING DEFECTS: The cost ameliorates a condition or defect that existed prior to the property’s acquisition or production by the taxpayer, no matter whether the taxpayer knew of this condition or defect at the time<br />
<br />
(2) BETTERMENTS: the cost results in “betterment” of the property or a material addition to the property. This includes costs that improve the property’s quality or strength, or cause the property to be expanded or enlarged<br />
<br />
(3) INCREASED PRODUCTIVITY: The cost results in a material increase in the property’s capacity, productivity, or efficiency <br />
<br />
'''Revenue Ruling 2004-62'''<br />
<br />
● It is well established that the costs incurred for silvicultural practices performed in established timber stands are deductible business expenses because they do not materially add value to the timber stand, substantially prolong its useful life or adapt the timber stand to a new or different use.<br />
<br />
● There is no established rule with respect to fertilization.<br />
<br />
● The Service rules that a deduction for fertilization costs is proper, for post-establishment fertilization is akin to the deductible post-establishment silvicultural practices in that it does not add to value of the timber or prolong the useful life of any of the taxpayer’s assets (the land and the trees). <br />
<br />
'''Restorations v. Repairs →''' taxpayers must capitalize costs that “restore” a unit or property <br />
<br />
{| class="wikitable"<br />
|'''Reg. § 1.263(a)-3 Amounts paid to improve tangible property.''' <br />
<br />
'''(k) Capitalization of restorations -'''<br />
<br />
''' (1) In general. A taxpayer must capitalize as an improvement an amount paid to restore a unit of property, including an amount paid to make good the exhaustion for which an allowance is or has been made. An amount restores a unit of property only if it -'''<br />
<br />
''' (i) Is for the replacement of a component of a unit of property for which the taxpayer has properly deducted a loss for that component, other than a casualty loss under § 1.165-7;'''<br />
<br />
''' (ii) Is for the replacement of a component of a unit of property for which the taxpayer has properly taken into account the adjusted basis of the component in realizing gain or loss resulting from the sale or exchange of the component;'''<br />
<br />
''' (iii) Is for the restoration of damage to a unit of property for which the taxpayer is required to take a basis adjustment as a result of a casualty loss under section 165, or relating to a casualty event described in section 165, subject to the limitation in paragraph (k)(4) of this section;'''<br />
<br />
''' (iv) Returns the unit of property to its ordinarily efficient operating condition if the property has deteriorated to a state of disrepair and is no longer functional for its intended use;'''<br />
<br />
''' (v) Results in the rebuilding of the unit of property to a like-new condition as determined under paragraph (k)(5) of this section after the end of its class life as defined in paragraph (i)(4) of this section; or'''<br />
<br />
''' (vi) Is for the replacement of a part or combination of parts that comprise a major component or a substantial structural part of a unit of property as determined under paragraph (k)(6) of this section.'''<br />
|} <br />
<br />
Restoration costs → generally either return property to its “ordinarily efficient operating condition” after the unit of property has deteriorated so much that it no longer functions as intended, or the cost returns property to a like-new condition.<br />
<br />
● When a taxpayer has previously taken a deduction for a loss on a component, costs to replace that component must be capitalized<br />
<br />
● Amounts paid for repairs or maintenance to tangible property can be treated as expenses. <br />
<br />
{| class="wikitable"<br />
|'''Reg. § 1.162-4 Repairs.''' <br />
<br />
'''(a) In general. A taxpayer may deduct amounts paid for repairs and maintenance to tangible property if the amounts paid are not otherwise required to be capitalized. Optionally, § 1.263(a)-3(n) provides an election to capitalize amounts paid for repair and maintenance consistent with the taxpayer's books and records.'''<br />
|} <br />
<br />
If the costs are deemed “repairs” then the taxpayer gets an immediate deduction under §162 or §212, assuming the costs relate to a business or investment activity. If the costs are “restorations” or “improvements”, the deduction is deferred because the cost is added to the property’s basis. <br />
<br />
<u>Midland Empire Packing Company v. Commissioner (1950)</u> - Tax Court<br />
<br />
RULE: An expenditure is currently deductible as a repair to property if it is made solely to keep the property in an ordinarily efficient operating condition. <br />
<br />
Case Notes:<br />
<br />
● Expenditures to repair property are deductible as an ordinary and necessary business expense. <br />
<br />
● On the other hand, expenditures for capital outlay are capitalized and deducted in installments over the capital asset’s useful life. <br />
<br />
● In order to determine whether expenditures are repairs or capital outlay, courts must look to the purpose of the expenditure. <br />
<br />
● If the expenditure is a replacement of the property in whole or in part, or if it is an improvement intended to add to the property’s value, prolong its life, or change its use, then it is a capital outlay.<br />
<br />
● Necessary v. ordinary → ordinary does not necessarily mean regular or frequent, and that even a one-time payment can be ordinary if it is a common and accepted manner of dealing with a particular threat to a business (<u>Welch v. Helvering</u>). <br />
<br />
{| class="wikitable"<br />
|'''Repairs'''<br />
|'''Improvements'''<br />
|-<br />
|Keep property in ordinary efficient working condition<br />
|Add to value or appreciably prolong the property’s useful life<br />
|} <br />
<br />
<u>Mt, Morris Drive-In Theatre Co. v. Commissioner (1955)</u> - Tax Court<br />
<br />
RULE: Under federal tax law, in determining whether construction expenses are deductible business expenses or non-deductible capital expenses, the decisive test is the character of the transaction that gives rise to the expenses. <br />
<br />
Case Notes:<br />
<br />
● In determining whether construction expenses are deductible ordinary and necessary business expenses or non-deductible capital expenses, the decisive test is the character of the transaction that gives rise to the expenses.<br />
<br />
● A business-expense deduction has been allowed in past cases for the costs of addressing an unforeseeable physical fault or external factor.<br />
<br />
● The business deduction has also been allowed where a farm spent money to adopt farming techniques that were not in use when the farm began operations.<br />
<br />
● The business deduction might also be allowed for the expenses of restoring or rearranging an existing capital asset. <br />
<br />
'''Adaptations''' → taxpayers must capitalize costs that adapt a property to a new or different use. <br />
<br />
{| class="wikitable"<br />
|'''§ 1.263(a)-3 Amounts paid to improve tangible property.''' <br />
<br />
'''(l) Capitalization of amounts to adapt property to a new or different use -'''<br />
<br />
''' (1) In general. A taxpayer must capitalize as an improvement an amount paid to adapt a unit of property to a new or different use. In general, an amount is paid to adapt a unit of property to a new or different use if the adaptation is not consistent with the taxpayer's ordinary use of the unit of property at the time originally placed in service by the taxpayer.'''<br />
<br />
''' (2) Application of adaption rule to buildings. In the case of a building, an amount is paid to improve a building if it is paid to adapt to a new or different use a property specified under paragraph (e)(2)(ii) (building), paragraph (e)(2)(iii)(B) (condominium), paragraph (e)(2)(iv)(B) (cooperative), or paragraph (e)(2)(v)(B) (leased building or leased portion of building) of this section. For example, an amount is paid to improve a building if it is paid to adapt the building structure or any one of its buildings systems to a new or different use.'''<br />
<br />
''' (3) Examples. The following examples illustrate the application of this paragraph (l) only and do not address whether capitalization is required under another provision of this section or under another provision of the Code (for example, section 263A). Unless otherwise stated, assume that the taxpayer has not properly deducted a loss for any unit of property, asset, or component of a unit of property that is removed and replaced.'''<br />
|} <br />
<br />
{| class="wikitable"<br />
|'''Betterments'''<br />
|'''Restorations'''<br />
|'''Adaptations'''<br />
|-<br />
|PRE EXISTING DEFECTS. The cost ameliorates a condition or defect that existed prior to the property’s acquisition of production by the taxpayer, no matter whether the taxpayer knew of this condition or defect at the time.<br />
<br />
Reg. §1.263(a)-3(j)(1)(i).<br />
|PREVIOUS DEDUCTION OR SALE. The cost is for the replacement of a component when the taxpayer has already deducted the costs of the original item or accounted for the basis of the item as a part of a sale or exchange.<br />
<br />
Reg. §1.263(a)-3(k)(1)(i), (ii), (iii)<br />
|DIFFERENT USE. The cost produces a change that is not consistent with the intended original use of the property.<br />
<br />
Reg. §1.263(a)-3(i)<br />
|-<br />
|MATERIAL ADDITION. The cost results in a material addition, including enlargement, expansion, or extension of the property.<br />
<br />
Reg. §1.263(a)-3(j)(1)(ii).<br />
|RETURNS TO ORDINARY OPERATION. The cost returns the property to its ordinarily efficient operating condition and the property has deteriorated so much that it is no longer functional for its intended use.<br />
<br />
Reg. §1.263(a)-3(k)(1)(iv)<br />
| <br />
|-<br />
|INCREASED PRODUCTIVITY. The cost results in a material increase in the property’s capacity, productivity, efficiency, strength, or quality.<br />
<br />
Reg. §1.263(a)-3(j)(1)(iii)<br />
|REBUILD TO LIKE-NEW CONDITION. The cost returns the property to a new, rebuilt, remanufactured condition.<br />
<br />
Reg. §1.263(a)-3(k)(3).<br />
| <br />
|-<br />
| <br />
|REPLACEMENT OF A MAJOR COMPONENT. The cost replaces a substantial structural part of the property. This includes components that are a large part of the structure or that perform a discrete and critical function.<br />
<br />
Reg. §1.263(a)-3(k)(4).<br />
| <br />
|} <br />
<br />
Problem Example → <br />
<br />
K and F own commercial building, lease space as sole business activity; in taxable year, K and F incurred costs below, all directly related to building; current deduction or capitalized costs: <br />
<br />
(a) $50,000 to remove asbestos (did not affect building operations) '''→''' '''IRC 263(a)-3(j)(3) Example 2; DEDUCTIBLE'''<br />
<br />
(b) $3,000 to restore awning that originally cost $1,000 to construct and install, current cost to construct and install is $10,000 → '''case by case basis'''<br />
<br />
(c) $22,000 to repair the driveway providing access from the main road to parking lot → capitalization of betterments<br />
<br />
(d) $5,000 to add safety equipment to elevators<br />
<br />
(e) $2,500 to fix leak<br />
<br />
'''Costs Related to <u>Intangible</u> Assets''' <br />
<br />
<u>INDOPCO, Inc. v. Commissioner (1992)</u> - SCOTUS <br />
<br />
RULE: Corporate expenses incurred for the purpose of changing the corporate structure in order to receive future benefits are not deductible as ordinary and necessary business expenses. <br />
<br />
Case Notes:<br />
<br />
● Section 162 of the Internal Revenue Code allows current deductions for ordinary and necessary business expenses incurred during the taxable year while carrying on a trade or business.<br />
<br />
● On the other hand, § 263 disallows deductions for capital expenditures that are intended to create or enhance an asset or to create a future benefit.<br />
<br />
● Instead, such expenditures must be amortized and depreciated over a related asset’s useful life or taken as a loss upon dissolution of the entire business.<br />
<br />
● Deductions are only allowable if the taxpayer can clearly demonstrate an enumerated right to claim a deduction; otherwise, capitalization of expenses is the norm.<br />
<br />
● In Commissioner v. Lincoln Savings & Loan Association, 403 U.S. 345 (1971), this Court held that a taxpayer’s expenditures that create or enhance a distinct asset should be capitalized.<br />
<br />
● However, the ruling does not mean that capital expenditures are limited to only those that create or enhance a distinct asset.<br />
<br />
● This Court also stated in Lincoln Savings that the presence of some future benefit is not necessarily a controlling factor that determines whether an expenditure should be capitalized.<br />
<br />
● However, that ruling does not preclude a court’s reliance on the presence of a significant future benefit in order to designate an expenditure as a capital outlay. <br />
<br />
The test from <u>INDOPCO</u> is sometimes referred to as the “significant future benefits test.” If an expenditure creates a significant future benefit, it should be capitalized. <br />
<br />
Revenue Ruling 92-80 → advertising expenses still deductible<br />
<br />
Revenue Ruling 94-38 → hazardous waste clean-up costs still deductible, except that construction of groundwater treatment facilities would capitalized<br />
<br />
Revenue Ruling 94-77 → severance benefits still deductible<br />
<br />
Revenue Ruling 95-32 → certain conservation expenditures still deductible<br />
<br />
Revenue Ruling 96-62 → training costs still deductible <br />
<br />
The INDOPCO Regulations → generally require capitalization of certain amounts paid to acquire or create intangible assets, and require capitalization of expenses that create or enhance a separate and distinct capital asset. <br />
<br />
'''Deduction for Expenses''' <br />
<br />
STEP ONE: Is it an expense or capital expenditure? <br />
<br />
STEP TWO: assuming it is an expense, is that expense deductible? Find specific provision<br />
<br />
STEP THREE: assuming there is a deduction, where on the tax ladder can the deduction come in?<br />
<br />
STEP FOUR: check 263A and then 263(a) <br />
<br />
Look to Sec. 62(a) → tells you where on the tax ladder the deduction falls, but you still need to look to the specific deduction’s provision to see if you qualify.<br />
<br />
● Above the line deductions always preferable (second to tax credits)<br />
<br />
● If not under 62(a), look at ITEMIZED DEDUCTIONS <br />
<br />
No catch-all for deductions, need to find a specific deduction existing in the code; all in different provisions, no master list <br />
<br />
In general →<br />
<br />
● Expenses are deductible if they relate to a taxpayer’s “trade or business” activity, or if the expense is paid or incurred in the production or collection of income from an activity that does not rise to the level of a trade or business (an “investment activity”). <br />
<br />
'''Trade or Business Expenses''' <br />
<br />
{| class="wikitable"<br />
|'''§ 162(a) - Trade or business expenses''' <br />
<br />
'''(a) In general. There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including—'''<br />
<br />
''' (1) a reasonable allowance for salaries or other compensation for personal services actually rendered;'''<br />
<br />
''' (2) traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business; and'''<br />
<br />
''' (3) rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.''' <br />
<br />
'''For purposes of the preceding sentence, the place of residence of a Member of Congress (including any Delegate and Resident Commissioner) within the State, congressional district, or possession which he represents in Congress shall be considered his home, but amounts expended by such Members within each taxable year for living expenses shall not be deductible for income tax purposes. For purposes of paragraph (2), the taxpayer shall not be treated as being temporarily away from home during any period of employment if such period exceeds 1 year. The preceding sentence shall not apply to any Federal employee during any period for which such employee is certified by the Attorney General (or the designee thereof) as traveling on behalf of the United States in temporary duty status to investigate or prosecute, or provide support services for the investigation or prosecution of, a Federal crime.'''<br />
|} <br />
<br />
Six elements required for a deduction →<br />
<br />
1) It must be an '''ordinary'''<br />
<br />
2) And '''necessary'''<br />
<br />
3) '''Expense'''<br />
<br />
4) That was '''paid or incurred during the taxable year'''<br />
<br />
5) '''In carrying on'''<br />
<br />
6) A '''trade or business''' activity <br />
<br />
'''Ordinary and Necessary''' → routine and directly related to the business activity; can be extraordinary and unusual, but the expense must have a business purpose and be related to the activity. <br />
<br />
<u>Welch v. Helvering (1933)</u> - SCOTUS [π grain co. secretary repaid company debts and deducted]<br />
<br />
RULE: Expenditures for ordinary and necessary business expenses may be deducted from gross income if incurred while carrying on a trade or business. <br />
<br />
Case Notes:<br />
<br />
● Section 162 of the Tax Code states that expenses for ordinary and necessary business expenses may be deducted from gross income if incurred while carrying on a trade or business.<br />
<br />
● Many payments may be deemed a necessary expense, but not all necessary payments are ordinary.<br />
<br />
● An expense does not need to be a regular and recurring event in order to be ordinary.<br />
<br />
● Even one-time payments can be ordinary -- For instance, if a company defends itself in a lawsuit by hiring an attorney, the attorney’s fees is probably an ordinary expense within the meaning of § 162.<br />
<br />
● But ultimately, whether an expense is both necessary and ordinary is a determination based on the specific facts at hand. <br />
<br />
<u>Jenkins v. Commissioner (1983)</u> - Tax Court [twitty burger failed, repaid investors]<br />
<br />
RULE: Under federal tax law, a taxpayer may deduct payments for expenses incurred by another if the taxpayer’s primary motivation is business in nature and there is a sufficient relationship between the expenses and the taxpayer’s business. <br />
<br />
Case Notes: <br />
<br />
● A taxpayer may deduct an expense if it is an ordinary and necessary expense of the taxpayer’s business.<br />
<br />
● Generally, a taxpayer may not deduct the expenses of another.<br />
<br />
● However, an exception exists for expenses that are primarily motivated by business and have a sufficient relationship with the taxpayer’s business. <br />
<br />
<u>Lohrke</u> Test: A payment may be deducted if it is an ordinary and necessary expense of a trade or business of the shareholder. <br />
<br />
'''In carrying on''' → continuing business; start-up costs not entirely deductible, a portion of such costs may be deducted in the year in which the new business begins and the balance of such costs are to be amortized (deducted on a pro rata basis) over 15 years. <br />
<br />
<u>Estate of Rockefeller v. Commissioner (1985)</u> - 2nd Cir. [deducted costs rel. to commissioned position]<br />
<br />
RULE: A federal taxpayer may deduct business expenses incurred to change positions with substantially similar job duties within the same trade or business. <br />
<br />
Case Notes:<br />
<br />
● A taxpayer may deduct business expenses used to carry on a trade or business, even if the expenses are not for his current position.<br />
<br />
● The new position sought by the taxpayer must have substantially similar job duties to his current position.<br />
<br />
● An unemployed taxpayer is still viewed as carrying on the trade or business of his most recent position, unless there is a significant lack of continuity.<br />
<br />
● For there to be a lack of continuity, the taxpayer must demonstrate an intent to return to a position with substantially similar duties.<br />
<br />
● The time lapse cannot be too great. <br />
<br />
'''Trade or business''' → if an activity is not a “trade or business” it is either an “investment” activity or a “personal” activity. <br />
<br />
<u>Commissioner v. Groetzinger (1987)</u> - SCOTUS [lived on gambling wages, loss was tablable]<br />
<br />
RULE: A federal taxpayer’s expenses are tax deductible if they arise from a trade or business that the taxpayer conducts primarily for income or profit, and not from an activity in which the taxpayer engages sporadically, or as a hobby, or for amusement. <br />
<br />
Case Notes:<br />
<br />
● A federal taxpayer’s expenses are tax deductible if the facts show that those expenses arise from a trade or business that the taxpayer conducts primarily for income or profit, and not from an activity in which the taxpayer engages sporadically, or as a hobby, or for amusement. <br />
<br />
● This Court now makes this rule explicit because the federal tax code lacks any clear definition of “trade or business,” even though this phrase appears many times throughout the tax code. <br />
<br />
● Also, this Court’s earlier trade-or-business tests are not fully satisfactory. <br />
<br />
● In <u>Higgins v. Commissioner, 312 U.S. 212 (1941)</u>, this Court held that the existence of a trade or business must be determined on the facts of each case, and that a trade or business must be engaged in for profit. <br />
<br />
● A year earlier in <u>Deputy v. DuPont, 308 U.S. 488 (1940)</u>, this Court assumed that trade or business expenses could include a taxpayer’s expenses from simply managing his or her own estate. <br />
<br />
● <u>Higgins</u>, however, specifically found that personal estate-management expenses did not amount to a trade or business. <br />
<br />
● Justice Frankfurter suggested in his <u>DuPont</u> concurrence that trade or business necessarily “involves holding oneself out to others as engaged in selling goods and services.” <br />
<br />
● However, Justice Frankfurter’s concurrence has never been adopted by this Court. <br />
<br />
● In this case, Justice Frankfurter’s test is rejected because the meanings of “holding oneself out,” “goods,” and “services” are too vague to be useful.<br />
<br />
'''Treatment of Capital Expenditures''' <br />
<br />
'''Cost Recovery''' <br />
<br />
A taxpayer generally cannot recover the cost of a capital expenditure for federal income tax purposes until the improved property is sold, exchanged, or otherwise disposed of in some form. <br />
<br />
{| class="wikitable"<br />
|'''Depreciation'''<br />
|'''Amortization'''<br />
|-<br />
|● Tangible assets (i.e. real property)<br />
<br />
● Cost recovery system governed by §167 and §168<br />
<br />
● Eligible tangible property must be described in §167(a)<br />
<br />
● Property must be held for use in a trade or business or for the production of income; personal-use property is not eligible for cost recovery over its useful life<br />
|● Intangible assets (i.e. loans)<br />
<br />
● Cost recovery system governed by §191<br />
<br />
● Eligible intangible property must be described in §197(c)(1) and §197(d)<br />
<br />
● Property must be held for use in a trade or business or for the production of income; personal-use property is not eligible for cost recovery over its useful life<br />
|} <br />
<br />
'''Depreciation of Tangible Property''' <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 167 - Depreciation'''<br />
<br />
'''(a) General rule. There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence)—'''<br />
<br />
''' (1) of property used in the trade or business, or'''<br />
<br />
''' (2) of property held for the production of income.''' <br />
<br />
'''(b) Cross reference. For determination of depreciation deduction in case of property to which section 168 applies, see section 168.'''<br />
<br />
'''(c) Basis for depreciation'''<br />
<br />
''' (1) In general. The basis on which exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the adjusted basis provided in section 1011, for the purpose of determining the gain on the sale or other disposition of such property.'''<br />
<br />
''' (2) Special rule for property subject to lease. If any property is acquired subject to a lease—'''<br />
<br />
''' (A) no portion of the adjusted basis shall be allocated to the leasehold interest, and'''<br />
<br />
''' (B) the entire adjusted basis shall be taken into account in determining the depreciation deduction (if any) with respect to the property subject to the lease.''' <br />
<br />
'''(d) Life tenants and beneficiaries of trusts and estates. In the case of property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust, the allowable deduction shall be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income allocable to each. In the case of an estate, the allowable deduction shall be apportioned between the estate and the heirs, legatees, and devisees on the basis of the income of the estate allocable to each.'''<br />
<br />
'''(e) Certain term interests not depreciable'''<br />
<br />
''' (1) In general. No depreciation deduction shall be allowed under this section (and no depreciation or amortization deduction shall be allowed under any other provision of this subtitle) to the taxpayer for any term interest in property for any period during which the remainder interest in such property is held (directly or indirectly) by a related person.'''<br />
<br />
''' (2) Coordination with other provisions'''<br />
<br />
''' (A) Section 273. This subsection shall not apply to any term interest to which section 273 applies.'''<br />
<br />
''' (B) Section 305(e). This subsection shall not apply to the holder of the dividend rights which were separated from any stripped preferred stock to which section 305(e)(1) applies.'''<br />
<br />
''' (3) Basis adjustments. If, but for this subsection, a depreciation or amortization deduction would be allowable to the taxpayer with respect to any term interest in property—'''<br />
<br />
''' (A) the taxpayer’s basis in such property shall be reduced by any depreciation or amortization deductions disallowed under this subsection, and'''<br />
<br />
''' (B) the basis of the remainder interest in such property shall be increased by the amount of such disallowed deductions (properly adjusted for any depreciation deductions allowable under subsection (d) to the taxpayer).'''<br />
<br />
''' (4) Special rules'''<br />
<br />
''' (A) Denial of increase in basis of remainderman. No increase in the basis of the remainder interest shall be made under paragraph (3)(B) for any disallowed deductions attributable to periods during which the term interest was held—'''<br />
<br />
''' (i) by an organization exempt from tax under this subtitle, or'''<br />
<br />
''' (ii) by a nonresident alien individual or foreign corporation but only if income from the term interest is not effectively connected with the conduct of a trade or business in the United States.'''<br />
<br />
''' (B) Coordination with subsection (d). If, but for this subsection, a depreciation or amortization deduction would be allowable to any person with respect to any term interest in property, the principles of subsection (d) shall apply to such person with respect to such term interest.'''<br />
<br />
''' (5) Definitions. For purposes of this subsection—'''<br />
<br />
''' (A) Term interest in property. The term “term interest in property” has the meaning given such term by section 1001(e)(2).'''<br />
<br />
''' (B) Related person. The term “related person” means any person bearing a relationship to the taxpayer described in subsection (b) or (e) of section 267.'''<br />
<br />
''' (6) Regulations. The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection, including regulations preventing avoidance of this subsection through cross-ownership arrangements or otherwise.'''<br />
<br />
'''(f) Treatment of certain property excluded from section 197'''<br />
<br />
''' (1) Computer software'''<br />
<br />
''' (A) In general. If a depreciation deduction is allowable under subsection (a) with respect to any computer software, such deduction shall be computed by using the straight line method and a useful life of 36 months.'''<br />
<br />
''' (B) Computer software. For purposes of this section, the term “computer software” has the meaning given to such term by section 197(e)(3)(B); except that such term shall not include any such software which is an amortizable section 197 intangible.'''<br />
<br />
''' (C) Tax-exempt use property subject to lease. In the case of computer software which would be tax-exempt use property as defined in subsection (h) of section 168 if such section applied to computer software, the useful life under subparagraph (A) shall not be less than 125 percent of the lease term (within the meaning of section 168(i)(3)).'''<br />
<br />
''' (2) Certain interests or rights acquired separately. If a depreciation deduction is allowable under subsection (a) with respect to any property described in subparagraph (B), (C), or (D) of section 197(e)(4), such deduction shall be computed in accordance with regulations prescribed by the Secretary. If such property would be tax-exempt use property as defined in subsection (h) of section 168 if such section applied to such property, the useful life under such regulations shall not be less than 125 percent of the lease term (within the meaning of section 168(i)(3)).'''<br />
<br />
''' (3) Mortgage servicing rights. If a depreciation deduction is allowable under subsection (a) with respect to any right described in section 197(e)(6), such deduction shall be computed by using the straight line method and a useful life of 108 months.'''<br />
<br />
'''(g) Depreciation under income forecast method'''<br />
<br />
''' (1) In general. If the depreciation deduction allowable under this section to any taxpayer with respect to any property is determined under the income forecast method or any similar method—'''<br />
<br />
''' (A) the income from the property to be taken into account in determining the depreciation deduction under such method shall be equal to the amount of income earned in connection with the property before the close of the 10th taxable year following the taxable year in which the property was placed in service,'''<br />
<br />
''' (B) the adjusted basis of the property shall only include amounts with respect to which the requirements of section 461(h) are satisfied,'''<br />
<br />
''' (C) the depreciation deduction under such method for the 10th taxable year beginning after the taxable year in which the property was placed in service shall be equal to the adjusted basis of such property as of the beginning of such 10th taxable year, and'''<br />
<br />
''' (D) such taxpayer shall pay (or be entitled to receive) interest computed under the look-back method of paragraph (2) for any recomputation year.'''<br />
<br />
''' (2) Look-back method. The interest computed under the look-back method of this paragraph for any recomputation year shall be determined by—'''<br />
<br />
''' (A) first determining the depreciation deductions under this section with respect to such property which would have been allowable for prior taxable years if the determination of the amounts so allowable had been made on the basis of the sum of the following (instead of the estimated income from such property)—'''<br />
<br />
''' (i) the actual income earned in connection with such property for periods before the close of the recomputation year, and'''<br />
<br />
''' (ii) an estimate of the future income to be earned in connection with such property for periods after the recomputation year and before the close of the 10th taxable year following the taxable year in which the property was placed in service,'''<br />
<br />
''' (B) second, determining (solely for purposes of computing such interest) the overpayment or underpayment of tax for each such prior taxable year which would result solely from the application of subparagraph (A), and'''<br />
<br />
''' (C) then using the adjusted overpayment rate (as defined in section 460(b)(7)), compounded daily, on the overpayment or underpayment determined under subparagraph (B).'''<br />
<br />
'''For purposes of the preceding sentence, any cost incurred after the property is placed in service (which is not treated as a separate property under paragraph (5)) shall be taken into account by discounting (using the Federal mid-term rate determined under section 1274(d) as of the time such cost is incurred) such cost to its value as of the date the property is placed in service. The taxpayer may elect with respect to any property to have the preceding sentence not apply to such property.'''<br />
<br />
''' (3) Exception from look-back method. Paragraph (1)(D) shall not apply with respect to any property which had a cost basis of $100,000 or less.'''<br />
<br />
''' (4) Recomputation year. For purposes of this subsection, except as provided in regulations, the term “recomputation year” means, with respect to any property, the 3d and the 10th taxable years beginning after the taxable year in which the property was placed in service, unless the actual income earned in connection with the property for the period before the close of such 3d or 10th taxable year is within 10 percent of the income earned in connection with the property for such period which was taken into account under paragraph (1)(A).'''<br />
<br />
''' (5) Special rules'''<br />
<br />
''' (A) Certain costs treated as separate property. For purposes of this subsection, the following costs shall be treated as separate properties:'''<br />
<br />
''' (i) Any costs incurred with respect to any property after the 10th taxable year beginning after the taxable year in which the property was placed in service.'''<br />
<br />
''' (ii) Any costs incurred after the property is placed in service and before the close of such 10th taxable year if such costs are significant and give rise to a significant increase in the income from the property which was not included in the estimated income from the property.'''<br />
<br />
''' (B) Syndication income from television series. In the case of property which is 1 or more episodes in a television series, income from syndicating such series shall not be required to be taken into account under this subsection before the earlier of—'''<br />
<br />
''' (i) the 4th taxable year beginning after the date the first episode in such series is placed in service, or'''<br />
<br />
''' (ii) the earliest taxable year in which the taxpayer has an arrangement relating to the future syndication of such series.'''<br />
<br />
''' (C) Special rules for financial exploitation of characters, etc. For purposes of this subsection, in the case of television and motion picture films, the income from the property shall include income from the exploitation of characters, designs, scripts, scores, and other incidental income associated with such films, but only to the extent that such income is earned in connection with the ultimate use of such items by, or the ultimate sale of merchandise to, persons who are not related persons (within the meaning of section 267(b)) to the taxpayer.'''<br />
<br />
''' (D) Collection of interest. For purposes of subtitle F (other than sections 6654 and 6655), any interest required to be paid by the taxpayer under paragraph (1) for any recomputation year shall be treated as an increase in the tax imposed by this chapter for such year.'''<br />
<br />
''' (E) Treatment of distribution costs. For purposes of this subsection, the income with respect to any property shall be the taxpayer’s gross income from such property.'''<br />
<br />
''' (F) Determinations. For purposes of paragraph (2), determinations of the amount of income earned in connection with any property shall be made in the same manner as for purposes of applying the income forecast method; except that any income from the disposition of such property shall be taken into account.'''<br />
<br />
''' (G) Treatment of pass-thru entities. Rules similar to the rules of section 460(b)(4) shall apply for purposes of this subsection.'''<br />
<br />
''' (6) Limitation on property for which income forecast method may be used. The depreciation deduction allowable under this section may be determined under the income forecast method or any similar method only with respect to—'''<br />
<br />
''' (A) property described in paragraph (3) or (4) of section 168(f),'''<br />
<br />
''' (B) copyrights,'''<br />
<br />
''' (C) books,'''<br />
<br />
''' (D) patents, and'''<br />
<br />
''' (E) other property specified in regulations. Such methods may not be used with respect to any amortizable section 197 intangible (as defined in section 197(c)).'''<br />
<br />
''' (7) Treatment of participations and residuals'''<br />
<br />
''' (A) In general. For purposes of determining the depreciation deduction allowable with respect to a property under this subsection, the taxpayer may include participations and residuals with respect to such property in the adjusted basis of such property for the taxable year in which the property is placed in service, but only to the extent that such participations and residuals relate to income estimated (for purposes of this subsection) to be earned in connection with the property before the close of the 10th taxable year referred to in paragraph (1)(A).'''<br />
<br />
''' (B) Participations and residuals. For purposes of this paragraph, the term “participations and residuals” means, with respect to any property, costs the amount of which by contract varies with the amount of income earned in connection with such property.'''<br />
<br />
''' (C) Special rules relating to recomputation years. If the adjusted basis of any property is determined under this paragraph, paragraph (4) shall be applied by substituting “for each taxable year in such period” for “for such period”.'''<br />
<br />
''' (D) Other special rules'''<br />
<br />
''' (i) Participations and residuals. Notwithstanding subparagraph (A), the taxpayer may exclude participations and residuals from the adjusted basis of such property and deduct such participations and residuals in the taxable year that such participations and residuals are paid.'''<br />
<br />
''' (ii) Coordination with other rules. Deductions computed in accordance with this paragraph shall be allowable notwithstanding paragraph (1)(B), section 263, 263A, 404, 419, or 461(h).'''<br />
<br />
''' (E) Authority to make adjustments. The Secretary shall prescribe appropriate adjustments to the basis of property and to the look-back method for the additional amounts allowable as a deduction solely by reason of this paragraph.'''<br />
<br />
''' (8) Special rules for certain musical works and copyrights'''<br />
<br />
''' (A) In general. If an election is in effect under this paragraph for any taxable year, then, notwithstanding paragraph (1), any expense which—'''<br />
<br />
''' (i) is paid or incurred by the taxpayer in creating or acquiring any applicable musical property placed in service during the taxable year, and'''<br />
<br />
''' (ii) is otherwise properly chargeable to capital account,'''<br />
<br />
'''shall be amortized ratably over the 5-year period beginning with the month in which the property was placed in service. The preceding sentence shall not apply to any expense which, without regard to this paragraph, would not be allowable as a deduction.'''<br />
<br />
''' (B) Exclusive method. Except as provided in this paragraph, no depreciation or amortization deduction shall be allowed with respect to any expense to which subparagraph (A) applies.'''<br />
<br />
''' (C) Applicable musical property. For purposes of this paragraph—'''<br />
<br />
''' (i) In general. The term “applicable musical property” means any musical composition (including any accompanying words), or any copyright with respect to a musical composition, which is property to which this subsection applies without regard to this paragraph.'''<br />
<br />
''' (ii) Exceptions. Such term shall not include any property—'''<br />
<br />
''' (I) with respect to which expenses are treated as qualified creative expenses to which section 263A(h) applies,'''<br />
<br />
''' (II) to which a simplified procedure established under section 263A(i)(2) [1] applies, or'''<br />
<br />
''' (III) which is an amortizable section 197 intangible (as defined in section 197(c)).'''<br />
<br />
''' (D) Election. An election under this paragraph shall be made at such time and in such form as the Secretary may prescribe and shall apply to all applicable musical property placed in service during the taxable year for which the election applies.'''<br />
<br />
''' (E) Termination. An election may not be made under this paragraph for any taxable year beginning after December 31, 2010.'''<br />
<br />
'''(h) Amortization of geological and geophysical expenditures'''<br />
<br />
''' (1) In general. Any geological and geophysical expenses paid or incurred in connection with the exploration for, or development of, oil or gas within the United States (as defined in section 638) shall be allowed as a deduction ratably over the 24-month period beginning on the date that such expense was paid or incurred.'''<br />
<br />
''' (2) Half-year convention. For purposes of paragraph (1), any payment paid or incurred during the taxable year shall be treated as paid or incurred on the mid-point of such taxable year.'''<br />
<br />
''' (3) Exclusive method. Except as provided in this subsection, no depreciation or amortization deduction shall be allowed with respect to such payments.'''<br />
<br />
''' (4) Treatment upon abandonment. If any property with respect to which geological and geophysical expenses are paid or incurred is retired or abandoned during the 24-month period described in paragraph (1), no deduction shall be allowed on account of such retirement or abandonment and the amortization deduction under this subsection shall continue with respect to such payment.'''<br />
<br />
''' (5) Special rule for major integrated oil companies'''<br />
<br />
''' (A) In general. In the case of a major integrated oil company, paragraphs (1) and (4) shall be applied by substituting “7-year” for “24 month”.'''<br />
<br />
''' (B) Major integrated oil company. For purposes of this paragraph, the term “major integrated oil company” means, with respect to any taxable year, a producer of crude oil—'''<br />
<br />
''' (i) which has an average daily worldwide production of crude oil of at least 500,000 barrels for the taxable year,'''<br />
<br />
''' (ii) which had gross receipts in excess of $1,000,000,000 for its last taxable year ending during calendar year 2005, and'''<br />
<br />
''' (iii) to which subsection (c) of section 613A does not apply by reason of paragraph (4) of section 613A(d), determined—'''<br />
<br />
''' (I) by substituting “15 percent” for “5 percent” each place it occurs in paragraph (3) of section 613A(d), and'''<br />
<br />
''' (II) without regard to whether subsection (c) of section 613A does not apply by reason of paragraph (2) of section 613A(d).''' <br />
<br />
'''For purposes of clauses (i) and (ii), all persons treated as a single employer under subsections (a) and (b) of section 52 shall be treated as 1 person and, in case of a short taxable year, the rule under section 448(c)(3)(B) shall apply.''' <br />
<br />
'''(i) Cross references'''<br />
<br />
''' (1) For additional rule applicable to depreciation of improvements in the case of mines, oil and gas wells, other natural deposits, and timber, see section 611.'''<br />
<br />
''' (2) For amortization of goodwill and certain other intangibles, see section 197.'''<br />
|} <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 168 - Accelerated cost recovery system'''<br />
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'''(a) General rule. Except as otherwise provided in this section, the depreciation deduction provided by section 167(a) for any tangible property shall be determined by using—'''<br />
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''' (1) the applicable depreciation method,'''<br />
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''' (2) the applicable recovery period, and'''<br />
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''' (3) the applicable convention.''' <br />
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'''(b) Applicable depreciation method. For purposes of this section—'''<br />
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''' (1) In general. Except as provided in paragraphs (2) and (3), the applicable depreciation method is—'''<br />
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''' (A) the 200 percent declining balance method,'''<br />
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''' (B) switching to the straight line method for the 1st taxable year for which using the straight line method with respect to the adjusted basis as of the beginning of such year will yield a larger allowance.'''<br />
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''' (2) 150 percent declining balance method in certain cases. Paragraph (1) shall be applied by substituting “150 percent” for “200 percent” in the case of—'''<br />
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''' (A) any 15-year or 20-year property not referred to in paragraph (3),'''<br />
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''' (B) any property (other than property described in paragraph (3)) which is a qualified smart electric meter or qualified smart electric grid system, or'''<br />
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''' (C) any property (other than property described in paragraph (3)) with respect to which the taxpayer elects under paragraph (5) to have the provisions of this paragraph apply.'''<br />
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''' (3) Property to which straight line method applies. The applicable depreciation method shall be the straight line method in the case of the following property:'''<br />
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''' (A) Nonresidential real property.'''<br />
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''' (B) Residential rental property.'''<br />
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''' (C) Any railroad grading or tunnel bore.'''<br />
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''' (D) Property with respect to which the taxpayer elects under paragraph (5) to have the provisions of this paragraph apply.'''<br />
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''' (E) Property described in subsection (e)(3)(D)(ii).'''<br />
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''' (F) Water utility property described in subsection (e)(5).'''<br />
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''' (G) Qualified improvement property described in subsection (e)(6).'''<br />
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''' (4) Salvage value treated as zero. Salvage value shall be treated as zero.'''<br />
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''' (5) Election. An election under paragraph (2)(D) or (3)(D) may be made with respect to 1 or more classes of property for any taxable year and once made with respect to any class shall apply to all property in such class placed in service during such taxable year. Such an election, once made, shall be irrevocable.'''<br />
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'''(c) Applicable recovery period. For purposes of this section, the applicable recovery period shall be determined in accordance with the following table: In the case of _____ the applicable recovery period is:'''<br />
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'''3-year property -- 3 years '''<br />
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'''5-year property -- 5 years '''<br />
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'''7-year property -- 7 years '''<br />
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'''10-year property -- 10 years '''<br />
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'''15-year property -- 15 years '''<br />
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'''20-year property -- 20 years '''<br />
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'''Water utility property -- 25 years '''<br />
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'''Residential rental property -- 27.5 years '''<br />
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'''Nonresidential real property -- 39 years.'''<br />
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'''Any railroad grading or tunnel bore -- 50 years.'''<br />
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'''(d) Applicable convention. For purposes of this section—'''<br />
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''' (1) In general. Except as otherwise provided in this subsection, the applicable convention is the half-year convention.'''<br />
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''' (2) Real property. In the case of—'''<br />
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''' (A) nonresidential real property,'''<br />
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''' (B) residential rental property, and'''<br />
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''' (C) any railroad grading or tunnel bore, the applicable convention is the mid-month convention.'''<br />
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''' (3) Special rule where substantial property placed in service during last 3 months of taxable year'''<br />
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''' (A) In general. Except as provided in regulations, if during any taxable year—'''<br />
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''' (i) the aggregate bases of property to which this section applies placed in service during the last 3 months of the taxable year, exceed'''<br />
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''' (ii) 40 percent of the aggregate bases of property to which this section applies placed in service during such taxable year, the applicable convention for all property to which this section applies placed in service during such taxable year shall be the mid-quarter convention.'''<br />
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''' (B) Certain property not taken into account. For purposes of subparagraph (A), there shall not be taken into account—'''<br />
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''' (i) any nonresidential real property [1] residential rental property, and railroad grading or tunnel bore, and'''<br />
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''' (ii) any other property placed in service and disposed of during the same taxable year.'''<br />
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''' (4) Definitions'''<br />
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''' (A) Half-year convention. The half-year convention is a convention which treats all property placed in service during any taxable year (or disposed of during any taxable year) as placed in service (or disposed of) on the mid-point of such taxable year.'''<br />
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''' (B) Mid-month convention. The mid-month convention is a convention which treats all property placed in service during any month (or disposed of during any month) as placed in service (or disposed of) on the mid-point of such month.'''<br />
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''' (C) Mid-quarter convention. The mid-quarter convention is a convention which treats all property placed in service during any quarter of a taxable year (or disposed of during any quarter of a taxable year) as placed in service (or disposed of) on the mid-point of such quarter.'''<br />
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'''(e) Classification of property. For purposes of this section—'''<br />
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''' (1) In general. Except as otherwise provided in this subsection, property shall be classified under the following table: Property shall be treated as _____ if such property has a class life (in years) of ____'''<br />
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'''3-year property -- 4 or less'''<br />
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'''5-year property -- More than 4 but less than 10'''<br />
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'''7-year property -- 10 or more but less than 16'''<br />
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'''10-year property -- 16 or more but less than 20'''<br />
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'''15-year property -- 20 or more but less than 25'''<br />
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'''20-year property -- 25 or more.'''<br />
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''' (2) Residential rental or nonresidential real property'''<br />
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''' (A) Residential rental property'''<br />
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''' (i) Residential rental property. The term “residential rental property” means any building or structure if 80 percent or more of the gross rental income from such building or structure for the taxable year is rental income from dwelling units.'''<br />
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''' (ii) Definitions. For purposes of clause (i)—'''<br />
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''' (I) the term “dwelling unit” means a house or apartment used to provide living accommodations in a building or structure, but does not include a unit in a hotel, motel, or other establishment more than one-half of the units in which are used on a transient basis, and'''<br />
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''' (II) if any portion of the building or structure is occupied by the taxpayer, the gross rental income from such building or structure shall include the rental value of the portion so occupied.'''<br />
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''' (B) Nonresidential real property. The term “nonresidential real property” means section 1250 property which is not—'''<br />
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''' (i) residential rental property, or'''<br />
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''' (ii) property with a class life of less than 27.5 years.'''<br />
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''' (3) Classification of certain property'''<br />
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''' (A) 3-year property. The term “3-year property” includes—'''<br />
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''' (i) any race horse—'''<br />
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''' (I) which is placed in service before January 1, 2018, and'''<br />
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''' (II) which is placed in service after December 31, 2017, and which is more than 2 years old at the time such horse is placed in service by such purchaser,'''<br />
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''' (ii) any horse other than a race horse which is more than 12 years old at the time it is placed in service, and'''<br />
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''' (iii) any qualified rent-to-own property.'''<br />
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''' (B) 5-year property. The term “5-year property” includes—'''<br />
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''' (i) any automobile or light general purpose truck,'''<br />
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''' (ii) any semiconductor manufacturing equipment,'''<br />
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''' (iii) any computer-based telephone central office switching equipment,'''<br />
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''' (iv) any qualified technological equipment,'''<br />
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''' (v) any section 1245 property used in connection with research and experimentation,'''<br />
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''' (vi) any property which—'''<br />
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''' (I) is described in subparagraph (A) of section 48(a)(3) (or would be so described if “solar or wind energy” were substituted for “solar energy” in clause (i) thereof and the last sentence of such section did not apply to such subparagraph),'''<br />
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''' (II) is described in paragraph (15) of section 48(l) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) and is a qualifying small power production facility within the meaning of section 3(17)(C) of the Federal Power Act (16 U.S.C. 796(17)(C)), as in effect on September 1, 1986, or'''<br />
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''' (III) is described in section 48(l)(3)(A)(ix) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990), and'''<br />
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''' (vii) any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) which is used in a farming business (as defined in section 263A(e)(4)), the original use of which commences with the taxpayer after December 31, 2017.'''<br />
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'''Nothing in any provision of law shall be construed to treat property as not being described in clause (vi)(I) (or the corresponding provisions of prior law) by reason of being public utility property (within the meaning of section 48(a)(3)).'''<br />
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''' (C) 7-year property. The term “7-year property” includes—'''<br />
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''' (i) any railroad track, and '''<br />
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''' (ii) any motorsports entertainment complex,'''<br />
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''' (iii) any Alaska natural gas pipeline,'''<br />
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''' (iv) any natural gas gathering line the original use of which commences with the taxpayer after April 11, 2005, and'''<br />
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''' '''<br />
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''' (v) any property which—'''<br />
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''' (I) does not have a class life, and'''<br />
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''' (II) is not otherwise classified under paragraph (2) or this paragraph.'''<br />
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''' (D) 10-year property. The term “10-year property” includes—'''<br />
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''' (i) any single purpose agricultural or horticultural structure (within the meaning of subsection (i)(13)),'''<br />
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''' (ii) any tree or vine bearing fruit or nuts,'''<br />
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''' (iii) any qualified smart electric meter, and'''<br />
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''' (iv) any qualified smart electric grid system.'''<br />
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''' (E) 15-year property. The term “15-year property” includes—'''<br />
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''' (i) any municipal wastewater treatment plant,'''<br />
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''' (ii) any telephone distribution plant and comparable equipment used for 2-way exchange of voice and data communications,'''<br />
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''' (iii) any section 1250 property which is a retail motor fuels outlet (whether or not food or other convenience items are sold at the outlet),'''<br />
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''' (iv) initial clearing and grading land improvements with respect to gas utility property,'''<br />
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''' (v) any section 1245 property (as defined in section 1245(a)(3)) used in the transmission at 69 or more kilovolts of electricity for sale and the original use of which commences with the taxpayer after April 11, 2005, and'''<br />
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''' (vi) any natural gas distribution line the original use of which commences with the taxpayer after April 11, 2005, and which is placed in service before January 1, 2011.'''<br />
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''' (F) 20-year property. The term “20-year property” means initial clearing and grading land improvements with respect to any electric utility transmission and distribution plant.'''<br />
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''' (4) Railroad grading or tunnel bore. The term “railroad grading or tunnel bore” means all improvements resulting from excavations (including tunneling), construction of embankments, clearings, diversions of roads and streams, sodding of slopes, and from similar work necessary to provide, construct, reconstruct, alter, protect, improve, replace, or restore a roadbed or right-of-way for railroad track.'''<br />
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''' (5) Water utility property. The term “water utility property” means property—'''<br />
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''' (A) which is an integral part of the gathering, treatment, or commercial distribution of water, and which, without regard to this paragraph, would be 20-year property, and'''<br />
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''' (B) any municipal sewer.'''<br />
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''' (6) Qualified improvement property'''<br />
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''' (A) In general. The term “qualified improvement property” means any improvement to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date such building was first placed in service.'''<br />
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''' '''<br />
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''' (B) Certain improvements not included. Such term shall not include any improvement for which the expenditure is attributable to—'''<br />
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''' (i) the enlargement of the building,'''<br />
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''' (ii) any elevator or escalator, or'''<br />
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''' (iii) the internal structural framework of the building.''' <br />
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'''(f) Property to which section does not apply [EXCLUDED]'''<br />
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'''(g) Alternative depreciation system for certain property'''<br />
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''' (1) In general. In the case of—'''<br />
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''' (A) any tangible property which during the taxable year is used predominantly outside the United States,'''<br />
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''' (B) any tax-exempt use property,'''<br />
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''' (C) any tax-exempt bond financed property,'''<br />
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''' (D) any imported property covered by an Executive order under paragraph (6),'''<br />
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''' (E) any property to which an election under paragraph (7) applies,'''<br />
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''' (F) any property described in paragraph (8), and'''<br />
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''' (G) any property with a recovery period of 10 years or more which is held by an electing farming business (as defined in section 163(j)(7)(C)), the depreciation deduction provided by section 167(a) shall be determined under the alternative depreciation system.'''<br />
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''' (2) Alternative depreciation system. For purposes of paragraph (1), the alternative depreciation system is depreciation determined by using—'''<br />
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''' (A) the straight line method (without regard to salvage value),'''<br />
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''' (B) the applicable convention determined under subsection (d), and'''<br />
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''' (C) a recovery period determined under the following table: In the case of __________ the recovery period shall be ______'''<br />
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''' (i) Property not described in clause (ii) or (iii) -- The class life.'''<br />
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''' (ii) Personal property with no class life -- 12 years.'''<br />
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''' (iii) Residential rental property -- 30 years'''<br />
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''' (iv) Nonresidential real property -- 40 years'''<br />
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''' (v) Any railroad grading or tunnel bore or water utility property -- 50 years'''<br />
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''' (3) Special rules for determining class life'''<br />
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''' (A) Tax-exempt use property subject to lease. In the case of any tax-exempt use property subject to a lease, the recovery period used for purposes of paragraph (2) shall (notwithstanding any other subparagraph of this paragraph) in no event be less than 125 percent of the lease term.'''<br />
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''' (B) Special rule for certain property assigned to classes. For purposes of paragraph (2), in the case of property described in any of the following subparagraphs of subsection (e)(3), the class life shall be determined as follows:If property is described in subparagraph _____, the class life is ____'''<br />
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'''(A)(iii), 4 '''<br />
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'''(B)(ii), 5 '''<br />
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'''(B)(iii), 9.5'''<br />
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'''(B)(vii), 10 '''<br />
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'''(C)(i), 10 '''<br />
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'''(C)(iii), 22 '''<br />
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'''(C)(iv), 14 '''<br />
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'''(D)(i), 15 '''<br />
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'''(D)(ii), 20 '''<br />
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'''(D)(v), 20 '''<br />
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'''(E)(i), 24 '''<br />
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'''(E)(ii), 24 '''<br />
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'''(E)(iii), 20 '''<br />
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'''(E)(iv), 20 '''<br />
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'''(E)(v), 30 '''<br />
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'''(E)(vi), 35 '''<br />
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'''(F), 25 '''<br />
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''' (C) Qualified technological equipment. In the case of any qualified technological equipment, the recovery period used for purposes of paragraph (2) shall be 5 years.'''<br />
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''' (D) Automobiles, etc. In the case of any automobile or light general purpose truck, the recovery period used for purposes of paragraph (2) shall be 5 years.'''<br />
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''' (E) Certain real property. In the case of any section 1245 property which is real property with no class life, the recovery period used for purposes of paragraph (2) shall be 40 years.'''<br />
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''' (4) Exception for certain property used outside United States. Subparagraph (A) of paragraph (1) shall not apply to—'''<br />
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''' (A) any aircraft which is registered by the Administrator of the Federal Aviation Agency and which is operated to and from the United States or is operated under contract with the United States;'''<br />
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''' (B) rolling stock which is used within and without the United States and which is—'''<br />
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''' (i) of a rail carrier subject to part A of subtitle IV of title 49, or'''<br />
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''' (ii) of a United States person (other than a corporation described in clause (i)) but only if the rolling stock is not leased to one or more foreign persons for periods aggregating more than 12 months in any 24-month period;'''<br />
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''' (C) any vessel documented under the laws of the United States which is operated in the foreign or domestic commerce of the United States;'''<br />
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''' (D) any motor vehicle of a United States person (as defined in section 7701(a)(30)) which is operated to and from the United States;'''<br />
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''' (E) any container of a United States person which is used in the transportation of property to and from the United States;'''<br />
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''' (F) any property (other than a vessel or an aircraft) of a United States person which is used for the purpose of exploring for, developing, removing, or transporting resources from the outer Continental Shelf (within the meaning of section 2 of the Outer Continental Shelf Lands Act, as amended and supplemented; (43 U.S.C. 1331));'''<br />
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''' (G) any property which is owned by a domestic corporation (other than a corporation which has an election in effect under section 936) or by a United States citizen (other than a citizen entitled to the benefits of section 931 or 933) and which is used predominantly in a possession of the United States by such a corporation or such a citizen, or by a corporation created or organized in, or under the law of, a possession of the United States;'''<br />
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''' (H) any communications satellite (as defined in section 103(3) of the Communications Satellite Act of 1962, 47 U.S.C. 702(3)), or any interest therein, of a United States person;'''<br />
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''' (I) any cable, or any interest therein, of a domestic corporation engaged in furnishing telephone service to which section 168(i)(10)(C) applies (or of a wholly owned domestic subsidiary of such a corporation), if such cable is part of a submarine cable system which constitutes part of a communication link exclusively between the United States and one or more foreign countries;'''<br />
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''' (J) any property (other than a vessel or an aircraft) of a United States person which is used in international or territorial waters within the northern portion of the Western Hemisphere for the purpose of exploring for, developing, removing, or transporting resources from ocean waters or deposits under such waters;'''<br />
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''' (K) any property described in section 48(l)(3)(A)(ix) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) which is owned by a United States person and which is used in international or territorial waters to generate energy for use in the United States; and'''<br />
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''' (L) any satellite (not described in subparagraph (H)) or other spacecraft (or any interest therein) held by a United States person if such satellite or other spacecraft was launched from within the United States.'''<br />
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'''For purposes of subparagraph (J), the term “northern portion of the Western Hemisphere” means the area lying west of the 30th meridian west of Greenwich, east of the international dateline, and north of the Equator, but not including any foreign country which is a country of South America.'''<br />
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''' (5) Tax-exempt bond financed property. For purposes of this subsection—'''<br />
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''' (A) In general. Except as otherwise provided in this paragraph, the term “tax-exempt bond financed property” means any property to the extent such property is financed (directly or indirectly) by an obligation the interest on which is exempt from tax under section 103(a).'''<br />
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''' (B) Allocation of bond proceeds. For purposes of subparagraph (A), the proceeds of any obligation shall be treated as used to finance property acquired in connection with the issuance of such obligation in the order in which such property is placed in service.'''<br />
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''' (C) Qualified residential rental projects. The term “tax-exempt bond financed property” shall not include any qualified residential rental project (within the meaning of section 142(a)(7)).'''<br />
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''' (6) Imported property'''<br />
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''' (A) Countries maintaining trade restrictions or engaging in discriminatory acts. If the President determines that a foreign country—'''<br />
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''' (i) maintains nontariff trade restrictions, including variable import fees, which substantially burden United States commerce in a manner inconsistent with provisions of trade agreements, or'''<br />
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''' (ii) engages in discriminatory or other acts (including tolerance of international cartels) or policies unjustifiably restricting United States commerce, the President may by Executive order provide for the application of paragraph (1)(D) to any article or class of articles manufactured or produced in such foreign country for such period as may be provided by such Executive order. Any period specified in the preceding sentence shall not apply to any property ordered before (or the construction, reconstruction, or erection of which began before) the date of the Executive order unless the President determines an earlier date to be in the public interest and specifies such date in the Executive order.'''<br />
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''' (B) Imported property. For purposes of this subsection, the term “imported property” means any property if—'''<br />
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''' (i) such property was completed outside the United States, or'''<br />
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''' (ii) less than 50 percent of the basis of such property is attributable to value added within the United States. For purposes of this subparagraph, the term “United States” includes the Commonwealth of Puerto Rico and the possessions of the United States.'''<br />
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''' (7) Election to use alternative depreciation system'''<br />
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''' (A) In general. If the taxpayer makes an election under this paragraph with respect to any class of property for any taxable year, the alternative depreciation system under this subsection shall apply to all property in such class placed in service during such taxable year. Notwithstanding the preceding sentence, in the case of nonresidential real property or residential rental property, such election may be made separately with respect to each property.'''<br />
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''' (B) Election irrevocable. An election under subparagraph (A), once made, shall be irrevocable.'''<br />
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''' (8) Electing real property trade or business. The property described in this paragraph shall consist of any nonresidential real property, residential rental property, and qualified improvement property held by an electing real property trade or business (as defined in 163(j)(7)(B)).'''<br />
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'''(h) Tax-exempt use property [EXCLUDED]'''<br />
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'''(i) Definitions and special rules [EXCLUDED]'''<br />
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'''(j) Property on Indian reservations [EXCLUDED]'''<br />
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'''(k) Special allowance for certain property [EXCLUDED]'''<br />
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'''(l) Special allowance for second generation biofuel plant property [EXCLUDED]'''<br />
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'''(m) Special allowance for certain reuse and recycling property [EXCLUDED]''' <br />
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'''(n) Special allowance for qualified disaster assistance property [EXCLUDED]'''<br />
|} <br />
<br />
{| class="wikitable"<br />
|Treas. Reg. § 1.167(a)-2 Tangible property.<br />
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The depreciation allowance in the case of tangible property applies only to that part of the property which is subject to wear and tear, to decay or decline from natural causes, to exhaustion, and to obsolescence. The allowance '''does not apply to inventories or stock in trade, or to land apart from the improvements or physical development added to it'''. The allowance does not apply to natural resources which are subject to the allowance for depletion provided in section 611. No deduction for depreciation shall be allowed on automobiles or other vehicles used solely for pleasure, on a building used by the taxpayer solely as his residence, or on furniture or furnishings therein, personal effects, or clothing; but properties and costumes used exclusively in a business, such as a theatrical business, may be depreciated.<br />
|} <br />
'''Property Eligible for Deduction'''<br />
§167(a) → permits a deduction for the “exhaustion, wear and tear” and for the “obsolescence” of property used in a trade or business or held for the production of income; two required features:<br />
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(1) It has a useful life beyond the taxable year (the reason it was capitalized in the first place); and<br />
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(2) It wears out, decays, declines in value due to natural causes, or is subject to exhaustion or obsolescence <br />
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<u>Simon v. Commissioner (1994)</u> - Tax Court [violin bows depreciated for wear and tear]<br />
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RULE: A federal taxpayer may take depreciation deductions for recovery property under the accelerated cost recovery system. <br />
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Case Notes:<br />
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● Taxpayers may take depreciation deductions for recovery property under the ACRS. <br />
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● Recovery property must be: <br />
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○ (1) tangible, <br />
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○ (2) placed in service after 1980, <br />
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○ (3) used in a trade or business, and <br />
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○ (4) of a character subject to the allowance for depreciation.<br />
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● A comparison between current and previous tax law indicates that Congress used the term “depreciation” to mean '''exhaustion, wear and tear, or obsolescence'''. <br />
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<u>Simon v. Commissioner (1995)</u> - 2nd Cir. Ct. of Appeals [PART II]<br />
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RULE: Demonstration of a business asset’s useful life is not required to take depreciation deductions under the Accelerated Recovery Tax Act (ARTA). <br />
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Case Notes: <br />
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● The ACRS, under § 168, allows taxpayers to take depreciation deductions for recovery property. <br />
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● Recovery property is “tangible property of a character subject to the allowance for depreciation,” used in the course of carrying on a trade or business. <br />
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● The requirement that the business asset also have a determinable useful life, was a determination required for depreciation deductions prior to the implementation of ACRS. <br />
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● Not all business assets are subject to wear and tear. For instance, paintings hung on the wall of a business office or violin bows kept as collector’s items in a for-profit museum are technically business assets that do not undergo wear and tear. <br />
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● Previously, a determination of a business asset’s determinable useful life was required in order to take a depreciation deduction. <br />
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● Depreciation deductions allow taxpayers to offset their taxable income by deducting the cost of a business asset over its useful life. <br />
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● The allowable depreciation allowance for each year could not be calculated without first establishing the asset’s useful life. <br />
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● The introduction of the ACRS, however, eliminated the need to determine the useful life of an asset. <br />
<br />
● In an effort to stimulate economic growth, the ACRS provides for accelerated depreciation periods that are unrelated to the useful life of an asset. <br />
<br />
● The determination of an asset’s useful life is no longer essential to calculate depreciation allowances. <br />
<br />
● In fact, depreciation periods under the ACRS are usually shorter than the asset’s true useful life. <br />
<br />
● Congress also sought to simplify depreciation deductions by de-emphasizing concepts such as useful life and salvage value.<br />
<br />
● §168 only requires that a business asset be subject to wear and tear to be eligible for depreciation deductions. <br />
<br />
Some tangible assets, like works of art, are not depreciable even though they are used in a trade or business (i.e. painting on the wall of a law office to attract clients). <br />
<br />
'''Legislative History''' <br />
<br />
'''ADR → Asset depreciation range''' -- Asset depreciation range was an accounting method established by the Internal Revenue Service in 1971 to determine the useful life of specific classes of depreciable assets. It was replaced with the accelerated cost recovery system ('''ACRS''') in 1981, which in turn was replaced by the modified accelerated cost recovery system ('''MACRS''') in 1986. <br />
<br />
'''ERTA''' → The Economic Recovery Tax Act of 1981 (Pub.L. 97–34), also known as the ERTA or "Kemp–Roth Tax Cut", was a federal law enacted in the United States in 1981. [August 31, 2018]<br />
<br />
● It was an act "to amend the Internal Revenue Code of 1954 to encourage economic growth through reductions in individual income tax rates, the expensing of depreciable property, incentives for small businesses, and incentives for savings, and for other purposes".<br />
<br />
● Included in the act was an across-the-board decrease in the marginal income tax rates in the United States by 25% over three years, with the top rate falling from 70% to 50% and the bottom rate dropping from 14% to 11%. <br />
<br />
● This act slashed estate taxes and trimmed taxes paid by business corporations by $150 billion over a five-year period. <br />
<br />
● Additionally the tax rates were indexed for inflation, though the indexing was delayed until 1985.<br />
<br />
● In the year after enactment of ERTA, the deficit ballooned, which in turn, drove interest rates from around 12% to over 20%, which, in turn, drove the economy into the second dip of the 1978-82 "double dip recession". <br />
<br />
'''ACRS''' → The Accelerated Cost Recovery System (ACRS) was a major component of the ERTA and was amended in 1986 to become the '''Modified Accelerated cost Recovery System''' ('''MACRS''').<br />
<br />
● The system changed the way that depreciation deductions are allowed for tax purposes. <br />
<br />
● Instead of basing the depreciation deduction on an estimate of the expected useful life of assets, the assets were placed into categories: 3, 5, 10, or 15 years of life. <br />
<br />
● For example, the agriculture industry saw a re-evaluation of their farming assets. Items such as automobiles and swine were given 3 year depreciation values, and things like buildings and land had a 15-year depreciation value.<br />
<br />
● The idea was that there would be a rise in tax cuts due to the optimistic consideration of depreciating values -- this would in turn put more cash into the pockets of business owners to promote investment and economic growth.<br />
<br />
'''Modified Accelerated Cost Recovery System (MACRS)''' → MACRS is a depreciation system which allows the capitalized cost basis of assets to be recovered over a specified life of the asset by annual deductions for value depreciation. MACRS is the depreciation system used in the United States, and was created after the release of the Tax Reform Act of 1986. <br />
<br />
{| class="wikitable"<br />
| colspan="2" |'''Table of Property Types and Class Lives'''<br />
|-<br />
|'''Description of Assets'''<br />
|'''Useful Life (Years)'''<br />
|-<br />
|Tractors, racehorses, rent-to-own property, etc.<br />
|3<br />
|-<br />
|Automobiles, buses, trucks, computers, office machinery, breeding cattle, furniture, etc.<br />
|5<br />
|-<br />
|Office furniture, fixtures, agricultural machinery, railroad track, etc.<br />
|7<br />
|-<br />
|Vessels, tugs, agricultural structure, tree or vine bearing fruits or nuts, etc.<br />
|10<br />
|-<br />
|Municipal wastewater treatment plant, restaurant property, natural gas distribution line, land improvements, such as shrubbery, fences, and sidewalks, etc.<br />
|15<br />
|-<br />
|Farm buildings, certain municipal sewers, etc.<br />
|20<br />
|-<br />
|Water utility property, certain municipal sewers, etc.<br />
|25<br />
|-<br />
|Any building or structure where 80% or more of its gross rental income is from dwelling units<br />
|27.5<br />
|-<br />
|An office building, store, or warehouse that is not residential property or has a class life of less than 27.5 years<br />
|39<br />
|} <br />
<br />
'''The Mechanics of Depreciation''' <br />
<br />
Variables affecting depreciation deductions under §168(a): <br />
<br />
(1) '''Depreciation base''' → the depreciation base for all assets is its cost basis; because the statute assumes that all depreciable assets have no salvage value under §168(b)(4), a taxpayer may recover his or her entire basis in the asset. <br />
<br />
(2) '''Class life''' → the estimated life expectancy of the asset; established in Revenue Procedure 87-56. <br />
<br />
{| class="wikitable"<br />
|'''Rev. Proc. 87-56''' <br />
<br />
'''SECTION 1. PURPOSE''' <br />
<br />
'''The purpose of this revenue procedure is to set forth the class lives of property that are necessary to compute the depreciation allowances available under section 168 of the Internal Revenue Code, as amended by section 201(a) of the Tax Reform Act of 1986 (Act), 1986-3 (Vol. 1) C.B. 38. Rev. Proc. 87-57, page 17, this Bulletin, describes the applicable depreciation methods, applicable recovery periods, and applicable conventions that must be used in computing depreciation allowances under section 168.''' <br />
<br />
'''SEC. 2. GENERAL RULES OF APPLICATION'''<br />
<br />
'''01 IN GENERAL. This revenue procedure specifies class lives and recovery periods for property subject to depreciation under the general depreciation system provided in section 168(a) of the Code or the alternative depreciation system provided in section 168(g).''' <br />
<br />
'''SEC. 5. TABLES OF CLASS LIVES AND RECOVERY PERIODS''' <br />
<br />
'''.01 Except for property described in section 5.02, below, the class lives (if any) and recovery periods for property subject to depreciation under section 168 of the Code appear in the tables below. These tables are based on the definition of class life in section 2.02 of this revenue procedure and the assigned items described in section 3 of this revenue procedure.''' <br />
<br />
'''.02 For purposes of depreciation under the general depreciation system, residential rental property has a recovery period of 27.5 years and nonresidential real property has a recovery period of 31.5 years. For purposes of the alternative depreciation system, residential rental and nonresidential real property each has a recovery period of 40 years.''' <br />
<br />
'''[TABLE EXCLUDED]'''<br />
|} <br />
<br />
(3) '''Applicable Recovery Period''' → under §168(a)(2)<br />
<br />
(a) The table in §168(e)(1) uses the asset’s class life to classify it as one of six different types of property<br />
<br />
(b) Then, the table in §168(c) lists the recovery period for each type of property (subject to the four exceptions noted at the end of the table)<br />
<br />
(c) The recovery period represents the number of taxable years over which the taxpayer may claim depreciation deductions<br />
<br />
(d) Taxpayers typically prefer shorter recovery periods, because that means bigger deductions and quicker recovery of the asset’s basis <br />
<br />
(4) '''Applicable depreciation method''' → <br />
<br />
(a) “Straight-line method” -- where the cost is recovered ratably, one divides the depreciation base by the applicable recovery period '''[FRAY WILL ONLY ASK US TO DO THIS]'''<br />
<br />
(b) Accelerated methods -- “Declining balance methods” -- §168(b) lists them; used more frequently than any other method.<br />
<br />
(i) “Double declining balance method” -- a taxpayer may claim double the percentage of the declining balance in the depreciation base; taxpayer would never fully recover the cost of the asset, statute says to switch to the straight-line method in the first year when that method yields a larger result<br />
<br />
(ii) “150 percent declining balance method” <br />
<br />
EXAMPLE: <br />
<br />
{| class="wikitable"<br />
|Year<br />
|Declining Balance<br />
|40% DDB<br />
|Straight-Line<br />
|Deduction<br />
|Adjusted Basis<br />
|-<br />
|1<br />
|$5,000<br />
|$2,000<br />
|$1,000<br />
| <br />
| <br />
|-<br />
|2<br />
|$3,000<br />
|$1,200<br />
|$750*<br />
| <br />
| <br />
|-<br />
|3<br />
|$1,800<br />
|$720<br />
| <br />
| <br />
| <br />
|-<br />
|4<br />
|$1,080<br />
|$432<br />
| <br />
| <br />
| <br />
|-<br />
|5<br />
|$540<br />
|$216<br />
| <br />
| <br />
| <br />
|} <br />
<br />
'''Losses''' <br />
<br />
'''Business and Investment Losses''' <br />
<br />
{| class="wikitable"<br />
|62(a)(3), 165(a)-(d)<br />
|} <br />
<br />
§1001(a) → defines a loss from the sale or exchange of property as the excess of TP’s adjusted basis over the amount realized<br />
<br />
§1001(c) → all realized losses are recognized (deductible) except as provided elsewhere in the Code<br />
<br />
● FOR INDIVIDUALS, §165(c) is the major limitation; only permits the deduction of three types of uncompensated losses:<br />
<br />
(1) Losses incurred in a trade or business;<br />
<br />
(2) Losses incurred in profit-motivated transactions; and<br />
<br />
(3) Casualty and theft losses with respect to personal-use property <br />
<br />
If a realized loss is not described in §165(c), an individual taxpayer cannot deduct the loss. <br />
<br />
§165(a) → two additional limitations<br />
<br />
(1) The loss must be “sustained” -- for example, a decline in the FMV of an asset cannot be claimed as a loss until the asset is sold or otherwise disposed of in a completed transaction<br />
<br />
(2) The taxpayer must not have been “compensated” for the loss -- if a TP receives insurance proceeds or other compensation for a loss (e.g. homeowners insurance), it would be a windfall to permit a loss deduction on top of recovery <br />
<br />
<u>Miller v. Commissioner (1984)</u> - 6th Cir. [boat damaged, did not file insurance claim, claimed loss]<br />
<br />
RULE: Taxpayers are allowed to claim deductions for economic detriments which are a loss and not compensated for by insurance or otherwise regardless whether the property was insured or not. <br />
<br />
''Facts:''<br />
<br />
● ''Plaintiff taxpayer had an undamaged boat and a friend who is a bad captain.'' <br />
<br />
● ''Unfortunately he lent his boat to this friend who then ran taxpayer's boat into the ground.'' <br />
<br />
● ''Taxpayer was able to collect $200.00 from his friend, reducing taxpayer's actual loss to $642.55.'' <br />
<br />
● ''After taking into account the $100.00 limitation under 26 U.S.C. § 165(c)(3), taxpayer claimed a $542.22 casualty loss deduction on his 1976 return.'' <br />
<br />
● ''While the taxpayer's boat was insured, he did not file an insurance claim for fear of having his insurance policy revoked.'' <br />
<br />
● ''26 U.S.C. § 165(c)allows a deduction for private parties for losses resulting from a shipwreck.''<br />
<br />
● ''The court considered whether a taxpayer's voluntary election not to file an insurance claim for a loss precludes the taxpayer from taking a casualty loss deduction according to 26 U.S.C. § 165.'' <br />
<br />
Case Notes: <br />
<br />
● If you damage something that is insured or under warranty but don't make a claim and don't receive compensation, can you still deduct the loss according to 26 U.S.C. § 165.<br />
<br />
● Plain language example: Someone backs into your car while you are away and breaks a taillight. While you have insurance for the taillight, you don't make a claim because you might lose your insurance or don't want to deal with the paperwork. The loss in excess of the limit in 26 U.S.C. § 165(c)3 (currently $100) may be deducted.<br />
<br />
● Previously, <u>Kentucky Utilities</u> rule → In order to claim a deduction, the court required the taxpayer to a) exhaust all reasonable prospects for insurance indemnification before claiming a sustained loss or (b) that 26 U.S.C. § 165 equated "not compensated by" with "not covered by."<br />
<br />
● Avoiding the <u>Kentucky Utilities</u> rule<br />
<br />
○ First, it allows insured taxpayers to decline insurance indemnification without the penalty of not being able to deduct the loss as if they did not have insurance. <br />
<br />
○ There are many valid reasons for not involving insurance companies and the tax law should not work against them. <br />
<br />
○ Second, taxpayers who carry no insurance or are under-insured are not rewarded with an additional deduction not available to their colleagues who carry the proper amount of insurance coverage.<br />
<br />
● Kentucky Utilities was overruled by Hills, which recognized that "compensated" is distinct from "covered." <br />
<br />
Individual Losses <br />
<br />
● §165(b) → If a TP receives no consideration for a realized loss (whether as payment or compensation), the loss deduction is limited to the TP’s basis in the loss property<br />
<br />
● Thus if a TP is unable to collect on an account receivable (in which a TP has a zero basis except in very limited cases), there is no deduction under §165(a)<br />
<br />
● §165(d) → limits the deduction for gambling losses to the amount of the TP’s gambling winnings; it does not matter whether gambling is a business, investment, or personal activity of the TP <br />
<br />
'''Net Operating Losses''' <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 172 - Net operating loss deduction'''<br />
<br />
'''(a) Deduction allowed. There shall be allowed as a deduction for the taxable year an amount equal to the lesser of—'''<br />
<br />
''' (1) the aggregate of the net operating loss carryovers to such year, plus the net operating loss carrybacks to such year, or'''<br />
<br />
''' (2) 80 percent of taxable income computed without regard to the deduction allowable under this section. For purposes of this subtitle, the term “net operating loss deduction” means the deduction allowed by this subsection.''' <br />
<br />
'''(b) Net operating loss carrybacks and carryovers'''<br />
<br />
''' (1) Years to which loss may be carried'''<br />
<br />
''' (A) General rule. Except as otherwise provided in this paragraph, a net operating loss for any taxable year—'''<br />
<br />
''' (i) except as otherwise provided in this paragraph, shall not be a net operating loss carryback to any taxable year preceding the taxable year of such loss, and'''<br />
<br />
''' (ii) shall be a net operating loss carryover to each taxable year following the taxable year of the loss.'''<br />
<br />
''' (B) Farming losses'''<br />
<br />
''' (i) In general. In the case of any portion of a net operating loss for the taxable year which is a farming loss with respect to the taxpayer, such loss shall be a net operating loss carryback to each of the 2 taxable years preceding the taxable year of such loss.'''<br />
<br />
''' (ii) Farming loss. For purposes of this section, the term “farming loss” means the lesser of—'''<br />
<br />
''' (I) the amount which would be the net operating loss for the taxable year if only income and deductions attributable to farming businesses (as defined in section 263A(e)(4)) are taken into account, or'''<br />
<br />
''' (II) the amount of the net operating loss for such taxable year.'''<br />
<br />
''' (iii) Coordination with paragraph (2). For purposes of applying paragraph (2), a farming loss for any taxable year shall be treated as a separate net operating loss for such taxable year to be taken into account after the remaining portion of the net operating loss for such taxable year.'''<br />
<br />
''' (iv) Election. Any taxpayer entitled to a 2-year carryback under clause (i) from any loss year may elect not to have such clause apply to such loss year. Such election shall be made in such manner as prescribed by the Secretary and shall be made by the due date (including extensions of time) for filing the taxpayer’s return for the taxable year of the net operating loss. Such election, once made for any taxable year, shall be irrevocable for such taxable year.'''<br />
<br />
''' (C) Insurance companies. In the case of an insurance company (as defined in section 816(a)) other than a life insurance company, the net operating loss for any taxable year—'''<br />
<br />
''' (i) shall be a net operating loss carryback to each of the 2 taxable years preceding the taxable year of such loss, and'''<br />
<br />
''' (ii) shall be a net operating loss carryover to each of the 20 taxable years following the taxable year of the loss.'''<br />
<br />
''' (2) Amount of carrybacks and carryovers. The entire amount of the net operating loss for any taxable year (hereinafter in this section referred to as the “loss year”) shall be carried to the earliest of the taxable years to which (by reason of paragraph (1)) such loss may be carried. The portion of such loss which shall be carried to each of the other taxable years shall be the excess, if any, of the amount of such loss over the sum of the taxable income for each of the prior taxable years to which such loss may be carried. For purposes of the preceding sentence, the taxable income for any such prior taxable year shall—'''<br />
<br />
''' (A) be computed with the modifications specified in subsection (d) other than paragraphs (1), (4), and (5) thereof, and by determining the amount of the net operating loss deduction without regard to the net operating loss for the loss year or for any taxable year thereafter,'''<br />
<br />
''' (B) not be considered to be less than zero, and'''<br />
<br />
''' (C) not exceed the amount determined under subsection (a)(2) for such prior taxable year.'''<br />
<br />
''' (3) Election to waive carryback. Any taxpayer entitled to a carryback period under paragraph (1) may elect to relinquish the entire carryback period with respect to a net operating loss for any taxable year. Such election shall be made in such manner as may be prescribed by the Secretary, and shall be made by the due date (including extensions of time) for filing the taxpayer’s return for the taxable year of the net operating loss for which the election is to be in effect. Such election, once made for any taxable year, shall be irrevocable for such taxable year.'''<br />
<br />
'''(c) Net operating loss defined. For purposes of this section, the term “net operating loss” means the excess of the deductions allowed by this chapter over the gross income. Such excess shall be computed with the modifications specified in subsection (d).'''<br />
<br />
'''(d) Modifications. The modifications referred to in this section are as follows:'''<br />
<br />
''' (1) Net operating loss deduction. No net operating loss deduction shall be allowed.'''<br />
<br />
''' (2) Capital gains and losses of taxpayers other than corporations. In the case of a taxpayer other than a corporation—'''<br />
<br />
''' (A) the amount deductible on account of losses from sales or exchanges of capital assets shall not exceed the amount includable on account of gains from sales or exchanges of capital assets; and'''<br />
<br />
''' (B) the exclusion provided by section 1202 shall not be allowed.'''<br />
<br />
''' (3) Deduction for personal exemptions. No deduction shall be allowed under section 151 (relating to personal exemptions). No deduction in lieu of any such deduction shall be allowed.'''<br />
<br />
''' (4) Nonbusiness deductions of taxpayers other than corporations. In the case of a taxpayer other than a corporation, the deductions allowable by this chapter which are not attributable to a taxpayer’s trade or business shall be allowed only to the extent of the amount of the gross income not derived from such trade or business. For purposes of the preceding sentence—'''<br />
<br />
''' (A) any gain or loss from the sale or other disposition of—'''<br />
<br />
''' (i) property, used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 167, or'''<br />
<br />
''' (ii) real property used in the trade or business, shall be treated as attributable to the trade or business;'''<br />
<br />
''' (B) the modifications specified in paragraphs (1), (2)(B), and (3) shall be taken into account;'''<br />
<br />
''' (C) any deduction for casualty or theft losses allowable under paragraph (2) or (3) of section 165(c) shall be treated as attributable to the trade or business; and'''<br />
<br />
''' (D) any deduction allowed under section 404 to the extent attributable to contributions which are made on behalf of an individual who is an employee within the meaning of section 401(c)(1) shall not be treated as attributable to the trade or business of such individual.'''<br />
<br />
''' (5) Computation of deduction for dividends received. The deductions allowed by section [1] 243 (relating to dividends received by corporations) and 245 (relating to dividends received from certain foreign corporations) shall be computed without regard to section 246(b) (relating to limitation on aggregate amount of deductions).'''<br />
<br />
''' (6) Modifications related to real estate investment trusts. In the case of any taxable year for which part II of subchapter M (relating to real estate investment trusts) applies to the taxpayer—'''<br />
<br />
''' (A) the net operating loss for such taxable year shall be computed by taking into account the adjustments described in section 857(b)(2) (other than the deduction for dividends paid described in section 857(b)(2)(B));'''<br />
<br />
''' (B) where such taxable year is a “prior taxable year” referred to in paragraph (2) of subsection (b), the term “taxable income” in such paragraph shall mean “real estate investment trust taxable income” (as defined in section 857(b)(2)); and'''<br />
<br />
''' (C) subsection (a)(2) shall be applied by substituting “real estate investment trust taxable income (as defined in section 857(b)(2) but without regard to the deduction for dividends paid (as defined in section 561))” for “taxable income”.'''<br />
<br />
''' [(7) Repealed. Pub. L. 115–97, title I, § 13305(b)(3), Dec. 22, 2017, 131 Stat. 2126.]'''<br />
<br />
''' (8) Qualified business income deduction. The deduction under section 199A shall not be allowed.'''<br />
<br />
''' (9) Deduction for foreign-derived intangible income. The deduction under section 250 shall not be allowed.'''<br />
<br />
'''(e) Law applicable to computations. In determining the amount of any net operating loss carryback or carryover to any taxable year, the necessary computations involving any other taxable year shall be made under the law applicable to such other taxable year.'''<br />
<br />
'''(f) Special rule for insurance companies. In the case of an insurance company (as defined in section 816(a)) other than a life insurance company—'''<br />
<br />
''' (1) the amount of the deduction allowed under subsection (a) shall be the aggregate of the net operating loss carryovers to such year, plus the net operating loss carrybacks to such year, and'''<br />
<br />
''' (2) subparagraph (C) of subsection (b)(2) shall not apply.''' <br />
<br />
'''(g) Cross references'''<br />
<br />
''' (1) For treatment of net operating loss carryovers in certain corporate acquisitions, see section 381.'''<br />
<br />
''' (2) For special limitation on net operating loss carryovers in case of a corporate change of ownership, see section 382.'''<br />
|} <br />
<br />
EXAMPLE → A and B operate similar businesses<br />
<br />
● A’s business income is very steady; in year 1 and year 2, A has a net business income of $10k<br />
<br />
● B’s business income is more volatile; in year 1, B had a new business LOSS of $10K and in year 2, B had a net business income of $30K<br />
<br />
● During the combined two-year operating period, both A and B had a net income of $20K, but they will not be treated the same. <br />
<br />
{| class="wikitable"<br />
| <br />
|A<br />
|B<br />
|-<br />
|Year 1<br />
|$10,000<br />
|($10,000)<br />
|-<br />
|Year 2<br />
|$10,000<br />
|$30,000<br />
|-<br />
|'''Total'''<br />
|'''$20,000'''<br />
|'''$20,000'''<br />
|} <br />
<br />
Section 172 → designed to ameliorate the different tax treatments<br />
<br />
● A will pay tax on $10K in each of years 1 and 2<br />
<br />
● B will pay no tax in year 1 but will also not be entitled to a return<br />
<br />
● In year 2, B will pay tax on $30K<br />
<br />
● UNDER §172 → B could '''carry''' his $10K “net operating loss” from year 1 over to year 2; by doing so, B’s year 2 taxable income would be reduced by $10K; by allowing a deduction on B’s year 2 income, equitable treatment is closer to achievable <br />
<br />
§172(b) → carryover<br />
<br />
● Taxpayers can carry forward net operating losses<br />
<br />
● Under §172(a), any net operating loss deduction cannot exceed 80% of a TP’s taxable income<br />
<br />
● TCJA removed carryback provisions <br />
<br />
'''Loss Limitations''' <br />
<br />
Other limitations on the deductibility of losses<br />
<br />
● §465 → a TP’s losses from business and investment activities are limited to the amount the TP is “at risk” in such activities<br />
<br />
○ If a TP invests $10K in an investment activity (like an ILP in a real estate LP), the TP can only claim up to $10K in losses from the activity<br />
<br />
● §469 → Losses from “passive” activities can only be deducted to the extent of income from passive activities<br />
<br />
● §1091 → with respect to sales of marketable securities, 1091 disallows losses from so called “wash sales”, where a TP sells shares of stock at a loss and then, within a short period following the sale, purchases shares in the same corporation in anticipation of an upturn in the stock price <br />
<br />
'''Transactions with Related Persons''' <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 267 - Losses, expenses, and interest with respect to transactions between related taxpayers'''<br />
<br />
'''(a) In general'''<br />
<br />
''' (1) Deduction for losses disallowed. No deduction shall be allowed in respect of any loss from the sale or exchange of property, directly or indirectly, between persons specified in any of the paragraphs of subsection (b). The preceding sentence shall not apply to any loss of the distributing corporation (or the distributee) in the case of a distribution in complete liquidation.'''<br />
<br />
''' (2) Matching of deduction and payee income item in the case of expenses and interest. If—'''<br />
<br />
''' (A) by reason of the method of accounting of the person to whom the payment is to be made, the amount thereof is not (unless paid) includible in the gross income of such person, and'''<br />
<br />
''' (B) at the close of the taxable year of the taxpayer for which (but for this paragraph) the amount would be deductible under this chapter, both the taxpayer and the person to whom the payment is to be made are persons specified in any of the paragraphs of subsection (b), then any deduction allowable under this chapter in respect of such amount shall be allowable as of the day as of which such amount is includible in the gross income of the person to whom the payment is made (or, if later, as of the day on which it would be so allowable but for this paragraph). For purposes of this paragraph, in the case of a personal service corporation (within the meaning of section 441(i)(2)), such corporation and any employee-owner (within the meaning of section 269A(b)(2), as modified by section 441(i)(2)) shall be treated as persons specified in subsection (b).'''<br />
<br />
''' (3) Payments to foreign persons'''<br />
<br />
''' (A) In general. The Secretary shall by regulations apply the matching principle of paragraph (2) in cases in which the person to whom the payment is to be made is not a United States person.'''<br />
<br />
''' (B) Special rule for certain foreign entities'''<br />
<br />
''' (i) In general. Notwithstanding subparagraph (A), in the case of any item payable to a controlled foreign corporation (as defined in section 957) or a passive foreign investment company (as defined in section 1297), a deduction shall be allowable to the payor with respect to such amount for any taxable year before the taxable year in which paid only to the extent that an amount attributable to such item is includible (determined without regard to properly allocable deductions and qualified deficits under section 952(c)(1)(B)) during such prior taxable year in the gross income of a United States person who owns (within the meaning of section 958(a)) stock in such corporation.'''<br />
<br />
''' (ii) Secretarial authority. The Secretary may by regulation exempt transactions from the application of clause (i), including any transaction which is entered into by a payor in the ordinary course of a trade or business in which the payor is predominantly engaged and in which the payment of the accrued amounts occurs within 8½ months after accrual or within such other period as the Secretary may prescribe.'''<br />
<br />
'''(b) Relationships. The persons referred to in subsection (a) are:'''<br />
<br />
''' (1) Members of a family, as defined in subsection (c)(4);'''<br />
<br />
''' (2) An individual and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual;'''<br />
<br />
''' (3) Two corporations which are members of the same controlled group (as defined in subsection (f));'''<br />
<br />
''' (4) A grantor and a fiduciary of any trust;'''<br />
<br />
''' (5) A fiduciary of a trust and a fiduciary of another trust, if the same person is a grantor of both trusts;'''<br />
<br />
''' (6) A fiduciary of a trust and a beneficiary of such trust;'''<br />
<br />
''' (7) A fiduciary of a trust and a beneficiary of another trust, if the same person is a grantor of both trusts;'''<br />
<br />
''' (8) A fiduciary of a trust and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for the trust or by or for a person who is a grantor of the trust;'''<br />
<br />
''' (9) A person and an organization to which section 501 (relating to certain educational and charitable organizations which are exempt from tax) applies and which is controlled directly or indirectly by such person or (if such person is an individual) by members of the family of such individual;'''<br />
<br />
''' (10) A corporation and a partnership if the same persons own—'''<br />
<br />
''' (A) more than 50 percent in value of the outstanding stock of the corporation, and'''<br />
<br />
''' (B) more than 50 percent of the capital interest, or the profits interest, in the partnership;'''<br />
<br />
''' (11) An S corporation and another S corporation if the same persons own more than 50 percent in value of the outstanding stock of each corporation;'''<br />
<br />
''' (12) An S corporation and a C corporation, if the same persons own more than 50 percent in value of the outstanding stock of each corporation; or'''<br />
<br />
''' (13) Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of such estate.''' <br />
<br />
'''(c) Constructive ownership of stock. For purposes of determining, in applying subsection (b), the ownership of stock—'''<br />
<br />
''' (1) Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries;'''<br />
<br />
''' (2) An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family;'''<br />
<br />
''' (3) An individual owning (otherwise than by the application of paragraph (2)) any stock in a corporation shall be considered as owning the stock owned, directly or indirectly, by or for his partner;'''<br />
<br />
''' (4) The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; and'''<br />
<br />
''' (5) Stock constructively owned by a person by reason of the application of paragraph (1) shall, for the purpose of applying paragraph (1), (2), or (3), be treated as actually owned by such person, but stock constructively owned by an individual by reason of the application of paragraph (2) or (3) shall not be treated as owned by him for the purpose of again applying either of such paragraphs in order to make another the constructive owner of such stock.''' <br />
<br />
'''(d) Amount of gain where loss previously disallowed'''<br />
<br />
''' (1) In general. If—'''<br />
<br />
''' (A) in the case of a sale or exchange of property to the taxpayer a loss sustained by the transferor is not allowable to the transferor as a deduction by reason of subsection (a)(1), and'''<br />
<br />
''' (B) the taxpayer sells or otherwise disposes of such property (or of other property the basis of which in the taxpayer’s hands is determined directly or indirectly by reference to such property) at a gain,'''<br />
<br />
'''then such gain shall be recognized only to the extent that it exceeds so much of such loss as is properly allocable to the property sold or otherwise disposed of by the taxpayer.'''<br />
<br />
''' (2) Exception for wash sales. Paragraph (1) shall not apply if the loss sustained by the transferor is not allowable to the transferor as a deduction by reason of section 1091 (relating to wash sales).'''<br />
<br />
''' (3) Exception for transfers from tax indifferent parties. Paragraph (1) shall not apply to the extent any loss sustained by the transferor (if allowed) would not be taken into account in determining a tax imposed under section 1 or 11 or a tax computed as provided by either of such sections.'''<br />
<br />
'''(e) Special rules for pass-thru entities'''<br />
<br />
''' (1) In general. In the case of any amount paid or incurred by, to, or on behalf of, a pass-thru entity, for purposes of applying subsection (a)(2)—'''<br />
<br />
''' (A) such entity,'''<br />
<br />
''' (B) in the case of—'''<br />
<br />
''' (i) a partnership, any person who owns (directly or indirectly) any capital interest or profits interest of such partnership, or'''<br />
<br />
''' (ii) an S corporation, any person who owns (directly or indirectly) any of the stock of such corporation,'''<br />
<br />
''' (C) any person who owns (directly or indirectly) any capital interest or profits interest of a partnership in which such entity owns (directly or indirectly) any capital interest or profits interest, and'''<br />
<br />
''' (D) any person related (within the meaning of subsection (b) of this section or section 707(b)(1)) to a person described in subparagraph (B) or (C), shall be treated as persons specified in a paragraph of subsection (b). Subparagraph (C) shall apply to a transaction only if such transaction is related either to the operations of the partnership described in such subparagraph or to an interest in such partnership.'''<br />
<br />
''' (2) Pass-thru entity. For purposes of this section, the term “pass-thru entity” means—'''<br />
<br />
''' (A) a partnership, and'''<br />
<br />
''' (B) an S corporation.'''<br />
<br />
''' (3) Constructive ownership in the case of partnerships. For purposes of determining ownership of a capital interest or profits interest of a partnership, the principles of subsection (c) shall apply, except that—'''<br />
<br />
''' (A) paragraph (3) of subsection (c) shall not apply, and'''<br />
<br />
''' (B) interests owned (directly or indirectly) by or for a C corporation shall be considered as owned by or for any shareholder only if such shareholder owns (directly or indirectly) 5 percent or more in value of the stock of such corporation.'''<br />
<br />
''' (4) Subsection (a)(2) not to apply to certain guaranteed payments of partnerships. In the case of any amount paid or incurred by a partnership, subsection (a)(2) shall not apply to the extent that section 707(c) applies to such amount.'''<br />
<br />
''' (5) Exception for certain expenses and interest of partnerships owning low-income housing'''<br />
<br />
''' (A) In general. This subsection shall not apply with respect to qualified expenses and interest paid or incurred by a partnership owning low-income housing to—'''<br />
<br />
''' (i) any qualified 5-percent or less partner of such partnership, or'''<br />
<br />
''' (ii) any person related (within the meaning of subsection (b) of this section or section 707(b)(1)) to any qualified 5-percent or less partner of such partnership.'''<br />
<br />
''' (B) Qualified 5-percent or less partner. For purposes of this paragraph, the term “qualified 5-percent or less partner” means any partner who has (directly or indirectly) an interest of 5 percent or less in the aggregate capital and profits interests of the partnership but only if—'''<br />
<br />
''' (i) such partner owned the low-income housing at all times during the 2-year period ending on the date such housing was transferred to the partnership, or'''<br />
<br />
''' (ii) such partnership acquired the low-income housing pursuant to a purchase, assignment, or other transfer from the Department of Housing and Urban Development or any State or local housing authority. For purposes of the preceding sentence, a partner shall be treated as holding any interest in the partnership which is held (directly or indirectly) by any person related (within the meaning of subsection (b) of this section or section 707(b)(1)) to such partner.'''<br />
<br />
''' (C) Qualified expenses and interest. For purpose of this paragraph, the term “qualified expenses and interest” means any expense or interest incurred by the partnership with respect to low-income housing held by the partnership but—'''<br />
<br />
''' (i) only if the amount of such expense or interest (as the case may be) is unconditionally required to be paid by the partnership not later than 10 years after the date such amount was incurred, and'''<br />
<br />
''' (ii) in the case of such interest, only if such interest is incurred at an annual rate not in excess of 12 percent.'''<br />
<br />
''' (D) Low-income housing. For purposes of this paragraph, the term “low-income housing” means—'''<br />
<br />
''' (i) any interest in property described in clause (i), (ii), (iii), or (iv) of section 1250(a)(1)(B), and'''<br />
<br />
''' (ii) any interest in a partnership owning such property.'''<br />
<br />
''' (6) Cross reference. For additional rules relating to partnerships, see section 707(b).'''<br />
<br />
'''(f) Controlled group defined; special rules applicable to controlled groups'''<br />
<br />
''' (1) Controlled group defined. For purposes of this section, the term “controlled group” has the meaning given to such term by section 1563(a), except that—'''<br />
<br />
''' (A) “more than 50 percent” shall be substituted for “at least 80 percent” each place it appears in section 1563(a), and'''<br />
<br />
''' (B) the determination shall be made without regard to subsections (a)(4) and (e)(3)(C) of section 1563.'''<br />
<br />
''' (2) Deferral (rather than denial) of loss from sale or exchange between membersIn the case of any loss from the sale or exchange of property which is between members of the same controlled group and to which subsection (a)(1) applies (determined without regard to this paragraph but with regard to paragraph (3))—'''<br />
<br />
''' (A) subsections (a)(1) and (d) shall not apply to such loss, but'''<br />
<br />
''' (B) such loss shall be deferred until the property is transferred outside such controlled group and there would be recognition of loss under consolidated return principles or until such other time as may be prescribed in regulations.'''<br />
<br />
''' (3) Loss deferral rules not to apply in certain cases'''<br />
<br />
''' (A) Transfer to DISC. For purposes of applying subsection (a)(1), the term “controlled group” shall not include a DISC.'''<br />
<br />
''' (B) Certain sales of inventory, Except to the extent provided in regulations prescribed by the Secretary, subsection (a)(1) shall not apply to the sale or exchange of property between members of the same controlled group (or persons described in subsection (b)(10)) if—'''<br />
<br />
''' (i) such property in the hands of the transferor is property described in section 1221(a)(1),'''<br />
<br />
''' (ii) such sale or exchange is in the ordinary course of the transferor’s trade or business,'''<br />
<br />
''' (iii) such property in the hands of the transferee is property described in section 1221(a)(1), and'''<br />
<br />
''' (iv) the transferee or the transferor is a foreigncorporation.'''<br />
<br />
''' (C) Certain foreign currency losses. To the extent provided in regulations, subsection (a)(1) shall not apply to any loss sustained by a member of a controlled group on the repayment of a loan made to another member of such group if such loan is payable in a foreign currency or is denominated in such a currency and such loss is attributable to a reduction in value of such foreign currency.'''<br />
<br />
''' (D) Redemptions by fund-of-funds regulated investment companies. Except to the extent provided in regulations prescribed by the Secretary, subsection (a)(1) shall not apply to any distribution in redemption of stock of a regulated investment company if—'''<br />
<br />
''' (i) such company issues only stock which is redeemable upon the demand of the stockholder, and'''<br />
<br />
''' (ii) such redemption is upon the demand of another regulated investment company.'''<br />
<br />
''' (4) Determination of relationship resulting in disallowance of loss, for purposes of other provisions. For purposes of any other section of this title which refers to a relationship which would result in a disallowance of losses under this section, deferral under paragraph (2) shall be treated as disallowance.'''<br />
<br />
'''(g) Coordination with section 1041. Subsection (a)(1) shall not apply to any transfer described in section 1041(a) (relating to transfers of property between spouses or incident to divorce).'''<br />
|} <br />
<br />
Related party sales <br />
<br />
● 267(a) prevents manipulation by disallowing any otherwise deductible loss if the loss results from the sale or exchange of property to a related person<br />
<br />
● 267(b) spells out specific relationships that will trigger disallowance (in-laws are not related) <br />
<br />
'''Limitation on the Deductibility of Capital Losses''' <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 1211 - Limitation on capital losses'''<br />
<br />
'''(a) Corporations. In the case of a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of gains from such sales or exchanges.'''<br />
<br />
'''(b) Other taxpayers. In the case of a taxpayer other than a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges, plus (if such losses exceed such gains) the lower of—'''<br />
<br />
''' (1) $3,000 ($1,500 in the case of a married individual filing a separate return), or'''<br />
<br />
''' (2) the excess of such losses over such gains.'''<br />
|} <br />
<br />
Deducting Capital Losses: The $3,000 Bonus<br />
<br />
● Capital loss → a loss arising from the sale or exchange of a capital asset<br />
<br />
● If the capital asset was held by the TP for more than one year prior to the sale or exchange, the TP has a '''long-term capital loss'''.<br />
<br />
● If the TP held the asset for one year or less, the TP has a '''short-term capital loss'''. <br />
<br />
1211(b) → generally limits the deductibility of capital losses to the extent of capital gains; also contains a TP-friendly bonus, if capital losses '''exceed''' capital gains (statute: “net capital loss”), up to $3,000 of the excess can be deducted (i.e., up to $3,000 of net capital loss can be used to offset a TP’s ordinary income). <br />
<br />
'''Carryover of Excess Capital Losses''' <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 1212 - Capital loss carrybacks and carryovers'''<br />
<br />
'''(a) Corporations'''<br />
<br />
''' (1) In general. If a corporation has a net capital loss for any taxable year (hereinafter in this paragraph referred to as the “loss year”), the amount thereof shall be—'''<br />
<br />
''' (A) a capital loss carryback to each of the 3 taxable years preceding the loss year, but only to the extent—'''<br />
<br />
''' (i) such loss is not attributable to a foreign expropriation capital loss, and'''<br />
<br />
''' (ii) the carryback of such loss does not increase or produce a net operating loss (as defined in section 172(c)) for the taxable year to which it is being carried back;'''<br />
<br />
''' (B) except as provided in subparagraph (C), a capital loss carryover to each of the 5 taxable years succeeding the loss year; and'''<br />
<br />
''' (C) a capital loss carryover to each of the 10 taxable years succeeding the loss year, but only to the extent such loss is attributable to a foreign expropriation loss, and shall be treated as a short-term capital loss in each such taxable year. The entire amount of the net capital loss for any taxable year shall be carried to the earliest of the taxable years to which such loss may be carried, and the portion of such loss which shall be carried to each of the other taxable years to which such loss may be carried shall be the excess, if any, of such loss over the total of the capital gain net income for each of the prior taxable years to which such loss may be carried. For purposes of the preceding sentence, the capital gain net income for any such prior taxable year shall be computed without regard to the net capital loss for the loss year or for any taxable year thereafter. In the case of any net capital loss which cannot be carried back in full to a preceding taxable year by reason of clause (ii) of subparagraph (A), the capital gain net income for such prior taxable year shall in no case be treated as greater than the amount of such loss which can be carried back to such preceding taxable year upon the application of such clause (ii).'''<br />
<br />
''' '''<br />
<br />
''' (2) Definitions and special rules'''<br />
<br />
''' (A) Foreign expropriation capital loss defined. For purposes of this subsection, the term “foreign expropriation capital loss” means, for any taxable year, the sum of the losses taken into account in computing the net capital loss for such year which are—'''<br />
<br />
''' (i) losses sustained directly by reason of the expropriation, intervention, seizure, or similar taking of property by the government of any foreign country, any political subdivision thereof, or any agency or instrumentality of the foregoing, or'''<br />
<br />
''' (ii) losses (treated under section 165(g)(1) as losses from the sale or exchange of capital assets) from securities which become worthless by reason of the expropriation, intervention, seizure, or similar taking of property by the government of any foreign country, any political subdivision thereof, or any agency or instrumentality of the foregoing.'''<br />
<br />
''' (B) Portion of loss attributable to foreign expropriation capital loss. For purposes of paragraph (1), the portion of any net capital loss for any taxable year attributable to a foreign expropriation capital loss is the amount of the foreign expropriation capital loss for such year (but not in excess of the net capital loss for such year).'''<br />
<br />
''' (C) Priority of application. For purposes of paragraph (1), if a portion of a net capital loss for any taxable year is attributable to a foreign expropriation capital loss, such portion shall be considered to be a separate net capital loss for such year to be applied after the other portion of such net capital loss.'''<br />
<br />
''' (3) Regulated investment companies'''<br />
<br />
''' (A) In general. If a regulated investment company has a net capital loss for any taxable year—'''<br />
<br />
''' (i) paragraph (1) shall not apply to such loss,'''<br />
<br />
''' (ii) the excess of the net short-term capital loss over the net long-term capital gain for such year shall be a short-term capital loss arising on the first day of the next taxable year, and'''<br />
<br />
''' (iii) the excess of the net long-term capital loss over the net short-term capital gain for such year shall be a long-term capital loss arising on the first day of the next taxable year.'''<br />
<br />
''' (B) Coordination with general rule. If a net capital loss to which paragraph (1) applies is carried over to a taxable year of a regulated investment company—'''<br />
<br />
''' (i) Losses to which this paragraph applies. Clauses (ii) and (iii) of subparagraph (A) shall be applied without regard to any amount treated as a short-term capital loss under paragraph (1).'''<br />
<br />
''' '''<br />
<br />
''' (ii) Losses to which general rule applies. Paragraph (1) shall be applied by substituting “net capital loss for the loss year or any taxable year thereafter (other than a net capital loss to which paragraph (3)(A) applies)” for “net capital loss for the loss year or any taxable year thereafter”.'''<br />
<br />
''' (4) Special rules on carrybacks. A net capital loss of a corporation shall not be carried back under paragraph (1)(A) to a taxable year—'''<br />
<br />
''' (A) for which it is a regulated investment company (as defined in section 851), or'''<br />
<br />
''' (B) for which it is a real estate investment trust (as defined in section 856).''' <br />
<br />
'''(b) Other taxpayers'''<br />
<br />
''' (1) In general. If a taxpayer other than a corporation has a net capital loss for any taxable year—'''<br />
<br />
''' (A) the excess of the net short-term capital loss over the net long-term capital gain for such year shall be a short-term capital loss in the succeeding taxable year, and'''<br />
<br />
''' (B) the excess of the net long-term capital loss over the net short-term capital gain for such year shall be a long-term capital loss in the succeeding taxable year.'''<br />
<br />
''' (2) Treatment of amounts allowed under section 1211(b)(1) or (2)'''<br />
<br />
''' (A) In general. For purposes of determining the excess referred to in subparagraph (A) or (B) of paragraph (1), there shall be treated as a short-term capital gain in the taxable year an amount equal to the lesser of—'''<br />
<br />
''' (i) the amount allowed for the taxable year under paragraph (1) or (2) of section 1211(b), or'''<br />
<br />
''' (ii) the adjusted taxable income for such taxable year.'''<br />
<br />
''' (B) Adjusted taxable income. For purposes of subparagraph (A), the term “adjusted taxable income” means taxable income increased by the sum of—'''<br />
<br />
''' (i) the amount allowed for the taxable year under paragraph (1) or (2) of section 1211(b), and'''<br />
<br />
''' (ii) the deduction allowed for such year under section 151 or any deduction in lieu thereof.'''<br />
<br />
'''For purposes of the preceding sentence, any excess of the deductions allowed for the taxable year over the gross income for such year shall be taken into account as negative taxable income.''' <br />
<br />
'''(c) Carryback of losses from section 1256 contracts to offset prior gains from such contracts'''<br />
<br />
''' (1) In general. If a taxpayer (other than a corporation) has a net section 1256 contracts loss for the taxable year and elects to have this subsection apply to such taxable year, the amount of such net section 1256 contracts loss—'''<br />
<br />
''' (A) shall be a carryback to each of the 3 taxable years preceding the loss year, and'''<br />
<br />
''' (B) to the extent that, after the application of paragraphs (2) and (3), such loss is allowed as a carryback to any such preceding taxable year—'''<br />
<br />
''' (i) 40 percent of the amount so allowed shall be treated as a short-term capital loss from section 1256 contracts, and'''<br />
<br />
''' (ii) 60 percent of the amount so allowed shall be treated as a long-term capital loss from section 1256 contracts.'''<br />
<br />
''' (2) Amount carried to each taxable year. The entire amount of the net section 1256 contracts loss for any taxable year shall be carried to the earliest of the taxable years to which such loss may be carried back under paragraph (1). The portion of such loss which shall be carried to each of the 2 other taxable years to which such loss may be carried back shall be the excess (if any) of such loss over the portion of such loss which, after the application of paragraph (3), was allowed as a carryback for any prior taxable year.'''<br />
<br />
''' (3) Amount which may be used in any prior taxable year. An amount shall be allowed as a carryback under paragraph (1) to any prior taxable year only to the extent—'''<br />
<br />
''' (A) such amount does not exceed the net section 1256 contract gain for such year, and'''<br />
<br />
''' (B) the allowance of such carryback does not increase or produce a net operating loss (as defined in section 172(c)) for such year.'''<br />
<br />
''' (4) Net section 1256 contracts loss. For purposes of paragraph (1), the term “net section 1256 contracts loss” means the lesser of—'''<br />
<br />
''' (A) the net capital loss for the taxable year determined by taking into account only gains and losses from section 1256 contracts, or'''<br />
<br />
''' (B) the sum of the amounts which, but for paragraph (6)(A), would be treated as capital losses in the succeeding taxable year under subparagraphs (A) and (B) of subsection (b)(1).'''<br />
<br />
''' (5) Net section 1256 contract gain. For purposes of paragraph (1)—'''<br />
<br />
''' (A) In general. The term “net section 1256 contract gain” means the lesser of—'''<br />
<br />
''' (i) the capital gain net income for the taxable year determined by taking into account only gains and losses from section 1256 contracts, or'''<br />
<br />
''' (ii) the capital gain net income for the taxable year.'''<br />
<br />
''' (B) Special rule. The net section 1256 contract gain for any taxable year before the loss year shall be computed without regard to the net section 1256 contracts loss for the loss year or for any taxable year thereafter.'''<br />
<br />
''' (6) Coordination with carryforward provisions of subsection (b)(1)'''<br />
<br />
''' (A) Carryforward amount reduced by amount used as carryback. For purposes of applying subsection (b)(1), if any portion of the net section 1256 contracts loss for any taxable year is allowed as a carryback under paragraph (1) to any preceding taxable year—'''<br />
<br />
''' (i) 40 percent of the amount allowed as a carryback shall be treated as a short-term capital gain for the loss year, and'''<br />
<br />
''' (ii) 60 percent of the amount allowed as a carryback shall be treated as a long-term capital gain for the loss year.'''<br />
<br />
''' (B) Carryover loss retains character as attributable to section 1256 contract. Any amount carried forward as a short-term or long-term capital loss to any taxable year under subsection (b)(1) (after the application of subparagraph (A)) shall, to the extent attributable to losses from section 1256 contracts, be treated as loss from section 1256 contracts for such taxable year.'''<br />
<br />
''' (7) Other definitions and special rules. For purposes of this subsection—'''<br />
<br />
''' (A)Section 1256 contract. The term “section 1256 contract” means any section 1256 contract (as defined in section 1256(b)) to which section 1256 applies.'''<br />
<br />
''' (B) Exclusion for estates and trusts. This subsection shall not apply to any estate or trust.'''<br />
|} <br />
<br />
Carryover of Excess Capital Losses → under 1212(b)(1), if the TP’s net capital loss exceeds the $3,000 bonus amount, then the non-deductible portion carries over to the next taxable year. <br />
<br />
EXAMPLE → For Year One, TP, an individual, recognized $5,000 in long-term capital gains and $3,000 in long-term capital losses; TP has no other capital gains or losses; the long-term capital losses are fully deductible and offset the long-term capital gains; TP has a “net capital gain” of $2,000 (which will be taxed at a preferential rate under 1(h). <br />
<br />
TP also recognized $4,000 in short-term capital gains and $9,000 in short-term capital losses in Year One; the total capital losses in Year One ($12,000) exceed the total capital gains ($9,000) by $3,000. Under 1211(b), however, TP may deduct all of the capital losses in Year One because this excess does not exceed $3,000; the $12,000 deduction will offset all of TP’s capital gains ($9,000) and even $3,000 of ordinary income from Year One. <br />
<br />
{| class="wikitable"<br />
| <br />
|Long-Term<br />
|Short-Term<br />
|TOTALS<br />
|-<br />
|Gains<br />
|$5,000<br />
|$4,000<br />
|$9,000<br />
|-<br />
|Losses<br />
|($3,000)<br />
|($9,000)<br />
|$12,000<br />
|-<br />
|Net<br />
|$2,000<br />
|($5,000)<br />
|($3,000)<br />
|} <br />
<br />
If total capital losses exceeds total capital gains by more than $3,000, under 1211(b), TP can deduct $3,000 of this excess in Year One; the remaining $$ comproses TP’s “net capital loss” → under 1212(b), that net capital loss will carry over to Year Two; to determine the flavor of the carryover amount 1212(b)(2)(A) tells us to treat the $3,000 bonus as a short-term capital gain.<br />
<br />
● In Year Two, the entire $$ carryover will be flavored as a short-term capital loss and TP can use that carryover amount to offset capital gains (and maybe up to $3,000 of ordinary income) recognized in Year Two.<br />
<br />
'''Transactions in Property''' <br />
<br />
{| class="wikitable"<br />
|Amount Realized (AR)<br />
<br />
- Adjusted Basis (AB)<br />
<br />
------------------------------<br />
<br />
Realized Gain (RG)<br />
|} <br />
{| class="wikitable"<br />
| Adjusted Basis (AB)<br />
<br />
- Amount Realized (AR)<br />
<br />
------------------------------<br />
<br />
Realized Loss (RL)<br />
|}<br />
<br />
<br />
'''The Impact of Debt Relief on Amount Realized'''<br />
<br />
''1001; 1012; 1014(a); 1016(a)''<br />
<br />
Recourse debt → one in which the lender has recourse against more than just property securing the loan; the borrower is personally on the hook for the money <br />
<br />
Nonrecourse debt → debt where the lender can go after the collateral on the loan (usually property) but not the borrower individually. <br />
<br />
'''''Debt incurred is included in basis and any relief from that debt is included in amount realized.''''' <br />
<br />
'''For recourse debt…''' <br />
<br />
EXAMPLE → A borrows $200 from the bank and uses $300 of her own funds to purchase a capital asset for $500 (agreed to recourse debt)<br />
<br />
# Borrowing $200 from the bank does not give rise to gross income for A, because A’s repayment obligation offsets any “accession to wealth” from receipt of the loan proceeds<br />
# Because A’s repayment obligation to Bank is part of her “cost” in acquiring the purchased asset, A’s basis in the asset is now $500.<br />
# IF A sells the purchased asset 13 months later to an unrelated buyer and the FMV is $900 →<br />
# STEP<br />
ONE: GROSS INCOME<br />
## '''''How much will the buyer pay for the asset?''''' Since the asset still secures A’s repayment obligation, the buyer will not pay the full $900 to A; if A defaults, the Bank would foreclose on the asset and the buyer could lose $200 of the asset’s value to the bank; buyer will either '''assume the debt''' and pay the seller an amount of cash equal to the excess of the asset’s value over the amount of the debt, or the buyer will take the property '''subject to the seller’s liability''' and pay the seller an amount of cash equal to the seller’s equity<br />
### Buyer here would pay $700 to A and either assume the liability to the Bank or take the property subject to the risk of A’s default<br />
## '''''What is the amount realized by A?''''' The amount of a recourse liability secured by transferred property is included in the seller’s amount realized; the liability has shifted to the buyer and is no longer the seller’s problem.<br />
### A’s amount realized is $900 ($700 cash and $200 debt relief) no matter whether the buyer assumes the debt or takes the asset subject to the debt<br />
## '''''What is the flavor of A’s gain?''''' By disposing of the debt in the same transaction as the underlying capital asset, the gain allocable to the debt relief piggybacks onto the flavor of the transferred asset.<br />
### With an amount realized of $900, A realizes a gain of $400 on the sale (amount realized of $900 less adjusted basis of $500); treated as a long-term capital gain since it was held for 13 months and will get preferential tax treatment under 1(h)<br />
### The entire gain is eligible for the preferential tax treatment even though a portion is allocable to A’s debt relief, this is different than if the Bank forgave or cancelled the debt (treated as COD income and ordinary income under 1). <br />
<br />
IF the amount of the debt is higher than the value of the asset → if the lender agrees not to pursue a claim against the seller for the difference, the lender effectively relieves the seller of the excess debt which would then be treated as COD income. <br />
<br />
'''BUT for nonrecourse debt...''' <br />
<br />
<u>Crane v. Commissioner (1947)</u> - SCOTUS<br />
<br />
RULE: The amount realized in the disposition of property subject to an unassumed mortgage includes the amount of the mortgage.<br />
<br />
Case Notes: <br />
<br />
● A taxpayer’s gain from the disposition of property is calculated by subtracting the adjusted basis from the amount realized. <br />
<br />
● The adjusted basis is found by adjusting the original basis for certain factors, such as depreciation; the amount realized is calculated by adding any money and property received. <br />
<br />
● Where the taxpayer receives the property from a decedent’s estate, the original basis is the fair market value at the time of receipt. <br />
<br />
● In order to ascertain the adjusted basis and amount realized for the property, it is first necessary to determine what the term “property” refers to. <br />
<br />
○ First, the plain meaning of the term suggests that “property” refers to the physical thing that is owned. <br />
<br />
○ Second, administrative regulations have used the term to refer to physical property. <br />
<br />
○ Third, in other provisions of the Revenue Code, Congress clearly distinguishes between property and equity and there is no indication that Congress interchanges the two terms. <br />
<br />
○ Finally, if property referred to equity, depreciation deductions based on equity would be miniscule; or, if depreciation deductions were based on the actual value of the property and deducted from an equity basis, negative deductions would result. <br />
<br />
● Interpreting the term to mean equity would negate the purpose of allowing depreciation deductions in the first place. <br />
<br />
● If property is based on equity, the taxpayer’s basis would change every time a mortgage payment is made, causing a great administrative burden on both the Commissioner and taxpayers. <br />
<br />
● It makes no difference whether the taxpayer is personally liable for the mortgage or not. A taxpayer who sells property subject to a mortgage receives a benefit equal to the value of the mortgage. <br />
<br />
● It is not unconstitutional to adjust TP’s cost basis by the amount of the depreciation deductions TP took on the property, in order to determine how much TP has gained from the sale. <br />
<br />
<u>Commissioner v. Tufts (1983)</u> - SCOTUS<br />
<br />
RULE: The amount realized in the disposition of property subject to a nonrecourse mortgage includes the entire amount of the mortgage regardless of whether the mortgage exceeds the fair market value of the property. <br />
<br />
Case Notes:<br />
<br />
● In <u>Crane</u>, this Court held that a taxpayer who sells property subject to a nonrecourse mortgage must include the unpaid balance of the mortgage in the amount realized. <br />
<br />
● Generally, with a nonrecourse mortgage, the mortgager is not personally liable for the loan. The mortgage is secured by property, so that the mortgager is only liable up to the fair market value of the property. <br />
<br />
● Upon sale of the property subject to a nonrecourse loan, the mortgager must calculate the amount realized. <br />
<br />
● The amount realized includes the sum of money and property received, as well as any debts the mortgager is relieved of through the transaction. <br />
<br />
● Though a taxpayer could technically only be relieved of liability equal in value to the fair market value of the property, the mortgager must include the entire amount of the unpaid mortgage in the amount realized. This is because the taxpayer receives certain benefits based on the assumption that the taxpayer is obligated to repay the entire nonrecourse mortgage. <br />
<br />
● For instance, the taxpayer receives a nonrecourse mortgage tax-free, since it is money the taxpayer must eventually pay back. If, after receiving the mortgage tax-free, the taxpayer does not include the entire unpaid loan in the amount realized upon disposition of the property, he receives the amount in excess of the fair market value of the property tax-free. <br />
<br />
● A taxpayer is allowed to include the entire amount of a nonrecourse loan in his cost basis of the property because he is expected to repay the entire loan. If he is not correspondingly required to include the entire unpaid loan in the amount realized, the taxpayer would receive an untaxed increase in basis. <br />
<br />
● To prevent such incongruities, a taxpayer must include the entire unpaid amount of a nonrecourse mortgage in his amount realized, regardless of whether the mortgage exceeds the fair market value of the property. <br />
<br />
'''Flavor''' <br />
<br />
'''Capital Assets''' <br />
<br />
''1221(a); 1222; 1223'' <br />
<br />
Capital Assets --<br />
<br />
● Defined in 1221(a); “negative definition” - if not included in list, it '''<u>IS</u>''' a capital asset<br />
<br />
● Overarching themes:<br />
<br />
○ Assets that are held to '''produce ordinary income''' are generally not capital assets (this includes inventory and other property held for sale to customers, buildings and equipment used in a business activity, certain IP rights that generate royalties, and supplies consumed in the ordinary course of business)<br />
<br />
○ Assets where '''gain results from the efforts of the TP''' and not from the mere passage of time are likely not capital assets (such as works of art, etc.) <br />
<br />
Section 1221(a)(1) lists three assets that do not qualify as capital assets:<br />
<br />
(1) Stock in trade; ''(raw materials used to manufacture or produce inventory property)''<br />
<br />
(2) Inventory property; and<br />
<br />
(3) Property held primarily for sale to customers in the ordinary course of business <br />
<br />
<u>Byram v. United States (1983)</u> - 5th Cir.<br />
<br />
RULE: For federal tax purposes, property held primarily for sale to customers in the ordinary course of business is ordinary income rather than a capital asset.<br />
<br />
Case Notes: <br />
<br />
● Property held primarily for sale to customers in the ordinary course of a taxpayer’s business is not a capital asset, thus subjecting it to a higher rate of taxation as ordinary income. <br />
<br />
● The issue of whether a taxpayer is holding property for sale to customers in the ordinary course of business is a factual issue of intent. <br />
<br />
● Seven-factor test to determine that TP’s purpose for holding the realty was not primarily for sale to customers in the ordinary course of his business; “seven pillars of capital gains treatment”<br />
<br />
(1) The nature and purpose of the acquisition of the property and the duration of the ownership;<br />
<br />
(2) The extent and nature of the TP’s efforts to sell the property;<br />
<br />
(3) The number, extent, continuity and substantiality of the sales; (IMPORTANT)<br />
<br />
(4) The extent of subdividing, developing, and advertising to increase sales;<br />
<br />
(5) The use of a business office for the sale of the property;<br />
<br />
(6) The character and degree of supervision or control exercised by the TP over any representative selling the property; and<br />
<br />
(7) The time and effort the TP habitually devoted to the sales. <br />
<br />
● These factors are known as the <u>Winthrop</u> factors and are not all weighed the same<br />
<br />
● <br />
<br />
{| class="wikitable"<br />
|'''<u>Winthrop</u> Factors'''<br />
<br />
(1) The nature and purpose of the acquisition of the property and the duration of the ownership;<br />
<br />
(2) The extent and nature of the TP’s efforts to sell the property;<br />
<br />
(3) The number, extent, continuity and substantiality of the sales; (IMPORTANT)<br />
<br />
(4) The extent of subdividing, developing, and advertising to increase sales;<br />
<br />
(5) The use of a business office for the sale of the property;<br />
<br />
(6) The character and degree of supervision or control exercised by the TP over any representative selling the property; and<br />
<br />
(7) The time and effort the TP habitually devoted to the sales. <br />
|} <br />
'''Futures contract→ a contract to buy a fixed amount of a commodity at a set price at some specific date in the future (e.g. a buyer promises to buy a seller’s corn at $10 per bushel in three months); the seller benefits because the seller knows the prices at which the product can be sold, and the buyer benefits because there is a fixed price for the manufacturing inputs and the buyer can plan accordingly.'''<br />
Many investors buy futures, not for the product, but for the bet on whether the price of the underlying commodity will rise or fall<br />
<br />
● if the price of a commodity goes up, the long future is worth more because a person could purchase the product for less than the sales price agreed to in the contract<br />
<br />
● if the price goes down, below the future price, the future is worthless because you can buy the product on the open market <br />
<br />
<u>Corn Products Refining Co. v. Commissioner (1955)</u> - SCOTUS<br />
<br />
RULE: For federal tax purposes, assets held by a business to hedge operating risks are not capital assets. <br />
<br />
Case Notes:<br />
<br />
● Assets bought and sold to hedge risks associated with an operating business are not capital assets under 26 U.S.C. § 1221. <br />
<br />
● If a taxpayer’s ordinary business activities involve hedging what might otherwise be considered capital assets, such as real estate or securities, the taxpayer’s gains or losses from the sale of those assets constitute ordinary income or losses, not capital gains or losses. <br />
<br />
● Investments, including investments in futures-commodity contracts, are capital assets.<br />
<br />
● <u>Corn Products</u> does not create a common-law exception to the definition of capital asset but instead found that the futures were surrogates for inventory<br />
<br />
● Definition of “capital asset” must be construed narrowly and its exceptions defined broadly <br />
<br />
<u>Arkansas Best</u> → motivation of the customer is irrelevant; if it falls within the definition, the gain or sale will be capital <br />
<br />
'''Section 1221(a)(7)''' → now specifically excludes from the definition of capital asset “hedging transactions” identified by the TP <br />
<br />
'''Section 1221(a)(8)''' → excludes supplies regularly used by the TP in a trade or business. <br />
<br />
'''Section 1237''' → Safe harbor for those who own real property to retain investment status rather than being treated like a broker. <br />
<br />
'''Holding Periods''' <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 1222 - Other terms relating to capital gains and losses'''<br />
<br />
'''For purposes of this subtitle—''' <br />
<br />
'''(1) Short-term capital gain. The term “short-term capital gain” means gain from the sale or exchange of a capital asset held for not more than 1 year, if and to the extent such gain is taken into account in computing gross income.'''<br />
<br />
'''(2) Short-term capital loss. The term “short-term capital loss” means loss from the sale or exchange of a capital asset held for not more than 1 year, if and to the extent that such loss is taken into account in computing taxable income.'''<br />
<br />
'''(3) Long-term capital gain. The term “long-term capital gain” means gain from the sale or exchange of a capital asset held for more than 1 year, if and to the extent such gain is taken into account in computing gross income.'''<br />
<br />
'''(4) Long-term capital loss. The term “long-term capital loss” means loss from the sale or exchange of a capital asset held for more than 1 year, if and to the extent that such loss is taken into account in computing taxable income.'''<br />
<br />
'''(5) Net short-term capital gain. The term “net short-term capital gain” means the excess of short-term capital gains for the taxable year over the short-term capital losses for such year.'''<br />
<br />
'''(6) Net short-term capital loss. The term “net short-term capital loss” means the excess of short-term capital losses for the taxable year over the short-term capital gains for such year.'''<br />
<br />
'''(7) Net long-term capital gain. The term “net long-term capital gain” means the excess of long-term capital gains for the taxable year over the long-term capital losses for such year.'''<br />
<br />
'''(8) Net long-term capital loss. The term “net long-term capital loss” means the excess of long-term capital losses for the taxable year over the long-term capital gains for such year.'''<br />
<br />
'''(9) Capital gain net income. The term “capital gain net income” means the excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges.'''<br />
<br />
'''(10) Net capital loss. The term “net capital loss” means the excess of the losses from sales or exchanges of capital assets over the sum allowed under section 1211. In the case of a corporation, for the purpose of determining losses under this paragraph, amounts which are short-term capital losses under section 1212(a)(1) shall be excluded.'''<br />
<br />
'''(11) Net capital gain. The term “net capital gain” means the excess of the net long-term capital gain for the taxable year over the net short-term capital loss for such year.'''<br />
|} <br />
<br />
Section 1222 → requires netting of “long-term” and “short-term” capital gains and losses; in certain situations, a TP may add the holding period of another owner or add the holding period from another asset. (TACKING RELEVANT FOR DETERMINING WHETHER THE 13 MONTH MINIMUM FOR LONG TERM HAS BEEN MET) <br />
<br />
Section 1223 → lists various situations where “tacking” of holding periods is allowed; unless one of these situations is present, a TP’s holding period begins upon acquisition.<br />
<br />
● For example, if a TP exchanges one capital asset for another in a transaction in which the taxpayer does not recognize gain or loss (a so-called “nonrecognition transaction” → NRT), the TP usually takes the new asset with a basis equal to the TP’s basis in the property surrendered (i.e. the gain or loss from the surrendered asset is preserved in the acquired asset”<br />
<br />
● 1223(1) → the TP’s holding period in the surrendered asset also carries over to the acquired asset; if a TP exchanges an asset held for five years for another capital asset in a NRT, the newly acquired asset is deemed to have been held for five years (and immediate sale would produce long-term cap gain or loss). <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 1223 - Holding period of property'''<br />
<br />
'''For purposes of this subtitle—''' <br />
<br />
'''(1) In determining the period for which the taxpayer has held property received in an exchange, there shall be included the period for which he held the property exchanged if, under this chapter, the property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as the property exchanged, and, in the case of such exchanges the property exchanged at the time of such exchange was a capital asset as defined in section 1221 or property described in section 1231. For purposes of this paragraph—'''<br />
<br />
''' (A) an involuntary conversion described in section 1033 shall be considered an exchange of the property converted for the property acquired, and'''<br />
<br />
''' (B) a distribution to which section 355 (or so much of section 356 as relates to section 355) applies shall be treated as an exchange.''' <br />
<br />
'''(2) In determining the period for which the taxpayer has held property however acquired there shall be included the period for which such property was held by any other person, if under this chapter such property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as it would have in the hands of such other person.''' <br />
<br />
'''(3) In determining the period for which the taxpayer has held stock or securities the acquisition of which (or the contract or option to acquire which) resulted in the nondeductibility (under section 1091 relating to wash sales) of the loss from the sale or other disposition of substantially identical stock or securities, there shall be included the period for which he held the stock or securities the loss from the sale or other disposition of which was not deductible.''' <br />
<br />
'''(4) In determining the period for which the taxpayer has held stock or rights to acquire stock received on a distribution, if the basis of such stock or rights is determined under section 307, there shall (under regulations prescribed by the Secretary) be included the period for which he held the stock in the distributing corporation before the receipt of such stock or rights upon such distribution.''' <br />
<br />
'''(5) In determining the period for which the taxpayer has held stock or securities acquired from a corporation by the exercise of rights to acquire such stock or securities, there shall be included only the period beginning with the date on which the right to acquire was exercised.''' <br />
<br />
'''[(6) Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(80)(C), Dec. 19, 2014, 128 Stat. 4049.]''' <br />
<br />
'''(7) In determining the period for which the taxpayer has held a commodity acquired in satisfaction of a commodity futures contract (other than a commodity futures contract to which section 1256 applies) there shall be included the period for which he held the commodity futures contract if such commodity futures contract was a capital asset in his hands.''' <br />
<br />
'''[(8) Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(80)(C), Dec. 19, 2014, 128 Stat. 4049.]''' <br />
<br />
'''(9) In the case of a person acquiring property from a decedent or to whom property passed from a decedent (within the meaning of section 1014(b)), if—'''<br />
<br />
''' (A) the basis of such property in the hands of such person is determined under section 1014, and'''<br />
<br />
''' (B) such property is sold or otherwise disposed of by such person within 1 year after the decedent’s death,'''<br />
<br />
'''then such person shall be considered to have held such property for more than 1 year.''' <br />
<br />
'''(10) If—'''<br />
<br />
''' (A) property is acquired by any person in a transfer to which section 1040 applies,'''<br />
<br />
''' (B) such property is sold or otherwise disposed of by such person within 1 year after the decedent’s death, and'''<br />
<br />
''' (C) such sale or disposition is to a person who is a qualified heir (as defined in section 2032A(e)(1)) with respect to the decedent,'''<br />
<br />
'''then the person making such sale or other disposition shall be considered to have held such property for more than 1 year.''' <br />
<br />
'''(11) In determining the period for which the taxpayer has held qualified replacement property (within the meaning of section 1042(b)) the acquisition of which resulted under section 1042 in the nonrecognition of any part of the gain realized on the sale of qualified securities (within the meaning of section 1042(b)), there shall be included the period for which such qualified securities had been held by the taxpayer.''' <br />
<br />
'''(12) In determining the period for which the taxpayer has held property the acquisition of which resulted under section 1043 in the nonrecognition of any part of the gain realized on the sale of other property, there shall be included the period for which such other property had been held as of the date of such sale.''' <br />
<br />
'''(13) Except for purposes of sections 1202(a)(2), 1202(c)(2)(A), 1400B(b), and 1400F(b), in determining the period for which the taxpayer has held property the acquisition of which resulted under section 1045 or 1397B in the nonrecognition of any part of the gain realized on the sale of other property, there shall be included the period for which such other property has been held as of the date of such sale.''' <br />
<br />
'''(14) If the security to which a securities futures contract (as defined in section 1234B) relates (other than a contract to which section 1256 applies) is acquired in satisfaction of such contract, in determining the period for which the taxpayer has held such security, there shall be included the period for which the taxpayer held such contract if such contract was a capital asset in the hands of the taxpayer.''' <br />
<br />
'''(15) Cross reference.— For special holding period provision relating to certain partnership distributions, see section 735(b).'''<br />
|} <br />
<br />
'''The Sale or Exchange Requirement'''<br />
<br />
''1222'' <br />
<br />
Section 1222 → states that a capital gain or capital loss arises only upon the “sale or exchange” of a capital asset<br />
<br />
● If a TP disposes of a capital asset in a transaction not properly characterized as a sale or exchange, any resulting fain would be ordinary income (BAD) any any realized loss would be ordinary loss (OK, GOOD).<br />
<br />
● The requirement '''must be narrower''' than the requirement of a “sale or disposition of property” under 1001(a) (the provision providing the basic formula for computing realized gains and losses)<br />
<br />
● There are ways to dispose of property other than by sale or exchange (abandonment, forfeiture, etc.)<br />
<br />
● There are no overt rationale for limiting capital gain or loss characterization only to property dispositions that constitute a sale or exchange. <br />
<br />
'''Depreciation Recapture''' <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 1245 - Gain from dispositions of certain depreciable property'''<br />
<br />
'''(a) General rule'''<br />
<br />
''' (1) Ordinary income. Except as otherwise provided in this section, if section 1245 property is disposed of the amount by which the lower of—'''<br />
<br />
''' (A) the recomputed basis of the property, or'''<br />
<br />
''' (B)'''<br />
<br />
''' (i) in the case of a sale, exchange, or involuntary conversion, the amount realized, or'''<br />
<br />
''' (ii) in the case of any other disposition, the fair market value of such property,'''<br />
<br />
'''exceeds the adjusted basis of such property shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.'''<br />
<br />
''' (2) Recomputed basis. For purposes of this section—'''<br />
<br />
''' (A) In general. The term “recomputed basis” means, with respect to any property, its adjusted basis recomputed by adding thereto all adjustments reflected in such adjusted basis on account of deductions (whether in respect of the same or other property) allowed or allowable to the taxpayer or to any other person for depreciation or amortization.'''<br />
<br />
''' (B) Taxpayer may establish amount allowed. For purposes of subparagraph (A), if the taxpayer can establish by adequate records or other sufficient evidence that the amount allowed for depreciation or amortization for any period was less than the amount allowable, the amount added for such period shall be the amount allowed.'''<br />
<br />
''' (C) Certain deductions treated as amortization. Any deduction allowable under section 179, 179B, 179C, 179D, 179E, 181, 190, 193, or 194 shall be treated as if it were a deduction allowable for amortization.'''<br />
<br />
''' (3) Section 1245 property. For purposes of this section, the term “section 1245 property” means any property which is or has been property of a character subject to the allowance for depreciation provided in section 167 and is either—'''<br />
<br />
''' (A) personal property,'''<br />
<br />
''' (B) other property (not including a building or its structural components) but only if such other property is tangible and has an adjusted basis in which there are reflected adjustments described in paragraph (2) for a period in which such property (or other property)—'''<br />
<br />
''' (i) was used as an integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electrical energy, gas, water, or sewage disposal services,'''<br />
<br />
''' (ii) constituted a research facility used in connection with any of the activities referred to in clause (i), or'''<br />
<br />
''' (iii) constituted a facility used in connection with any of the activities referred to in clause (i) for the bulk storage of fungible commodities (including commodities in a liquid or gaseous state),'''<br />
<br />
''' (C) so much of any real property (other than any property described in subparagraph (B)) which has an adjusted basis in which there are reflected adjustments for amortization under section 169, 179, 179B, 179C, 179D, 179E, 185,[1] 188 (as in effect before its repeal by the Revenue Reconciliation Act of 1990), 190, 193, or 194,[2]'''<br />
<br />
''' (D) a single purpose agricultural or horticultural structure (as defined in section 168(i)(13)),'''<br />
<br />
''' (E) a storage facility (not including a building or its structural components) used in connection with the distribution of petroleum or any primary product of petroleum, or'''<br />
<br />
''' (F) any railroad grading or tunnel bore (as defined in section 168(e)(4)).''' <br />
<br />
'''(b) Exceptions and limitations'''<br />
<br />
''' (1) Gifts. Subsection (a) shall not apply to a disposition by gift.'''<br />
<br />
''' (2) Transfers at death. Except as provided in section 691 (relating to income in respect of a decedent), subsection (a) shall not apply to a transfer at death.'''<br />
<br />
''' (3) Certain tax-free transactions. If the basis of property in the hands of a transferee is determined by reference to its basis in the hands of the transferor by reason of the application of section 332, 351, 361, 721, or 731, then the amount of gain taken into account by the transferor under subsection (a)(1) shall not exceed the amount of gain recognized to the transferor on the transfer of such property (determined without regard to this section). Except as provided in paragraph (6), this paragraph shall not apply to a disposition to an organization (other than a cooperative described in section 521) which is exempt from the tax imposed by this chapter.'''<br />
<br />
''' (4) Like kind exchanges; involuntary conversions, etc.If property is disposed of and gain (determined without regard to this section) is not recognized in whole or in part under section 1031 or 1033, then the amount of gain taken into account by the transferor under subsection (a)(1) shall not exceed the sum of—'''<br />
<br />
''' (A) the amount of gain recognized on such disposition (determined without regard to this section), plus'''<br />
<br />
''' (B) the fair market value of property acquired which is not section 1245 property and which is not taken into account under subparagraph (A).'''<br />
<br />
''' (5) Property distributed by a partnership to a partner'''<br />
<br />
''' (A) In general. For purposes of this section, the basis of section 1245 property distributed by a partnership to a partner shall be deemed to be determined by reference to the adjusted basis of such property to the partnership.'''<br />
<br />
''' (B) Adjustments added back. In the case of any property described in subparagraph (A), for purposes of computing the recomputed basis of such property the amount of the adjustments added back for periods before the distribution by the partnership shall be—'''<br />
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''' (i) the amount of the gain to which subsection (a) would have applied if such property had been sold by the partnership immediately before the distribution at its fair market value at such time, reduced by'''<br />
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''' (ii) the amount of such gain to which section 751(b) applied.'''<br />
<br />
''' (6) Transfers to tax-exempt organization where property will be used in unrelated business'''<br />
<br />
''' (A) In general. The second sentence of paragraph (3) shall not apply to a disposition of section 1245 property to an organization described in section 511(a)(2) or 511(b)(2) if, immediately after such disposition, such organization uses such property in an unrelated trade or business (as defined in section 513).'''<br />
<br />
''' (B) Later change in use. If any property with respect to the disposition of which gain is not recognized by reason of subparagraph (A) ceases to be used in an unrelated trade or business of the organization acquiring such property, such organization shall be treated for purposes of this section as having disposed of such property on the date of such cessation.'''<br />
<br />
''' (7) Timber property. In determining, under subsection (a)(2), the recomputed basis of property with respect to which a deduction under section 194 was allowed for any taxable year, the taxpayer shall not take into account adjustments under section 194 to the extent such adjustments are attributable to the amortizable basis of the taxpayer acquired before the 10th taxable year preceding the taxable year in which gain with respect to the property is recognized.'''<br />
<br />
''' (8) Disposition of amortizable section 197 intangibles'''<br />
<br />
''' (A) In general. If a taxpayer disposes of more than 1 amortizable section 197 intangible (as defined in section 197(c)) in a transaction or a series of related transactions, all such amortizable 197 intangibles shall be treated as 1 section 1245 property for purposes of this section.'''<br />
<br />
''' (B) Exception. Subparagraph (A) shall not apply to any amortizable section 197 intangible (as so defined) with respect to which the adjusted basis exceeds the fair market value.'''<br />
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'''(c) Adjustments to basis. The Secretary shall prescribe such regulations as he may deem necessary to provide for adjustments to the basis of property to reflect gain recognized under subsection (a).'''<br />
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'''(d) Application of section. This section shall apply notwithstanding any other provision of this subtitle.'''<br />
|} <br />
<br />
Section 1245 → error-correcting device<br />
<br />
● When a TP takes a depreciation on property, the TP’s basis is reduced by the amount of the depreciation<br />
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● If the TP later sells that asset for more than the basis, at least some of that gain is, by definition, due to the previously taken depreciation<br />
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● The TP took more depreciation than economic depreciation would have allowed so now they must pay tax on the difference<br />
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● Applies to machines, equipment, and vehicles <br />
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FIRST calculate your realized gain<br />
<br />
THEN calculate your recapture amount (amount realized - recomputed basis)<br />
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RESULTING NUMBER tells you how much is allowed to be treated as capital gain (rather than ordinary income) <br />
<br />
Recomputed basis amount → take current actual basis and add it to any depreciation deductions you have received. <br />
<br />
If RESULTING NUMBER is a negative/loss (below zero) → all of your gain will be ordinary income <br />
<br />
Recapture only comes into play when you have a gain, it does not apply where there is a loss (if the realized gain/first calculation comes up as a loss, don’t even move on to recapture amount) <br />
<br />
EXAMPLE → A acquires depreciable equipment for use in their business at a cost of $100,000, makes no 179 election, and properly plans to claim straight-line depreciation deductions of $10,000 each year for 10 years; after 3 years of depreciation deductions, and ignoring the half-year convention, the TP’s basis in the equipment is $70,000. <br />
<br />
If TP sells the equipment to an unrelated buyer for $80,000 cash, TP realizes and recognizes $10,000 of gain (but what is the flavor?) <br />
<br />
● Under 1221(a)(2) → not a capital asset <br />
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● BUT because TP held the equipment for more than a year, the gain is properly treated as a 1231 gain<br />
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● That means '''there is a chance''' the gain could be treated as long-term capital gain under 1231(a)(1) <br />
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BUT the $10,000 gain is entirely due to the fact that TP received a $10,000 deduction that offset '''ordinary income'''; to the extent the depreciation deduction was used to offset ordinary income, fairness dictates that gain attributable solely to depreciation should be treated as ordinary income and not long-term capital gain. <br />
<br />
In this example, 1245 would recharacterize the flavor of the gain as ordinary income<br />
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● Under 1245(a)(1) → gain attributable to depreciation deductions (and not economic appreciation) '''must be''' taxed as ordinary income<br />
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● This recharacterization of the gain is known as “'''depreciation recapture'''” → it is triggered by the need to account for the fact that prior depreciation deductions offset ordinary income <br />
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Depreciation recapture and 1245<br />
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● Under 1245 is limited to “section 1245” property (defined in 1245(a)(3)).<br />
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● 1245(a)(3)(A) encompasses all depreciable personal property<br />
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● In order to determine the portion of a realized gain that is attributable to prior depreciation deductions, the statute creates a device called '''recomputed basis'''. <br />
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'''Recomputed Basis''' → calculated by adding to the adjusted basis all deductions allowed or allowable to the taxpayer or to any other person for depreciation or amortization<br />
<br />
→ the recomputed basis is then compared to the '''amount realized''' (in the event of a sale, exchange, or involuntary conversion of the property) or the '''fair market value''' of the property (in the case of any other disposition) <br />
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'''''The smaller number is then applied against the taxpayer’s adjusted basis to determine the recapture amount, the portion of the gain that must be treated as ordinary income'''''. <br />
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More 1245 rules →<br />
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● 1245 does not apply where the taxpayer has a realized loss<br />
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● 1245 requires the recognition of ordinary income even where the transaction would not otherwise be taxable <br />
<br />
'''Depreciation Recapture for Real Property: Section 1250''' <br />
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Review:<br />
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● TPs can depreciate the cost of real property used in a trade or business activity or held for investment<br />
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● While the underlying land is not depreciable, structures on the land are subject to “exhaustion” or “wear and tear” and thus qualify for depreciation deductions<br />
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● The depreciation deductions offset ordinary income and reduce the taxpayer’s basis in the subject property<br />
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● When the taxpayer sells the real property, at least some portion of any resulting gain will be attributable to the prior depreciation deductions<br />
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● FAIRNESS dictates that the portion of the realized gain attributable to prior depreciation deductions should be treated as ordinary income<br />
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● Although real property used in a trade or business activity is not a capital asset under 1221(a)(2), gain from the sale of such property qualifies as 1231 gain if the taxpayer has held the property for more than one year under 1231(b)<br />
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● If the taxpayer’s section 1231 gains exceed the taxpayer’s 1231 losses for the taxable year, the gains and losses are treated as long-term capital gains and losses, meaning any net gain will qualify for preferential tax treatment pursuant to 1231(a)(1). <br />
<br />
If the subject real property is held as '''investment property''', it is a capital asset to begin with and the resulting gain is automatically eligible for preferential tax rates if the subject property was held for more than a year, even though the property was depreciable in the hands of the taxpayer. <br />
<br />
To permit preferential tax treatment to a gain caused only by the taxpayer’s taking depreciation deductions to offset ordinary income is an unjustified double benefit → 1245 recapture does not apply to most depreciable real property like buildings and their permanent fixtures, SO… <br />
<br />
1250 <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 1250 - Gain from dispositions of certain depreciable realty'''<br />
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'''(a) General rule. Except as otherwise provided in this section—'''<br />
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''' (1) Additional depreciation after December 31, 1975'''<br />
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''' (A) In general. If section 1250 property is disposed of after December 31, 1975, then the applicable percentage of the lower of—'''<br />
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''' (i) that portion of the additional depreciation (as defined in subsection (b)(1) or (4)) attributable to periods after December 31, 1975, in respect of the property, or'''<br />
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''' (ii) the excess of the amount realized (in the case of a sale, exchange, or involuntary conversion), or the fair market value of such property (in the case of any other disposition), over the adjusted basis of such property,'''<br />
<br />
'''shall be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.'''<br />
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''' (B) Applicable percentage. For purposes of subparagraph (A), the term “applicable percentage” means—'''<br />
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''' (i) in the case of section 1250 property with respect to which a mortgage is insured under section 221(d)(3) or 236 of the National Housing Act, or housing financed or assisted by direct loan or tax abatement under similar provisions of State or local laws and with respect to which the owner is subject to the restrictions described in section 1039(b)(1)(B) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990), 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full months;'''<br />
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''' (ii) in the case of dwelling units which, on the average, were held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under the provisions of State or local law authorizing similar levels of subsidy for lower-income families, 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full months;'''<br />
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''' (iii) in the case of section 1250 property with respect to which a depreciation deduction for rehabilitation expenditures was allowed under section 167(k), 100 percent minus 1 percentage point for each full month in excess of 100 full months after the date on which such property was placed in service;'''<br />
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''' (iv) in the case of section 1250 property with respect to which a loan is made or insured under title V of the Housing Act of 1949, 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full months; and'''<br />
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''' (v) in the case of all other section 1250 property, 100 percent. In the case of a building (or a portion of a building devoted to dwelling units), if, on the average, 85 percent or more of the dwelling units contained in such building (or portion thereof) are units described in clause (ii), such building (or portion thereof) shall be treated as property described in clause (ii). Clauses (i), (ii), and (iv) shall not apply with respect to the additional depreciation described in subsection (b)(4) which was allowed under section 167(k).'''<br />
<br />
''' (2) Additional depreciation after December 31, 1969, and before January 1, 1976'''<br />
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''' (A) In general. If section 1250 property is disposed of after December 31, 1969, and the amount determined under paragraph (1)(A)(ii) exceeds the amount determined under paragraph (1)(A)(i), then the applicable percentage of the lower of—'''<br />
<br />
''' (i) that portion of the additional depreciation attributable to periods after December 31, 1969, and before January 1, 1976, in respect of the property, or'''<br />
<br />
''' (ii) the excess of the amount determined under paragraph (1)(A)(ii) over the amount determined under paragraph (1)(A)(i), shall also be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.''' <br />
<br />
''' (B) Applicable percentage. For purposes of subparagraph (A), the term “applicable percentage” means—'''<br />
<br />
''' (i) in the case of section 1250 property disposed of pursuant to a written contract which was, on July 24, 1969, and at all times thereafter, binding on the owner of the property, 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 20 full months;'''<br />
<br />
''' (ii) in the case of section 1250 property with respect to which a mortgage is insured under section 221(d)(3) or 236 of the National Housing Act, or housing financed or assisted by direct loan or tax abatement under similar provisions of State or local laws, and with respect to which the owner is subject to the restrictions described in section 1039(b)(1)(B) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990), 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 20 full months;'''<br />
<br />
''' (iii) in the case of residential rental property (as defined in section 167(j)(2)(B)) other than that covered by clauses (i) and (ii), 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full months;'''<br />
<br />
''' (iv) in the case of section 1250 property with respect to which a depreciation deduction for rehabilitation expenditures was allowed under section 167(k), 100 percent minus 1 percentage point for each full month in excess of 100 full months after the date on which such property was placed in service; and'''<br />
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''' (v) in the case of all other section 1250 property, 100 percent. Clauses (i), (ii), and (iii) shall not apply with respect to the additional depreciation described in subsection (b)(4).'''<br />
<br />
''' (3) Additional depreciation before January 1, 1970'''<br />
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''' (A) In general. If section 1250 property is disposed of after December 31, 1963, and the amount determined under paragraph (1)(A)(ii) exceeds the sum of the amounts determined under paragraphs (1)(A)(i) and (2)(A)(i), then the applicable percentage of the lower of—'''<br />
<br />
''' (i) that portion of the additional depreciation attributable to periods before January 1, 1970, in respect of the property, or'''<br />
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''' (ii) the excess of the amount determined under paragraph (1)(A)(ii) over the sum of the amounts determined under paragraphs (1)(A)(i) and (2)(A)(i), shall also be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.'''<br />
<br />
''' (B) Applicable percentage. For purposes of subparagraph (A), the term “applicable percentage” means 100 percent minus 1 percentage point for each full month the property was held after the date on which the property was held for 20 full months.'''<br />
<br />
''' (4) Special rule. For purposes of this subsection, any reference to section 167(k) or 167(j)(2)(B) shall be treated as a reference to such section as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990.'''<br />
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''' (5) Cross reference. For reduction in the case of corporations on capital gain treatment under this section, see section 291(a)(1).'''<br />
<br />
'''(b) Additional depreciation defined. For purposes of this section—'''<br />
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''' (1) In general. The term “additional depreciation” means, in the case of any property, the depreciation adjustments in respect of such property; except that, in the case of property held more than one year, it means such adjustments only to the extent that they exceed the amount of the depreciation adjustments which would have resulted if such adjustments had been determined for each taxable year under the straight line method of adjustment.'''<br />
<br />
''' (2) Property held by lessee. In the case of a lessee, in determining the depreciation adjustments which would have resulted in respect of any building erected (or other improvement made) on the leased property, or in respect of any cost of acquiring the lease, the lease period shall be treated as including all renewal periods. For purposes of the preceding sentence—'''<br />
<br />
''' (A) the term “renewal period” means any period for which the lease may be renewed, extended, or continued pursuant to an option exercisable by the lessee, but'''<br />
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''' (B) the inclusion of renewal periods shall not extend the period taken into account by more than ⅔ of the period on the basis of which the depreciation adjustments were allowed.'''<br />
<br />
''' (3) Depreciation adjustments. The term “depreciation adjustments” means, in respect of any property, all adjustments attributable to periods after December 31, 1963, reflected in the adjusted basis of such property on account of deductions (whether in respect of the same or other property) allowed or allowable to the taxpayer or to any other person for exhaustion, wear and tear, obsolescence, or amortization (other than amortization under section 168 (as in effect before its repeal by the Tax Reform Act of 1976), 169, 185 (as in effect before its repeal by the Tax Reform Act of 1986), 188 (as in effect before its repeal by the Revenue Reconciliation Act of 1990), 190, or 193). For purposes of the preceding sentence, if the taxpayer can establish by adequate records or other sufficient evidence that the amount allowed as a deduction for any period was less than the amount allowable, the amount taken into account for such period shall be the amount allowed.'''<br />
<br />
''' (4) Additional depreciation attributable to rehabilitation expenditures. The term “additional depreciation” also means, in the case of section 1250 property with respect to which a depreciation or amortization deduction for rehabilitation expenditures was allowed under section 167(k) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) or 191 (as in effect before its repeal by the Economic Recovery Tax Act of 1981), the depreciation or amortization adjustments allowed under such section to the extent attributable to such property, except that, in the case of such property held for more than one year after the rehabilitation expenditures so allowed were incurred, it means such adjustments only to the extent that they exceed the amount of the depreciation adjustments which would have resulted if such adjustments had been determined under the straight line method of adjustment without regard to the useful life permitted under section 167(k) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) or 191 (as in effect before its repeal by the Economic Recovery Tax Act of 1981).'''<br />
<br />
''' (5) Method of computing straight line adjustments. For purposes of paragraph (1), the depreciation adjustments which would have resulted for any taxable year under the straight line method shall be determined—'''<br />
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''' (A) in the case of property to which section 168 applies, by determining the adjustments which would have resulted for such year if the taxpayer had elected the straight line method for such year using the recovery period applicable to such property, and'''<br />
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''' (B) in the case any property to which section 168 does not apply, if a useful life (or salvage value) was used in determining the amount allowable as a deduction for any taxable year, by using such life (or value).''' <br />
<br />
'''(c) Section 1250 property. For purposes of this section, the term “section 1250 property” means any real property (other than section 1245 property, as defined in section 1245(a)(3)) which is or has been property of a character subject to the allowance for depreciation provided in section 167.'''<br />
<br />
'''(d) Exceptions and limitations'''<br />
<br />
''' '''<br />
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''' (1) Gifts. Subsection (a) shall not apply to a disposition by gift.'''<br />
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''' (2) Transfers at death. Except as provided in section 691 (relating to income in respect of a decedent), subsection (a) shall not apply to a transfer at death.'''<br />
<br />
''' (3) Certain tax-free transactions. If the basis of property in the hands of a transferee is determined by reference to its basis in the hands of the transferor by reason of the application of section 332, 351, 361, 721, or 731, then the amount of gain taken into account by the transferor under subsection (a) shall not exceed the amount of gain recognized to the transferor on the transfer of such property (determined without regard to this section). Except as provided in paragraph (9), this paragraph shall not apply to a disposition to an organization (other than a cooperative described in section 521) which is exempt from the tax imposed by this chapter.'''<br />
<br />
''' (4) Like kind exchanges; involuntary conversions, etc.'''<br />
<br />
''' (A) Recognition limit. If property is disposed of and gain (determined without regard to this section) is not recognized in whole or in part under section 1031 or 1033, then the amount of gain taken into account by the transferor under subsection (a) shall not exceed the greater of the following:'''<br />
<br />
''' (i) the amount of gain recognized on the disposition (determined without regard to this section), increased as provided in subparagraph (B), or'''<br />
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''' (ii) the amount determined under subparagraph (C).'''<br />
<br />
''' (B) Increase for certain stock. With respect to any transaction, the increase provided by this subparagraph is the amount equal to the fair market value of any stock purchased in a corporation which (but for this paragraph) would result in nonrecognition of gain under section 1033(a)(2)(A).'''<br />
<br />
''' (C) Adjustment where insufficient section 1250 property is acquired. With respect to any transaction, the amount determined under this subparagraph shall be the excess of—'''<br />
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''' (i) the amount of gain which would (but for this paragraph) be taken into account under subsection (a), over'''<br />
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''' (ii) the fair market value (or cost in the case of a transaction described in section 1033(a)(2)) of the section 1250 property acquired in the transaction.'''<br />
<br />
''' (D) Basis of property acquired. In the case of property purchased by the taxpayer in a transaction described in section 1033(a)(2), in applying section 1033(b)(2), such sentence [1] shall be applied—'''<br />
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''' (i) first solely to section 1250 properties and to the amount of gain not taken into account under subsection (a) by reason of this paragraph, and'''<br />
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''' (ii) then to all purchased properties to which such sentence applies and to the remaining gain not recognized on the transaction as if the cost of the section 1250 properties were the basis of such properties computed under clause (i). In the case of property acquired in any other transaction to which this paragraph applies, rules consistent with the preceding sentence shall be applied under regulations prescribed by the Secretary.'''<br />
<br />
''' (E) Additional depreciation with respect to property disposed of. In the case of any transaction described in section 1031 or 1033, the additional depreciation in respect of the section 1250 property acquired which is attributable to the section 1250 property disposed of shall be an amount equal to the amount of the gain which was not taken into account under subsection (a) by reason of the application of this paragraph.'''<br />
<br />
''' (5) Property distributed by a partnership to a partner'''<br />
<br />
''' (A) In general. For purposes of this section, the basis of section 1250 property distributed by a partnership to a partner shall be deemed to be determined by reference to the adjusted basis of such property to the partnership.'''<br />
<br />
''' (B) Additional depreciation. In respect of any property described in subparagraph (A), the additional depreciation attributable to periods before the distribution by the partnership shall be—'''<br />
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''' (i) the amount of the gain to which subsection (a) would have applied if such property had been sold by the partnership immediately before the distribution at its fair market value at such time and the applicable percentage for the property had been 100 percent, reduced by'''<br />
<br />
''' (ii) if section 751(b) applied to any part of such gain, the amount of such gain to which section 751(b) would have applied if the applicable percentage for the property had been 100 percent.'''<br />
<br />
''' (6) Transfers to tax-exempt organization where property will be used in unrelated business'''<br />
<br />
''' (A) In general. The second sentence of paragraph (3) shall not apply to a disposition of section 1250 property to an organization described in section 511(a)(2) or 511(b)(2) if, immediately after such disposition, such organization uses such property in an unrelated trade or business (as defined in section 513).'''<br />
<br />
''' (B) Later change in use. If any property with respect to the disposition of which gain is not recognized by reason of subparagraph (A) ceases to be used in an unrelated trade or business of the organization acquiring such property, such organization shall be treated for purposes of this section as having disposed of such property on the date of such cessation.'''<br />
<br />
''' (7) Foreclosure dispositions. If any section 1250 property is disposed of by the taxpayer pursuant to a bid for such property at foreclosure or by operation of an agreement or of process of law after there was a default on indebtedness which such property secured, the applicable percentage referred to in paragraph (1)(B), (2)(B), or (3)(B) of subsection (a), as the case may be, shall be determined as if the taxpayer ceased to hold such property on the date of the beginning of the proceedings pursuant to which the disposition occurred, or, in the event there are no proceedings, such percentage shall be determined as if the taxpayer ceased to hold such property on the date, determined under regulations prescribed by the Secretary, on which such operation of an agreement or process of law, pursuant to which the disposition occurred, began.'''<br />
<br />
'''(e) Holding period. For purposes of determining the applicable percentage under this section, the provisions of section 1223 shall not apply, and the holding period of section 1250 property shall be determined under the following rules:'''<br />
<br />
''' (1) Beginning of holding period. The holding period of section 1250 property shall be deemed to begin—'''<br />
<br />
''' (A) in the case of property acquired by the taxpayer, on the day after the date of acquisition, or'''<br />
<br />
''' (B) in the case of property constructed, reconstructed, or erected by the taxpayer, on the first day of the month during which the property is placed in service.'''<br />
<br />
''' (2) Property with transferred basis. If the basis of property acquired in a transaction described in paragraph (1), (2), or (3) of subsection (d) is determined by reference to its basis in the hands of the transferor, then the holding period of the property in the hands of the transferee shall include the holding period of the property in the hands of the transferor.'''<br />
<br />
'''(f) Special rules for property which is substantially improved'''<br />
<br />
''' (1) Amount treated as ordinary income. If, in the case of a disposition of section 1250 property, the property is treated as consisting of more than one element by reason of paragraph (3), then the amount taken into account under subsection (a) in respect of such section 1250 property as ordinary income shall be the sum of the amounts determined under paragraph (2).'''<br />
<br />
''' (2) Ordinary income attributable to an element. For purposes of paragraph (1), the amount taken into account for any element shall be the sum of a series of amounts determined for the periods set forth in subsection (a), with the amount for any such period being determined by multiplying—'''<br />
<br />
''' (A) the amount which bears the same ratio to the lower of the amounts specified in clause (i) or (ii) of subsection (a)(1)(A), in clause (i) or (ii) of subsection (a)(2)(A), or in clause (i) or (ii) of subsection (a)(3)(A), as the case may be, for the section 1250 property as the additional depreciation for such element attributable to such period bears to the sum of the additional depreciation for all elements attributable to such period, by'''<br />
<br />
''' (B) the applicable percentage for such element for such period.'''<br />
<br />
'''For purposes of this paragraph, determinations with respect to any element shall be made as if it were a separate property.'''<br />
<br />
''' (3) Property consisting of more than one element. In applying this subsection in the case of any section 1250 property, there shall be treated as a separate element—'''<br />
<br />
''' (A) each separate improvement,'''<br />
<br />
''' (B) if, before completion of section 1250 property, units thereof (as distinguished from improvements) were placed in service, each such unit of section 1250 property, and'''<br />
<br />
''' (C) the remaining property which is not taken into account under subparagraphs (A) and (B).'''<br />
<br />
''' (4) Property which is substantially improved. For purposes of this subsection—'''<br />
<br />
''' (A) In general. The term “separate improvement” means each improvement added during the 36–month period ending on the last day of any taxable year to the capital account for the property, but only if the sum of the amounts added to such account during such period exceeds the greatest of—'''<br />
<br />
''' (i) 25 percent of the adjusted basis of the property,'''<br />
<br />
''' (ii) 10 percent of the adjusted basis of the property, determined without regard to the adjustments provided in paragraphs (2) and (3) of section 1016(a), or'''<br />
<br />
''' (iii) $5,000. For purposes of clauses (i) and (ii), the adjusted basis of the property shall be determined as of the beginning of the first day of such 36–month period, or of the holding period of the property (within the meaning of subsection (e)), whichever is the later.'''<br />
<br />
''' (B) Exception. Improvements in any taxable year shall be taken into account for purposes of subparagraph (A) only if the sum of the amounts added to the capital account for the property for such taxable year exceeds the greater of—'''<br />
<br />
''' (i) $2,000, or'''<br />
<br />
''' (ii) one percent of the adjusted basis referred to in subparagraph (A)(ii), determined, however, as of the beginning of such taxable year. For purposes of this section, if the amount added to the capital account for any separate improvement does not exceed the greater of clause (i) or (ii), such improvement shall be treated as placed in service on the first day, of a calendar month, which is closest to the middle of the taxable year.'''<br />
<br />
''' (C) Improvement. The term “improvement” means, in the case of any section 1250 property, any addition to capital account for such property after the initial acquisition or after completion of the property.'''<br />
<br />
'''(g) Adjustments to basis. The Secretary shall prescribe such regulations as he may deem necessary to provide for adjustments to the basis of property to reflect gain recognized under subsection (a).'''<br />
<br />
'''(h) Application of section. This section shall apply notwithstanding any other provision of this subtitle.'''<br />
|} <br />
<br />
Section 1250 → appears to provide a recapture mechanism (but it does not)<br />
<br />
● '''1250(a)(1)(A)''' → In order to trigger a 1250 recapture, TP must have taken “additional depreciation” on depreciable real property<br />
<br />
● '''1250(b)(1) → Additional depreciation''' → generally defined as the excess of the amount of accelerated depreciation deductions allowed to the taxpayer over the amount that would have been allowed had the property been depreciated using the straight-line method<br />
<br />
● BUT pursuant to 168(b)(3), TPs with depreciable real property are required to use the straight-line method <br />
<br />
1250 is no longer effective to provide recapture for depreciable real property sold at a gain, but an indirect form of recapture sits in 1(h)(1)(D): <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 1 - Tax imposed''' <br />
<br />
'''(h) Maximum capital gains rate'''<br />
<br />
''' (1) In general. If a taxpayer has a net capital gain for any taxable year, the tax imposed by this section for such taxable year shall not exceed the sum of—'''<br />
<br />
''' (A) a tax computed at the rates and in the same manner as if this subsection had not been enacted on the greater of—'''<br />
<br />
''' (i) taxable income reduced by the net capital gain; or'''<br />
<br />
''' (ii) the lesser of—'''<br />
<br />
''' (I) the amount of taxable income taxed at a rate below 25 percent; or'''<br />
<br />
''' (II) taxable income reduced by the adjusted net capital gain;'''<br />
<br />
''' (B) 0 percent of so much of the adjusted net capital gain (or, if less, taxable income) as does not exceed the excess (if any) of—'''<br />
<br />
''' (i) the amount of taxable income which would (without regard to this paragraph) be taxed at a rate below 25 percent, over'''<br />
<br />
''' (ii) the taxable income reduced by the adjusted net capital gain;'''<br />
<br />
''' (C) 15 percent of the lesser of—'''<br />
<br />
''' (i) so much of the adjusted net capital gain (or, if less, taxable income) as exceeds the amount on which a tax is determined under subparagraph (B), or'''<br />
<br />
''' (ii) the excess of—'''<br />
<br />
''' (I) the amount of taxable income which would (without regard to this paragraph) be taxed at a rate below 39.6 percent, over'''<br />
<br />
''' (II) the sum of the amounts on which a tax is determined under subparagraphs (A) and (B),'''<br />
<br />
''' (D) 20 percent of the adjusted net capital gain (or, if less, taxable income) in excess of the sum of the amounts on which tax is determined under subparagraphs (B) and (C),'''<br />
<br />
''' (E) 25 percent of the excess (if any) of—'''<br />
<br />
''' (i) the unrecaptured section 1250 gain (or, if less, the net capital gain (determined without regard to paragraph (11))), over'''<br />
<br />
''' (ii) the excess (if any) of—'''<br />
<br />
''' (I) the sum of the amount on which tax is determined under subparagraph (A) plus the net capital gain, over'''<br />
<br />
''' (II) taxable income; and'''<br />
<br />
''' (F) 28 percent of the amount of taxable income in excess of the sum of the amounts on which tax is determined under the preceding subparagraphs of this paragraph.'''<br />
<br />
''' (2) Net capital gain taken into account as investment income'''<br />
<br />
'''For purposes of this subsection, the net capital gain for any taxable year shall be reduced (but not below zero) by the amount which the taxpayer takes into account as investment income under section 163(d)(4)(B)(iii).'''<br />
<br />
''' (3) Adjusted net capital gain. For purposes of this subsection, the term “adjusted net capital gain” means the sum of—'''<br />
<br />
''' (A) net capital gain (determined without regard to paragraph (11)) reduced (but not below zero) by the sum of—'''<br />
<br />
''' (i) unrecaptured section 1250 gain, and'''<br />
<br />
''' (ii) 28-percent rate gain, plus'''<br />
<br />
''' (B) qualified dividend income (as defined in paragraph (11)).'''<br />
<br />
''' (4) 28-percent rate gain. For purposes of this subsection, the term “28-percent rate gain” means the excess (if any) of—'''<br />
<br />
''' (A) the sum of—'''<br />
<br />
''' (i) collectibles gain; and'''<br />
<br />
''' (ii) section 1202 gain, over'''<br />
<br />
''' (B) the sum of—'''<br />
<br />
''' (i) collectibles loss;'''<br />
<br />
''' (ii) the net short-term capital loss; and'''<br />
<br />
''' (iii) the amount of long-term capital loss carried under section 1212(b)(1)(B) to the taxable year.'''<br />
<br />
''' (5) Collectibles gain and loss. For purposes of this subsection—'''<br />
<br />
''' (A) In general. The terms “collectibles gain” and “collectibles loss” mean gain or loss (respectively) from the sale or exchange of a collectible (as defined in section 408(m) without regard to paragraph (3) thereof) which is a capital asset held for more than 1 year but only to the extent such gain is taken into account in computing gross income and such loss is taken into account in computing taxable income.'''<br />
<br />
''' (B) Partnerships, etc. For purposes of subparagraph (A), any gain from the sale of an interest in a partnership, S corporation, or trust which is attributable to unrealized appreciation in the value of collectibles shall be treated as gain from the sale or exchange of a collectible. Rules similar to the rules of section 751 shall apply for purposes of the preceding sentence.'''<br />
<br />
''' (6) Unrecaptured section 1250 gain. For purposes of this subsection—'''<br />
<br />
''' (A) In general. The term “unrecaptured section 1250 gain” means the excess (if any) of—'''<br />
<br />
''' (i) the amount of long-term capital gain (not otherwise treated as ordinary income) which would be treated as ordinary income if section 1250(b)(1) included all depreciation and the applicable percentage under section 1250(a) were 100 percent, over'''<br />
<br />
''' (ii) the excess (if any) of—'''<br />
<br />
''' (I) the amount described in paragraph (4)(B); over'''<br />
<br />
''' (II) the amount described in paragraph (4)(A).'''<br />
<br />
''' (B) Limitation with respect to section 1231 property. The amount described in subparagraph (A)(i) from sales, exchanges, and conversions described in section 1231(a)(3)(A) for any taxable year shall not exceed the net section 1231 gain (as defined in section 1231(c)(3)) for such year.'''<br />
<br />
''' (7)Section 1202 gain. For purposes of this subsection, the term “section 1202 gain” means the excess of—'''<br />
<br />
''' (A) the gain which would be excluded from gross income under section 1202 but for the percentage limitation in section 1202(a), over'''<br />
<br />
''' (B) the gain excluded from gross income under section 1202.'''<br />
<br />
''' (8) Coordination with recapture of net ordinary losses under section 1231. If any amount is treated as ordinary income under section 1231(c), such amount shall be allocated among the separate categories of net section 1231 gain (as defined in section 1231(c)(3)) in such manner as the Secretary may by forms or regulations prescribe.'''<br />
<br />
''' (9) Regulations. The Secretary may prescribe such regulations as are appropriate (including regulations requiring reporting) to apply this subsection in the case of sales and exchanges by pass-thru entities and of interests in such entities.'''<br />
<br />
''' (10) Pass-thru entity defined. For purposes of this subsection, the term “pass-thru entity” means—'''<br />
<br />
''' (A) a regulated investment company;'''<br />
<br />
''' (B) a real estate investment trust;'''<br />
<br />
''' (C) an S corporation;'''<br />
<br />
''' (D) a partnership;'''<br />
<br />
''' (E) an estate or trust;'''<br />
<br />
''' (F) a common trust fund; and'''<br />
<br />
''' (G) a qualified electing fund (as defined in section 1295).'''<br />
<br />
''' (11) Dividends taxed as net capital gain'''<br />
<br />
''' (A) In general. For purposes of this subsection, the term “net capital gain” means net capital gain (determined without regard to this paragraph) increased by qualified dividend income.'''<br />
<br />
''' (B) Qualified dividend income. For purposes of this paragraph—'''<br />
<br />
''' (i) In general. The term “qualified dividend income” means dividends received during the taxable year from—'''<br />
<br />
''' (I) domestic corporations, and'''<br />
<br />
''' (II) qualified foreign corporations.'''<br />
<br />
''' (ii) Certain dividends excluded. Such term shall not include—'''<br />
<br />
''' (I) any dividend from a corporation which for the taxable year of the corporation in which the distribution is made, or the preceding taxable year, is a corporation exempt from tax under section 501 or 521,'''<br />
<br />
''' (II) any amount allowed as a deduction under section 591 (relating to deduction for dividends paid by mutual savings banks, etc.), and'''<br />
<br />
''' (III) any dividend described in section 404(k).'''<br />
<br />
''' (iii) Coordination with section 246(c)Such term shall not include any dividend on any share of stock—'''<br />
<br />
''' (I) with respect to which the holding period requirements of section 246(c) are not met (determined by substituting in section 246(c) “60 days” for “45 days” each place it appears and by substituting “121-day period” for “91-day period”), or'''<br />
<br />
''' (II) to the extent that the taxpayer is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property.'''<br />
<br />
''' (C) Qualified foreign corporations'''<br />
<br />
''' (i) In general. Except as otherwise provided in this paragraph, the term “qualified foreign corporation” means any foreign corporation if—'''<br />
<br />
''' (I) such corporation is incorporated in a possession of the United States, or'''<br />
<br />
''' (II) such corporation is eligible for benefits of a comprehensive income tax treaty with the United States which the Secretary determines is satisfactory for purposes of this paragraph and which includes an exchange of information program.'''<br />
<br />
''' (ii) Dividends on stock readily tradable on United States securities market. A foreign corporation not otherwise treated as a qualified foreign corporation under clause (i) shall be so treated with respect to any dividend paid by such corporation if the stock with respect to which such dividend is paid is readily tradable on an established securities market in the United States.'''<br />
<br />
''' (iii) Exclusion of dividends of certain foreign corporations. Such term shall not include—'''<br />
<br />
''' (I) any foreign corporation which for the taxable year of the corporation in which the dividend was paid, or the preceding taxable year, is a passive foreign investment company (as defined in section 1297), and'''<br />
<br />
''' (II) any corporation which first becomes a surrogate foreign corporation (as defined in section 7874(a)(2)(B)) after the date of the enactment of this subclause, other than a foreign corporation which is treated as a domestic corporation under section 7874(b).'''<br />
<br />
''' (iv) Coordination with foreign tax credit limitation. Rules similar to the rules of section 904(b)(2)(B) shall apply with respect to the dividend rate differential under this paragraph.'''<br />
<br />
''' (D) Special rules'''<br />
<br />
''' (i) Amounts taken into account as investment income. Qualified dividend income shall not include any amount which the taxpayer takes into account as investment income under section 163(d)(4)(B).'''<br />
<br />
''' (ii) Extraordinary dividends. If a taxpayer to whom this section applies receives, with respect to any share of stock, qualified dividend income from 1 or more dividends which are extraordinary dividends (within the meaning of section 1059(c)), any loss on the sale or exchange of such share shall, to the extent of such dividends, be treated as long-term capital loss.'''<br />
<br />
''' (iii) Treatment of dividends from regulated investment companies and real estate investment trusts. A dividend received from a regulated investment company or a real estate investment trust shall be subject to the limitations prescribed in sections 854 and 857'''<br />
|} <br />
<br />
199A → Qualified Business Income<br />
<br />
● Reduction offered in 11 for C Corporations<br />
<br />
● No reduction for businesses operated as sole proprietorships, noncorporate entities like partnerships and LLCs, or S Corporations<br />
<br />
● Deduction will terminate at the end of 2025 and unavailable on 2026 tax returns unless Congress extends it -- 199A(i)</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=Income_Tax_Freeland/Outline&diff=42468Income Tax Freeland/Outline2022-05-31T23:04:03Z<p>Rezsue: Replaced content with "{{Infobox Text-Specific Outline |subject=Income Tax |text=Fundamentals of Federal Income Taxation: Cases and Materials |authors=James Freeland*Daniel Lathrope*Stephen Lind..."</p>
<hr />
<div>{{Infobox Text-Specific Outline<br />
|subject=Income Tax<br />
|text=Fundamentals of Federal Income Taxation: Cases and Materials<br />
|authors=James Freeland*Daniel Lathrope*Stephen Lind*Richard Stephens*<br />
|professor=Julian M. Fray<br />
}}</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=Income_Tax_Freeland/Outline&diff=42466Income Tax Freeland/Outline2022-05-31T22:56:08Z<p>Rezsue: </p>
<hr />
<div>{{Infobox Text-Specific Outline<br />
|subject=Income Tax<br />
|text=Fundamentals of Federal Income Taxation: Cases and Materials<br />
|authors=James Freeland*Daniel Lathrope*Stephen Lind*Richard Stephens*<br />
|professor=Julian M. Fray<br />
}}<br />
'''Applicable Tax Rates'''<br />
<br />
<br />
Origination Clause → all tax bills must come out of the House. <br />
<br />
● Shell bill: the Senate receives a tax bill from the House, completely guts it (leaves it a shell of a bill), fills in its own provisions, passes it, and sends it back to the House.<br />
<br />
<br />
'''Court System'''<br />
<br />
Tax Court → same level as district court, subject to Circuit Court of Appeals in relevant district for binding authority; bench trials only (no jury); taxpayer does not need to pay first and seek a refund before bringing an action.<br />
<br />
District Court & US Court of Claims → taxpayer must pay the tax bill first, then seek a refund (bring action).<br />
<br />
The FIRST Tax Bill → February 28, 1913<br />
<br />
'''Federal Income Tax - Applicable Tax Rates'''<br />
<br />
<br />
Tax Cuts and Jobs Act (2017)<br />
<br />
● Tax breaks for individuals are temporary (easier to pass extensions)<br />
<br />
● Tax breaks for corporations are permanent<br />
<br />
● Result of lobbying efforts<br />
<br />
<br />
Authorities: lower tiers <u>do not</u> have authority outweighing higher tiers<br />
<br />
{| class="wikitable"<br />
|'''Tier 1'''<br />
|'''Tier 2'''<br />
|'''Tier 3'''<br />
|-<br />
|IRS Code<br />
<br />
Regulations<br />
<br />
Cases<br />
<br />
Treaties<br />
|Public Administrative Rulings<br />
<br />
Legislative History<br />
|Private Administrative Rulings<br />
<br />
IRS Publications<br />
|-<br />
|Get court deference; Chevron Deference for '''FINAL REGULATIONS''', otherwise, '''LAST IN TIME RULE'''<br />
|No deference, court looks to weight of arguments<br />
|No deference, court looks to weight of arguments<br />
|}<br />
<nowiki>*</nowiki>IRS letter rulings can be persuasive (agency interpretation if own law)<br />
<br />
'''Chevron Deference''': 2 part test ONLY ON '''FINAL REGULATIONS'''<br />
<br />
#If Congress has clearly addressed the issue, “that is the end of the matter” and the Court gives effect to the intent of Congress<br />
#If the statute is silent or ambiguous with respect to the specific question, the agency interpretation is given “controlling weight” unless it is arbitrary or capricious<br />
<br />
'''LAST IN TIME RULE''' → most recent authority wins <br />
<br />
'''Effective tax rate''' → tax liability as a percentage of taxable income; the total percentage of tax paid (overall rate, average after all brackets considered, total tax paid); Effective tax rates will show how '''progressive''' a tax is (the more brackets in the tax ladder, the more '''progressive''').<br />
<br />
● Will '''always''' be lower than the marginal tax rate. <br />
<br />
'''Marginal tax rate''' → rate of tax applicable to the taxpayer’s '''last dollar''' of taxable income (the tax bracket at the end, highest bracket applicable to taxpayer). <br />
<br />
'''2018 Marginal Tax Rates''' - Unmarried Persons <br />
<br />
{| class="wikitable"<br />
|'''10%'''<br />
|'''$0-$9,525'''<br />
|-<br />
|'''12%'''<br />
|'''$9,526-$38,700'''<br />
|-<br />
|'''22%'''<br />
|'''$38,701-$82,500'''<br />
|-<br />
|'''24%'''<br />
|'''$82,501-$157,500'''<br />
|-<br />
|'''32%'''<br />
|'''$157,501-$200,000'''<br />
|-<br />
|'''35%'''<br />
|'''$200,001-$500,000'''<br />
|-<br />
|'''37%'''<br />
|'''Over $500,000'''<br />
|} <br />
<br />
'''Progressive tax''' → progresses higher as income increases (i.e. federal income tax)<br />
<br />
'''Regressive tax''' → all pay the same, regardless of income (i.e. sales tax, flat tax in MA)<br />
<br />
'''Dead-weight loss''' → cost to implement law or provision outweighs the minimal amount of revenue it would raise. <br />
<br />
Four Pillars of Tax Law Analysis (steps to answer tax law questions):<br />
<br />
1) Sufficiency → does the provision raise enough revenue?<br />
<br />
2) Equity → does the provision treat everyone equally?<br />
<br />
3) Efficiency → don’t want to create too many market disturbances (don’t stifle a section of the market unless that’s a goal)<br />
<br />
4) Administrability → is the rule imposable, policable, practical to regulate and enforce? Is it administratively feasible? (the higher the cost, the less practical it is) <br />
<br />
Horizontal equity → same situation, same treatment<br />
<br />
Vertical equity → different situation, different treatment <br />
<br />
Types of Tax:<br />
<br />
● Capitation Tax: everyone pays the same dollar amount<br />
<br />
○ Problems: regressive, if different incomes, drastically different impacts (i.e. tax of $5,000 on income of $10,000 v. income of $100,000)<br />
<br />
○ Unlikely that much revenue could be generated under this method<br />
<br />
● Sales Tax → percentage cost of goods, levied against consumer<br />
<br />
○ States without income tax (TX, FL) use higher sales tax to create revenue<br />
<br />
● Value Added Tax (VAT) → percentage cost of goods, levied against the business, not the consumer<br />
<br />
○ By the time the consumer buys, tax has been paid, BUT cost of good generally higher<br />
<br />
● Real Estate Tax → tax imposed on real property (annually)<br />
<br />
● Estate Tax → currently imposed on the largest estates, only paid by a tiny portion of estates, exclusion amount doubled<br />
<br />
● Flat Tax → everyone pays the same percentage of their income <br />
<br />
'''tax = base x rate''' <br />
<br />
BASE → taxable income RATE → progressive tax bracket, calculated as income increases <br />
<br />
Tax Brackets<br />
<br />
● Even though marginal rates are going up, you don’t lose money<br />
<br />
● Each increment taxed at rate of bracket: First $9,000 taxed at 10%, of the next $10,000, $525 will be taxed at 10% and the remaining will be taxed at the next bracket of 12%<br />
<br />
● Taxpayer still benefit from lower rates regardless of income (fewer than 4% of the population makes it to the final tax bracket)<br />
<br />
● Tax brackets are updated annually → previously, they were linked to the consumer price index, now brackets are linked to chained CPI (effectively raising taxes) <br />
<br />
Filing Status → §1(a)-(c)<br />
<br />
1) Married filing jointly<br />
<br />
2) Surviving spouse<br />
<br />
3) Head of household<br />
<br />
4) Unmarried<br />
<br />
5) Married filing separately <br />
<br />
'''Taxable Income''' <br />
<br />
Taxable Income Defined → §63<br />
<br />
STEP ONE: GROSS INCOME <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 61 - Gross income defined''' <br />
<br />
'''(a) General definition. Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:'''<br />
<br />
''' (1) Compensation for services, including fees, commissions, fringe benefits, and similar items;'''<br />
<br />
''' (2) Gross income derived from business;'''<br />
<br />
''' (3) Gains derived from dealings in property;'''<br />
<br />
''' (4) Interest;'''<br />
<br />
''' (5) Rents;'''<br />
<br />
''' (6) Royalties;'''<br />
<br />
''' (7) Dividends;'''<br />
<br />
''' (8) [1] Alimony and separate maintenance payments;'''<br />
<br />
''' (9) Annuities;'''<br />
<br />
''' (10) Income from life insurance and endowment contracts;'''<br />
<br />
''' (11) Pensions;'''<br />
<br />
''' (12) Income from discharge of indebtedness;'''<br />
<br />
''' (13) Distributive share of partnership gross income;'''<br />
<br />
''' (14) Income in respect of a decedent; and'''<br />
<br />
''' (15) Income from an interest in an estate or trust.''' <br />
<br />
'''(b) Cross references. For items specifically included in gross income, see part II (sec. 71 and following). For items specifically excluded from gross income, see part III (sec. 101 and following).'''<br />
|} <br />
<br />
STEP TWO: DEDUCTIONS UNDER §62(a) <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 62 - Adjusted gross income defined''' <br />
<br />
'''(a) General rule. For purposes of this subtitle, the term “adjusted gross income” means, in the case of an individual, gross income minus the following deductions:'''<br />
<br />
''' (1) Trade and business deductions. The deductions allowed by this chapter (other than by part VII of this subchapter) which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee.'''<br />
<br />
''' (2) Certain trade and business deductions of employees'''<br />
<br />
''' (A) Reimbursed expenses of employees. The deductions allowed by part VI (section 161 and following) which consist of expenses paid or incurred by the taxpayer, in connection with the performance by him of services as an employee, under a reimbursement or other expense allowance arrangement with his employer. The fact that the reimbursement may be provided by a third party shall not be determinative of whether or not the preceding sentence applies.'''<br />
<br />
''' (B) Certain expenses of performing artists. The deductions allowed by section 162 which consist of expenses paid or incurred by a qualified performing artist in connection with the performances by him of services in the performing arts as an employee.'''<br />
<br />
''' (C) Certain expenses of officials. The deductions allowed by section 162 which consist of expenses paid or incurred with respect to services performed by an official as an employee of a State or a political subdivision thereof in a position compensated in whole or in part on a fee basis.'''<br />
<br />
''' (D) Certain expenses of elementary and secondary school teachers. The deductions allowed by section 162 which consist of expenses, not in excess of $250, paid or incurred by an eligible educator—'''<br />
<br />
''' (i) by reason of the participation of the educator in professional development courses related to the curriculum in which the educator provides instruction or to the students for which the educator provides instruction, and'''<br />
<br />
''' '''<br />
<br />
''' (ii) in connection with books, supplies (other than non athletic supplies for courses of instruction in health or physical education), computer equipment (including related software and services) and other equipment, and supplementary materials used by the eligible educator in the classroom.'''<br />
<br />
''' (E) Certain expenses of members of reserve components of the Armed Forces of the United States'''<br />
<br />
'''The deductions allowed by section 162 which consist of expenses, determined at a rate not in excess of the rates for travel expenses (including per diem in lieu of subsistence) authorized for employees of agencies under subchapter I of chapter 57 of title 5, United States Code, paid or incurred by the taxpayer in connection with the performance of services by such taxpayer as a member of a reserve component of the Armed Forces of the United States for any period during which such individual is more than 100 miles away from home in connection with such services.'''<br />
<br />
''' (3) Losses from sale or exchange of property. The deductions allowed by part VI (sec. 161 and following) as losses from the sale or exchange of property.'''<br />
<br />
''' (4) Deductions attributable to rents and royalties. The deductions allowed by part VI (sec. 161 and following), by section 212 (relating to expenses for production of income), and by section 611 (relating to depletion) which are attributable to property held for the production of rents or royalties.'''<br />
<br />
''' (5) Certain deductions of life tenants and income beneficiaries of property. In the case of a life tenant of property, or an income beneficiary of property held in trust, or an heir, legatee, or devisee of an estate, the deduction for depreciation allowed by section 167 and the deduction allowed by section 611.'''<br />
<br />
''' (6) Pension, profit-sharing, and annuity plans of self-employed individuals. In the case of an individual who is an employee within the meaning of section 401(c)(1), the deduction allowed by section 404.'''<br />
<br />
''' (7) Retirement savings. The deduction allowed by section 219 (relating to deduction of certain retirement savings).'''<br />
<br />
''' [(8) Repealed. Pub. L. 104–188, title I, § 1401(b)(4), Aug. 20, 1996, 110 Stat. 1788]'''<br />
<br />
''' (9) Penalties forfeited because of premature withdrawal of funds from time savings accounts or deposits. The deductions allowed by section 165 for losses incurred in any transaction entered into for profit, though not connected with a trade or business, to the extent that such losses include amounts forfeited to a bank, mutual savings bank, savings and loan association, building and loan association, cooperative bank or homestead association as a penalty for premature withdrawal of funds from a time savings account, certificate of deposit, or similar class of deposit.'''<br />
<br />
''' (10) Alimony. The deduction allowed by section 215.'''<br />
<br />
''' (11) Reforestation expenses. The deduction allowed by section 194.'''<br />
<br />
''' (12) Certain required repayments of supplemental unemployment compensation benefits. The deduction allowed by section 165 for the repayment to a trust described in paragraph (9) or (17) of section 501(c) of supplemental unemployment compensation benefits received from such trust if such repayment is required because of the receipt of trade readjustment allowances under section 231 or 232 of the Trade Act of 1974 (19 U.S.C. 2291 and 2292).'''<br />
<br />
''' (13) Jury duty pay remitted to employer. Any deduction allowable under this chapter by reason of an individual remitting any portion of any jury pay to such individual’s employer in exchange for payment by the employer of compensation for the period such individual was performing jury duty. For purposes of the preceding sentence, the term “jury pay” means any payment received by the individual for the discharge of jury duty.'''<br />
<br />
''' [(14) Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(34)(C), Dec. 19, 2014, 128 Stat. 4042]'''<br />
<br />
''' (15) Moving expenses. The deduction allowed by section 217.'''<br />
<br />
''' (16) Archer MSAs. The deduction allowed by section 220.'''<br />
<br />
''' (17) Interest on education loans. The deduction allowed by section 221.'''<br />
<br />
''' (18) Higher education expenses. The deduction allowed by section 222.'''<br />
<br />
''' (19) Health savings accounts. The deduction allowed by section 223.'''<br />
<br />
''' (20) Costs involving discrimination suits, etc. Any deduction allowable under this chapter for attorney fees and court costs paid by, or on behalf of, the taxpayer in connection with any action involving a claim of unlawful discrimination (as defined in subsection (e)) or a claim of a violation of subchapter III of chapter 37 of title 31, United States Code [2] or a claim made under section 1862(b)(3)(A) of the Social Security Act (42 U.S.C. 1395y(b)(3)(A)). The preceding sentence shall not apply to any deduction in excess of the amount includible in the taxpayer’s gross income for the taxable year on account of a judgment or settlement (whether by suit or agreement and whether as lump sum or periodic payments) resulting from such claim.'''<br />
<br />
''' (21) Attorneys’ fees relating to awards to whistleblowers'''<br />
<br />
''' (A) In general. Any deduction allowable under this chapter for attorney fees and court costs paid by, or on behalf of, the taxpayer in connection with any award under—'''<br />
<br />
''' (i) section 7623(b), or'''<br />
<br />
''' (ii) in the case of taxable years beginning after December 31, 2017, any action brought under—'''<br />
<br />
''' (I) section 21F of the Securities Exchange Act of 1934 (15 U.S.C. 78u–6),'''<br />
<br />
''' (II) a State false claims act, including a State false claims act with qui tam provisions, or'''<br />
<br />
''' (III) section 23 of the Commodity Exchange Act (7 U.S.C. 26).'''<br />
<br />
''' (B) May not exceed award. Subparagraph (A) shall not apply to any deduction in excess of the amount includible in the taxpayer’s gross income for the taxable year on account of such award.''' <br />
<br />
'''Nothing in this section shall permit the same item to be deducted more than once. The deduction allowed by section 199A shall not be treated as a deduction described in any of the preceding paragraphs of this subsection.''' <br />
<br />
'''(b) Qualified performing artist'''<br />
<br />
''' (1) In general. For purposes of subsection (a)(2)(B), the term “qualified performing artist” means, with respect to any taxable year, any individual if—'''<br />
<br />
''' (A) such individual performed services in the performing arts as an employee during the taxable year for at least 2 employers,'''<br />
<br />
''' (B) the aggregate amount allowable as a deduction under section 162 in connection with the performance of such services exceeds 10 percent of such individual’s gross income attributable to the performance of such services, and'''<br />
<br />
''' (C) the adjusted gross income of such individual for the taxable year (determined without regard to subsection (a)(2)(B)) does not exceed $16,000.'''<br />
<br />
''' (2) Nominal employer not taken into account. An individual shall not be treated as performing services in the performing arts as an employee for any employer during any taxable year unless the amount received by such individual from such employer for the performance of such services during the taxable year equals or exceeds $200.'''<br />
<br />
''' (3) Special rules for married couples'''<br />
<br />
''' (A) In general. Except in the case of a husband and wife who lived apart at all times during the taxable year, if the taxpayer is married at the close of the taxable year, subsection (a)(2)(B) shall apply only if the taxpayer and his spouse file a joint return for the taxable year.'''<br />
<br />
''' (B) Application of paragraph (1)In the case of a joint return—'''<br />
<br />
''' (i) paragraph (1) (other than subparagraph (C) thereof) shall be applied separately with respect to each spouse, but'''<br />
<br />
''' (ii) paragraph (1)(C) shall be applied with respect to their combined adjusted gross income.'''<br />
<br />
''' (C) Determination of marital status. For purposes of this subsection, marital status shall be determined under section 7703(a).'''<br />
<br />
''' (D) Joint return. For purposes of this subsection, the term “joint return” means the joint return of a husband and wife made under section 6013.'''<br />
<br />
'''(c) Certain arrangements not treated as reimbursement arrangements. For purposes of subsection (a)(2)(A), an arrangement shall in no event be treated as a reimbursement or other expense allowance arrangement if—'''<br />
<br />
''' (1) such arrangement does not require the employee to substantiate the expenses covered by the arrangement to the person providing the reimbursement, or'''<br />
<br />
''' (2) such arrangement provides the employee the right to retain any amount in excess of the substantiated expenses covered under the arrangement.''' <br />
<br />
'''The substantiation requirements of the preceding sentence shall not apply to any expense to the extent that substantiation is not required under section 274(d) for such expense by reason of the regulations prescribed under the 2nd sentence thereof.''' <br />
<br />
'''(d) Definition; special rules'''<br />
<br />
''' (1) Eligible educator'''<br />
<br />
''' (A) In general. For purposes of subsection (a)(2)(D), the term “eligible educator” means, with respect to any taxable year, an individual who is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide in a school for at least 900 hours during a school year.'''<br />
<br />
''' (B) School. The term “school” means any school which provides elementary education or secondary education (kindergarten through grade 12), as determined under State law.'''<br />
<br />
''' (2) Coordination with exclusions. A deduction shall be allowed under subsection (a)(2)(D) for expenses only to the extent the amount of such expenses exceeds the amount excludable under section 135, 529(c)(1), or 530(d)(2) for the taxable year.'''<br />
<br />
''' (3) Inflation adjustment. In the case of any taxable year beginning after 2015, the $250 amount in subsection (a)(2)(D) shall be increased by an amount equal to—'''<br />
<br />
''' (A) such dollar amount, multiplied by'''<br />
<br />
''' (B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 2014” for “calendar year 2016” in subparagraph (A)(ii) thereof.''' <br />
<br />
'''Any increase determined under the preceding sentence shall be rounded to the nearest multiple of $50.''' <br />
<br />
'''(e) Unlawful discrimination defined. For purposes of subsection (a)(20), the term “unlawful discrimination” means an act that is unlawful under any of the following:'''<br />
<br />
''' (1) Section 302 of the Civil Rights Act of 1991 (2 U.S.C. 1202).[3]'''<br />
<br />
''' (2) Section 201, 202, 203, 204, 205, 206, or 207 of the Congressional Accountability Act of 1995 (2 U.S.C. 1311, 1312, 1313, 1314, 1315, 1316, or 1317).'''<br />
<br />
''' (3) The National Labor Relations Act (29 U.S.C. 151 et seq.).'''<br />
<br />
''' (4) The Fair Labor Standards Act of 1938 (29 U.S.C. 201 et seq.).'''<br />
<br />
''' '''<br />
<br />
''' (5) Section 4 or 15 of the Age Discrimination in Employment Act of 1967 (29 U.S.C. 623 or 633a).'''<br />
<br />
''' (6) Section 501 or 504 of the Rehabilitation Act of 1973 (29 U.S.C. 791 or 794).'''<br />
<br />
''' (7) Section 510 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1140).'''<br />
<br />
''' (8) Title IX of the Education Amendments of 1972 (20 U.S.C. 1681 et seq.).'''<br />
<br />
''' (9) The Employee Polygraph Protection Act of 1988 (29 U.S.C. 2001 et seq.).'''<br />
<br />
''' (10) The Worker Adjustment and Retraining Notification Act (29 U.S.C. 2102 et seq.).'''<br />
<br />
''' (11) Section 105 of the Family and Medical Leave Act of 1993 (29 U.S.C. 2615).'''<br />
<br />
''' (12) Chapter 43 of title 38, United States Code (relating to employment and reemployment rights of members of the uniformed services).'''<br />
<br />
''' (13) Section 1977, 1979, or 1980 of the Revised Statutes (42 U.S.C. 1981, 1983, or 1985).'''<br />
<br />
''' (14) Section 703, 704, or 717 of the Civil Rights Act of 1964 (42 U.S.C. 2000e–2, 2000e–3, or 2000e–16).'''<br />
<br />
''' (15) Section 804, 805, 806, 808, or 818 of the Fair Housing Act (42 U.S.C. 3604, 3605, 3606, 3608, or 3617).'''<br />
<br />
''' (16) Section 102, 202, 302, or 503 of the Americans with Disabilities Act of 1990 (42 U.S.C. 12112, 12132, 12182, or 12203).'''<br />
<br />
''' (17) Any provision of Federal law (popularly known as whistleblower protection provisions) prohibiting the discharge of an employee, the discrimination against an employee, or any other form of retaliation or reprisal against an employee for asserting rights or taking other actions permitted under Federal law.'''<br />
<br />
''' (18) Any provision of Federal, State, or local law, or common law claims permitted under Federal, State, or local law—'''<br />
<br />
''' (i) providing for the enforcement of civil rights, or'''<br />
<br />
''' (ii) regulating any aspect of the employment relationship, including claims for wages, compensation, or benefits, or prohibiting the discharge of an employee, the discrimination against an employee, or any other form of retaliation or reprisal against an employee for asserting rights or taking other actions permitted by law.'''<br />
|} <br />
<br />
STEP THREE: LESS QUALIFIED BUSINESS INCOME UNDER 199A <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 199A - Qualified business income''' <br />
<br />
'''(a) In general. In the case of a taxpayer other than a corporation, there shall be allowed as a deduction for any taxable year an amount equal to the sum of—'''<br />
<br />
''' (1) the lesser of—'''<br />
<br />
''' (A) the combined qualified business income amount of the taxpayer, or'''<br />
<br />
''' (B) an amount equal to 20 percent of the excess (if any) of—'''<br />
<br />
''' (i) the taxable income of the taxpayer for the taxable year, over'''<br />
<br />
''' (ii) the sum of any net capital gain (as defined in section 1(h)), plus the aggregate amount of the qualified cooperative dividends, of the taxpayer for the taxable year, plus'''<br />
<br />
''' (2) the lesser of—'''<br />
<br />
''' (A) 20 percent of the aggregate amount of the qualified cooperative dividends of the taxpayer for the taxable year, or'''<br />
<br />
''' (B) taxable income (reduced by the net capital gain (as so defined)) of the taxpayer for the taxable year.''' <br />
<br />
'''The amount determined under the preceding sentence shall not exceed the taxable income (reduced by the net capital gain (as so defined)) of the taxpayer for the taxable year.''' <br />
<br />
'''(b) Combined qualified business income amount. For purposes of this section—'''<br />
<br />
''' (1) In general. The term “combined qualified business income amount” means, with respect to any taxable year, an amount equal to—'''<br />
<br />
''' (A) the sum of the amounts determined under paragraph (2) for each qualified trade or business carried on by the taxpayer, plus'''<br />
<br />
''' (B) 20 percent of the aggregate amount of the qualified REIT dividends and qualified publicly traded partnership income of the taxpayer for the taxable year.'''<br />
<br />
''' (2) Determination of deductible amount for each trade or business. The amount determined under this paragraph with respect to any qualified trade or business is the lesser of—'''<br />
<br />
''' (A) 20 percent of the taxpayer’s qualified business income with respect to the qualified trade or business, or'''<br />
<br />
''' (B) the greater of—'''<br />
<br />
''' (i) 50 percent of the W–2 wages with respect to the qualified trade or business, or'''<br />
<br />
''' (ii) the sum of 25 percent of the W–2 wages with respect to the qualified trade or business, plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property.'''<br />
<br />
''' (3) Modifications to limit based on taxable income'''<br />
<br />
''' (A) Exception from limit. In the case of any taxpayer whose taxable income for the taxable year does not exceed the threshold amount, paragraph (2) shall be applied without regard to subparagraph (B).'''<br />
<br />
''' (B) Phase-in of limit for certain taxpayers'''<br />
<br />
''' (i) In general. If—'''<br />
<br />
''' (I) the taxable income of a taxpayer for any taxable year exceeds the threshold amount, but does not exceed the sum of the threshold amount plus $50,000 ($100,000 in the case of a joint return), and'''<br />
<br />
''' (II) the amount determined under paragraph (2)(B) (determined without regard to this subparagraph) with respect to any qualified trade or business carried on by the taxpayer is less than the amount determined under paragraph (2)(A) with respect such trade or business, then paragraph (2) shall be applied with respect to such trade or business without regard to subparagraph (B) thereof and by reducing the amount determined under subparagraph (A) thereof by the amount determined under clause (ii).'''<br />
<br />
''' (ii) Amount of reduction. The amount determined under this subparagraph is the amount which bears the same ratio to the excess amount as—'''<br />
<br />
''' (I) the amount by which the taxpayer’s taxable income for the taxable year exceeds the threshold amount, bears to'''<br />
<br />
''' (II) $50,000 ($100,000 in the case of a joint return).'''<br />
<br />
''' (iii) Excess amount. For purposes of clause (ii), the excess amount is the excess of—'''<br />
<br />
''' (I) the amount determined under paragraph (2)(A) (determined without regard to this paragraph), over'''<br />
<br />
''' (II) the amount determined under paragraph (2)(B) (determined without regard to this paragraph).'''<br />
<br />
''' (4) Wages, etc'''<br />
<br />
''' (A) In general. The term “W–2 wages” means, with respect to any person for any taxable year of such person, the amounts described in paragraphs (3) and (8) of section 6051(a) paid by such person with respect to employment of employees by such person during the calendar year ending during such taxable year.'''<br />
<br />
''' (B) Limitation to wages attributable to qualified business income. Such term shall not include any amount which is not properly allocable to qualified business income for purposes of subsection (c)(1).'''<br />
<br />
''' (C) Return requirement. Such term shall not include any amount which is not properly included in a return filed with the Social Security Administration on or before the 60th day after the due date (including extensions) for such return.'''<br />
<br />
''' (5) Acquisitions, dispositions, and short taxable years. The Secretary shall provide for the application of this subsection in cases of a short taxable year or where the taxpayer acquires, or disposes of, the major portion of a trade or business or the major portion of a separate unit of a trade or business during the taxable year.'''<br />
<br />
''' (6) Qualified property. For purposes of this section:'''<br />
<br />
''' ''' <br />
<br />
''' (A) In general. The term “qualified property” means, with respect to any qualified trade or business for a taxable year, tangible property of a character subject to the allowance for depreciation under section 167—'''<br />
<br />
''' (i) which is held by, and available for use in, the qualified trade or business at the close of the taxable year,'''<br />
<br />
''' (ii) which is used at any point during the taxable year in the production of qualified business income, and'''<br />
<br />
''' (iii) the depreciable period for which has not ended before the close of the taxable year.'''<br />
<br />
''' (B) Depreciable period. The term “depreciable period” means, with respect to qualified property of a taxpayer, the period beginning on the date the property was first placed in service by the taxpayer and ending on the later of—'''<br />
<br />
''' (i) the date that is 10 years after such date, or'''<br />
<br />
''' (ii) the last day of the last full year in the applicable recovery period that would apply to the property under section 168 (determined without regard to subsection (g) thereof).''' <br />
<br />
'''(c) Qualified business income. For purposes of this section—'''<br />
<br />
''' (1) In general. The term “qualified business income” means, for any taxable year, the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer. Such term shall not include any qualified REIT dividends, qualified cooperative dividends, or qualified publicly traded partnership income.'''<br />
<br />
''' (2) Carryover of losses. If the net amount of qualified income, gain, deduction, and loss with respect to qualified trades or businesses of the taxpayer for any taxable year is less than zero, such amount shall be treated as a loss from a qualified trade or business in the succeeding taxable year.'''<br />
<br />
''' (3) Qualified items of income, gain, deduction, and loss. For purposes of this subsection—'''<br />
<br />
''' (A) In general. The term “qualified items of income, gain, deduction, and loss” means items of income, gain, deduction, and loss to the extent such items are—'''<br />
<br />
''' (i) effectively connected with the conduct of a trade or business within the United States (within the meaning of section 864(c), determined by substituting “qualified trade or business (within the meaning of section 199A)” for“nonresident alien individual or a foreign corporation” or for “a foreign corporation” each place it appears), and'''<br />
<br />
''' (ii) included or allowed in determining taxable income for the taxable year.'''<br />
<br />
''' (B) Exceptions. The following investment items shall not be taken into account as a qualified item of income, gain, deduction, or loss:'''<br />
<br />
''' (i) Any item of short-term capital gain, short-term capital loss, long-term capital gain, or long-term capital loss.'''<br />
<br />
''' (ii) Any dividend, income equivalent to a dividend, or payment in lieu of dividends described in section 954(c)(1)(G).'''<br />
<br />
''' (iii) Any interest income other than interest income which is properly allocable to a trade or business.'''<br />
<br />
''' (iv) Any item of gain or loss described in subparagraph (C) or (D) of section 954(c)(1) (applied by substituting “qualified trade or business” for “controlled foreign corporation”).'''<br />
<br />
''' (v) Any item of income, gain, deduction, or loss taken into account under section 954(c)(1)(F) (determined without regard to clause (ii) thereof and other than items attributable to notional principal contracts entered into in transactions qualifying under section 1221(a)(7)).'''<br />
<br />
''' (vi) Any amount received from an annuity which is not received in connection with the trade or business.'''<br />
<br />
''' (vii) Any item of deduction or loss properly allocable to an amount described in any of the preceding clauses.'''<br />
<br />
''' (4) Treatment of reasonable compensation and guaranteed payments. Qualified business income shall not include—'''<br />
<br />
''' (A) reasonable compensation paid to the taxpayer by any qualified trade or business of the taxpayer for services rendered with respect to the trade or business,'''<br />
<br />
''' (B) any guaranteed payment described in section 707(c) paid to a partner for services rendered with respect to the trade or business, and'''<br />
<br />
''' (C) to the extent provided in regulations, any payment described in section 707(a) to a partner for services rendered with respect to the trade or business.''' <br />
<br />
'''(d) Qualified trade or business. For purposes of this section—'''<br />
<br />
''' (1) In general. The term “qualified trade or business” means any trade or business other than—'''<br />
<br />
''' (A) a specified service trade or business, or'''<br />
<br />
''' (B) the trade or business of performing services as an employee.'''<br />
<br />
''' (2) Specified service trade or business. The term “specified service trade or business” means any trade or business—'''<br />
<br />
''' (A) which is described in section 1202(e)(3)(A) (applied without regard to the words “engineering, architecture,”) or which would be so described if the term “employees or owners” were substituted for “employees” therein, or'''<br />
<br />
''' (B) which involves the performance of services that consist of investing and investment management, trading, or dealing in securities (as defined in section 475(c)(2)), partnership interests, or commodities (as defined in section 475(e)(2)).'''<br />
<br />
''' (3) Exception for specified service businesses based on taxpayer’s income'''<br />
<br />
''' (A) In generalIf, for any taxable year, the taxable income of any taxpayer is less than the sum of the threshold amount plus $50,000 ($100,000 in the case of a joint return), then—'''<br />
<br />
''' (i) any specified service trade or business of the taxpayer shall not fail to be treated as a qualified trade or business due to paragraph (1)(A), but'''<br />
<br />
''' (ii) only the applicable percentage of qualified items of income, gain, deduction, or loss, and the W–2 wages and the unadjusted basis immediately after acquisition of qualified property, of the taxpayer allocable to such specified service trade or business shall be taken into account in computing the qualified business income, W–2 wages, and the unadjusted basis immediately after acquisition of qualified property of the taxpayer for the taxable year for purposes of applying this section.'''<br />
<br />
''' (B) Applicable percentage. For purposes of subparagraph (A), the term “applicable percentage” means, with respect to any taxable year, 100 percent reduced (not below zero) by the percentage equal to the ratio of—'''<br />
<br />
''' (i) the taxable income of the taxpayer for the taxable year in excess of the threshold amount, bears to'''<br />
<br />
''' (ii) $50,000 ($100,000 in the case of a joint return).''' <br />
<br />
'''(e) Other Definitions. For purposes of this section—'''<br />
<br />
''' (1) Taxable income. Taxable income shall be computed without regard to the deduction allowable under this section.'''<br />
<br />
''' (2) Threshold amount'''<br />
<br />
''' (A) In general. The term “threshold amount” means $157,500 (200 percent of such amount in the case of a joint return).'''<br />
<br />
''' (B) Inflation adjustment. In the case of any taxable year beginning after 2018, the dollar amount in subparagraph (A) shall be increased by an amount equal to—'''<br />
<br />
''' (i) such dollar amount, multiplied by'''<br />
<br />
''' (ii) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 2017” for “calendar year 2016” in subparagraph (A)(ii) thereof.''' <br />
<br />
'''The amount of any increase under the preceding sentence shall be rounded as provided in section 1(f)(7).'''<br />
<br />
''' (3) Qualified REIT dividend. The term “qualified REIT dividend” means any dividend from a real estate investment trust received during the taxable year which—'''<br />
<br />
''' (A) is not a capital gain dividend, as defined in section 857(b)(3), and'''<br />
<br />
''' (B) is not qualified dividend income, as defined in section 1(h)(11).'''<br />
<br />
''' (4) Qualified cooperative dividend. The term “qualified cooperative dividend” means any patronage dividend (as defined in section 1388(a)), any per-unit retain allocation (as defined in section 1388(f)), and any qualified written notice of allocation (as defined in section 1388(c)), or any similar amount received from an organization described in subparagraph (B)(ii), which—'''<br />
<br />
''' (A) is includible in gross income, and'''<br />
<br />
''' (B) is received from—'''<br />
<br />
''' (i) an organization or corporation described in section 501(c)(12) or 1381(a), or'''<br />
<br />
''' (ii) an organization which is governed under this title by the rules applicable to cooperatives under this title before the enactment of subchapter T.'''<br />
<br />
''' (5) Qualified publicly traded partnership income. The term “qualified publicly traded partnership income” means, with respect to any qualified trade or business of a taxpayer, the sum of—'''<br />
<br />
''' (A) the net amount of such taxpayer’s allocable share of each qualified item of income, gain, deduction, and loss (as defined in subsection (c)(3) and determined after the application of subsection (c)(4)) from a publicly traded partnership (as defined in section 7704(a)) [1] which is not treated as a corporation under section 7704(c), plus'''<br />
<br />
''' (B) any gain recognized by such taxpayer upon disposition of its interest in such partnership to the extent such gain is treated as an amount realized from the sale or exchange of property other than a capital asset under section 751(a).''' <br />
<br />
'''(f) Special rules'''<br />
<br />
''' (1) Application to partnerships and s corporations'''<br />
<br />
''' (A) In general. In the case of a partnership or S corporation—'''<br />
<br />
''' (i) this section shall be applied at the partner or shareholder level,'''<br />
<br />
''' (ii) each partner or shareholder shall take into account such person’s allocable share of each qualified item of income, gain, deduction, and loss, and'''<br />
<br />
''' (iii) each partner or shareholder shall be treated for purposes of subsection (b) as having W–2 wages and unadjusted basis immediately after acquisition of qualified property for the taxable year in an amount equal to such person’s allocable share of the W–2 wages and the unadjusted basis immediately after acquisition of qualified property of the partnership or S corporation for the taxable year (as determined under regulations prescribed by the Secretary).''' <br />
<br />
'''For purposes of clause (iii), a partner’s or shareholder’s allocable share of W–2 wages shall be determined in the same manner as the partner’s or shareholder’s allocable share of wage expenses. For purposes of such clause, partner’s or shareholder’s allocable share of the unadjusted basis immediately after acquisition of qualified property shall be determined in the same manner as the partner’s or shareholder’s allocable share of depreciation. For purposes of this subparagraph, in the case of an S corporation, an allocable share shall be the shareholder’s pro rata share of an item.'''<br />
<br />
''' (B) Application to trusts and estates. Rules similar to the rules under section 199(d)(1)(B)(i) (as in effect on December 1, 2017) for the apportionment of W–2 wages shall apply to the apportionment of W–2 wages and the apportionment of unadjusted basis immediately after acquisition of qualified property under this section.'''<br />
<br />
''' (C) Treatment of trades or business in Puerto Rico'''<br />
<br />
''' (i) In general. In the case of any taxpayer with qualified business income from sources within the commonwealth of Puerto Rico, if all such income is taxable under section 1 for such taxable year, then for purposes of determining the qualified business income of such taxpayer for such taxable year, the term “United States” shall include the Commonwealth of Puerto Rico.'''<br />
<br />
''' (ii) Special rule for applying limit. In the case of any taxpayer described in clause (i), the determination of W–2 wages of such taxpayer with respect to any qualified trade or business conducted in Puerto Rico shall be made without regard to any exclusion under section 3401(a)(8) for remuneration paid for services in Puerto Rico.'''<br />
<br />
''' (2) Coordination with minimum tax. For purposes of determining alternative minimum taxable income under section 55, qualified business income shall be determined without regard to any adjustments under sections 56 through 59.'''<br />
<br />
''' (3) Deduction limited to income taxes. The deduction under subsection (a) shall only be allowed for purposes of this chapter.'''<br />
<br />
''' (4) Regulations. The Secretary shall prescribe such regulations as are necessary to carry out the purposes of this section, including regulations—'''<br />
<br />
''' (A) for requiring or restricting the allocation of items and wages under this section and such reporting requirements as the Secretary determines appropriate, and'''<br />
<br />
''' (B) for the application of this section in the case of tiered entities.''' <br />
<br />
'''(g) Deduction allowed to specified agricultural or horticultural cooperatives'''<br />
<br />
''' (1) In general. In the case of any taxable year of a specified agricultural or horticultural cooperative beginning after December 31, 2017, there shall be allowed a deduction in an amount equal to the lesser of—'''<br />
<br />
''' (A) 20 percent of the excess (if any) of—'''<br />
<br />
''' (i) the gross income of a specified agricultural or horticultural cooperative, over'''<br />
<br />
''' (ii) the qualified cooperative dividends (as defined in subsection (e)(4)) paid during the taxable year for the taxable year, or'''<br />
<br />
''' (B) the greater of—'''<br />
<br />
''' (i) 50 percent of the W–2 wages of the cooperative with respect to its trade or business, or'''<br />
<br />
''' (ii) the sum of 25 percent of the W–2 wages of the cooperative with respect to its trade or business, plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property of the cooperative.'''<br />
<br />
''' (2) Limitation. The amount determined under paragraph (1) shall not exceed the taxable income of the specified agricultural or horticultural for the taxable year.'''<br />
<br />
''' (3) Specified agricultural or horticultural cooperative. For purposes of this subsection, the term “specified agricultural or horticultural cooperative” means an organization to which part I of subchapter T applies which is engaged in—'''<br />
<br />
''' (A) the manufacturing, production, growth, or extraction in whole or significant part of any agricultural or horticultural product,'''<br />
<br />
''' (B) the marketing of agricultural or horticultural products which its patrons have so manufactured, produced, grown, or extracted, or'''<br />
<br />
''' (C) the provision of supplies, equipment, or services to farmers or to organizations described in subparagraph (A) or (B).''' <br />
<br />
'''(h) Anti-abuse rules. The Secretary shall—'''<br />
<br />
''' (1) apply rules similar to the rules under section 179(d)(2) in order to prevent the manipulation of the depreciable period of qualified property using transactions between related parties, and'''<br />
<br />
''' (2) prescribe rules for determining the unadjusted basis immediately after acquisition of qualified property acquired in like-kind exchanges or involuntary conversions.''' <br />
<br />
'''(i) Termination. This section shall not apply to taxable years beginning after December 31, 2025.'''<br />
|} <br />
<br />
STEP FOUR A: LESS GENERAL DEDUCTION OR ITEMIZED DEDUCTIONS UNDER 63(c) and 63(d) <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 63 - Taxable income defined''' <br />
<br />
'''(a) In general. Except as provided in subsection (b), for purposes of this subtitle, the term “taxable income” means gross income minus the deductions allowed by this chapter (other than the standard deduction).'''<br />
<br />
'''(b) Individuals who do not itemize their deductions. In the case of an individual who does not elect to itemize his deductions for the taxable year, for purposes of this subtitle, the term “taxable income” means adjusted gross income, minus—'''<br />
<br />
''' (1) the standard deduction,'''<br />
<br />
''' (2) the deduction for personal exemptions provided in section 151, and'''<br />
<br />
''' (3) the deduction provided in section 199A.''' <br />
<br />
'''(c) Standard deduction. For purposes of this subtitle—'''<br />
<br />
''' (1) In general. Except as otherwise provided in this subsection, the term “standard deduction” means the sum of—'''<br />
<br />
''' (A) the basic standard deduction, and'''<br />
<br />
''' (B) the additional standard deduction.'''<br />
<br />
''' (2) Basic standard deduction. For purposes of paragraph (1), the basic standard deduction is—'''<br />
<br />
''' (A) 200 percent of the dollar amount in effect under subparagraph (C) for the taxable year in the case of—'''<br />
<br />
''' (i) a joint return, or'''<br />
<br />
''' (ii) a surviving spouse (as defined in section 2(a)),'''<br />
<br />
''' (B) $4,400 in the case of a head of household (as defined in section 2(b)), or'''<br />
<br />
''' (C) $3,000 in any other case.'''<br />
<br />
''' (3) Additional standard deduction for aged and blind. For purposes of paragraph (1), the additional standard deduction is the sum of each additional amount to which the taxpayer is entitled under subsection (f).'''<br />
<br />
''' (4) Adjustments for inflation. In the case of any taxable year beginning in a calendar year after 1988, each dollar amount contained in paragraph (2)(B), (2)(C), or (5) or subsection (f) shall be increased by an amount equal to—'''<br />
<br />
''' (A) such dollar amount, multiplied by'''<br />
<br />
''' (B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting for “calendar year 2016” in subparagraph (A)(ii) thereof—'''<br />
<br />
''' (i) “calendar year 1987” in the case of the dollar amounts contained in paragraph (2)(B), (2)(C), or (5)(A) or subsection (f), and'''<br />
<br />
''' (ii) “calendar year 1997” in the case of the dollar amount contained in paragraph (5)(B).'''<br />
<br />
''' (5) Limitation on basic standard deduction in the case of certain dependents. In the case of an individual with respect to whom a deduction under section 151 is allowable to another taxpayer for a taxable year beginning in the calendar year in which the individual’s taxable year begins, the basic standard deduction applicable to such individual for such individual’s taxable year shall not exceed the greater of—'''<br />
<br />
''' (A) $500, or'''<br />
<br />
''' (B) the sum of $250 and such individual’s earned income.'''<br />
<br />
''' (6) Certain individuals, etc., not eligible for standard deduction. In the case of—'''<br />
<br />
''' (A) a married individual filing a separate return where either spouse itemizes deductions,'''<br />
<br />
''' (B) a nonresident alien individual,'''<br />
<br />
''' (C) an individual making a return under section 443(a)(1) for a period of less than 12 months on account of a change in his annual accounting period, or'''<br />
<br />
''' (D) an estate or trust, common trust fund, or partnership, the standard deduction shall be zero.''' <br />
<br />
'''(7) Special rules for taxable years 2018 through 2025. In the case of a taxable year beginning after December 31, 2017, and before January 1, 2026—'''<br />
<br />
''' (A) Increase in standard deduction. Paragraph (2) shall be applied—'''<br />
<br />
''' (i) by substituting “$18,000” for “$4,400” in subparagraph (B), and'''<br />
<br />
''' (ii) by substituting “$12,000” for “$3,000” in subparagraph (C).'''<br />
<br />
''' (B) Adjustment for inflation'''<br />
<br />
''' (i) In general. Paragraph (4) shall not apply to the dollar amounts contained in paragraphs (2)(B) and (2)(C).'''<br />
<br />
''' (ii) Adjustment of increased amounts. In the case of a taxable year beginning after 2018, the $18,000 and $12,000 amounts in subparagraph (A) shall each be increased by an amount equal to—'''<br />
<br />
''' (I) such dollar amount, multiplied by'''<br />
<br />
''' (II) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “2017” for “2016” in subparagraph (A)(ii) thereof.''' <br />
<br />
'''If any increase under this clause is not a multiple of $50, such increase shall be rounded to the next lowest multiple of $50.''' <br />
<br />
'''(d) Itemized deductions. For purposes of this subtitle, the term “itemized deductions” means the deductions allowable under this chapter other than—'''<br />
<br />
''' (1) the deductions allowable in arriving at adjusted gross income,'''<br />
<br />
''' (2) the deduction for personal exemptions provided by section 151, and'''<br />
<br />
''' (3) the deduction provided in section 199A.''' <br />
<br />
'''(e) Election to itemize'''<br />
<br />
''' (1) In general. Unless an individual makes an election under this subsection for the taxable year, no itemized deduction shall be allowed for the taxable year. For purposes of this subtitle, the determination of whether a deduction is allowable under this chapter shall be made without regard to the preceding sentence.'''<br />
<br />
''' (2) Time and manner of election. Any election under this subsection shall be made on the taxpayer’s return, and the Secretary shall prescribe the manner of signifying such election on the return.'''<br />
<br />
''' (3) Change of election.Under regulations prescribed by the Secretary, a change of election with respect to itemized deductions for any taxable year may be made after the filing of the return for such year. If the spouse of the taxpayer filed a separate return for any taxable year corresponding to the taxable year of the taxpayer, the change shall not be allowed unless, in accordance with such regulations—'''<br />
<br />
''' (A) the spouse makes a change of election with respect to itemized deductions, for the taxable year covered in such separate return, consistent with the change of treatment sought by the taxpayer, and'''<br />
<br />
''' (B) the taxpayer and his spouse consent in writing to the assessment (within such period as may be agreed on with the Secretary) of any deficiency, to the extent attributable to such change of election, even though at the time of the filing of such consent the assessment of such deficiency would otherwise be prevented by the operation of any law or rule of law.''' <br />
<br />
'''This paragraph shall not apply if the tax liability of the taxpayer’s spouse for the taxable year corresponding to the taxable year of the taxpayer has been compromised under section 7122.''' <br />
<br />
'''(f) Aged or blind additional amounts'''<br />
<br />
''' (1) Additional amounts for the aged. The taxpayer shall be entitled to an additional amount of $600—'''<br />
<br />
''' (A) for himself if he has attained age 65 before the close of his taxable year, and'''<br />
<br />
''' (B) for the spouse of the taxpayer if the spouse has attained age 65 before the close of the taxable year and an additional exemption is allowable to the taxpayer for such spouse under section 151(b).'''<br />
<br />
''' (2) Additional amount for blind. The taxpayer shall be entitled to an additional amount of $600—'''<br />
<br />
''' (A) for himself if he is blind at the close of the taxable year, and'''<br />
<br />
''' (B) for the spouse of the taxpayer if the spouse is blind as of the close of the taxable year and an additional exemption is allowable to the taxpayer for such spouse under section 151(b).''' <br />
<br />
'''For purposes of subparagraph (B), if the spouse dies during the taxable year the determination of whether such spouse is blind shall be made as of the time of such death.'''<br />
<br />
''' (3) Higher amount for certain unmarried individuals. In the case of an individual who is not married and is not a surviving spouse, paragraphs (1) and (2) shall be applied by substituting “$750” for “$600”.'''<br />
<br />
''' (4) Blindness defined. For purposes of this subsection, an individual is blind only if his central visual acuity does not exceed 20/200 in the better eye with correcting lenses, or if his visual acuity is greater than 20/200 but is accompanied by a limitation in the fields of vision such that the widest diameter of the visual field subtends an angle no greater than 20 degrees.'''<br />
<br />
'''(g) Marital status. For purposes of this section, marital status shall be determined under section 7703.'''<br />
|} <br />
<br />
STEP FOUR B: ITEMIZED DEDUCTIONS §67 <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 67 - 2-percent floor on miscellaneous itemized deductions''' <br />
<br />
'''(a) General rule. In the case of an individual, the miscellaneous itemized deductions for any taxable year shall be allowed only to the extent that the aggregate of such deductions exceeds 2 percent of adjusted gross income.'''<br />
<br />
'''(b) Miscellaneous itemized deductions. For purposes of this section, the term “miscellaneous itemized deductions” means the itemized deductions other than—'''<br />
<br />
''' (1) the deduction under section 163 (relating to interest),'''<br />
<br />
''' (2) the deduction under section 164 (relating to taxes),'''<br />
<br />
''' (3) the deduction under section 165(a) for casualty or theft losses described in paragraph (2) or (3) of section 165(c) or for losses described in section 165(d),'''<br />
<br />
''' (4) the deductions under section 170 (relating to charitable, etc., contributions and gifts) and section 642(c) (relating to deduction for amounts paid or permanently set aside for a charitable purpose),'''<br />
<br />
''' (5) the deduction under section 213 (relating to medical, dental, etc., expenses),'''<br />
<br />
''' (6) any deduction allowable for impairment-related work expenses,'''<br />
<br />
''' (7) the deduction under section 691(c) (relating to deduction for estate tax in case of income in respect of the decedent),'''<br />
<br />
''' (8) any deduction allowable in connection with personal property used in a short sale,'''<br />
<br />
''' (9) the deduction under section 1341 (relating to computation of tax where taxpayer restores substantial amount held under claim of right),'''<br />
<br />
''' (10) the deduction under section 72(b)(3) (relating to deduction where annuity payments cease before investment recovered),'''<br />
<br />
''' (11) the deduction under section 171 (relating to deduction for amortizable bond premium), and'''<br />
<br />
''' (12) the deduction under section 216 (relating to deductions in connection with cooperative housing corporations).''' <br />
<br />
'''(c) Disallowance of indirect deduction through pass-thru entity'''<br />
<br />
''' (1) In general. The Secretary shall prescribe regulations which prohibit the indirect deduction through pass-thru entities of amounts which are not allowable as a deduction if paid or incurred directly by an individual and which contain such reporting requirements as may be necessary to carry out the purposes of this subsection.'''<br />
<br />
''' (2) Treatment of publicly offered regulated investment companies'''<br />
<br />
''' (A) In general. Paragraph (1) shall not apply with respect to any publicly offered regulated investment company.'''<br />
<br />
''' (B) Publicly offered regulated investment companies. For purposes of this subsection—'''<br />
<br />
''' (i) In general. The term “publicly offered regulated investment company” means a regulated investment company the shares of which are—'''<br />
<br />
''' (I) continuously offered pursuant to a public offering (within the meaning of section 4 of the Securities Act of 1933, as amended (15 U.S.C. 77a to 77aa)),'''<br />
<br />
''' (II) regularly traded on an established securities market, or'''<br />
<br />
''' (III) held by or for no fewer than 500 persons at all times during the taxable year.'''<br />
<br />
''' (ii) Secretary may reduce 500 person requirement. The Secretary may by regulation decrease the minimum shareholder requirement of clause (i)(III) in the case of regulated investment companies which experience a loss of shareholders through net redemptions of their shares.'''<br />
<br />
''' (3) Treatment of certain other entities. Paragraph (1) shall not apply—'''<br />
<br />
''' (A) with respect to cooperatives and real estate investment trusts, and'''<br />
<br />
''' (B) except as provided in regulations, with respect to estates and trusts.''' <br />
<br />
'''(d) Impairment-related work expenses. For purposes of this section, the term “impairment-related work expenses” means expenses—'''<br />
<br />
''' (1) of a handicapped individual (as defined in section 190(b)(3)) for attendant care services at the individual’s place of employment and other expenses in connection with such place of employment which are necessary for such individual to be able to work, and'''<br />
<br />
''' (2) with respect to which a deduction is allowable under section 162 (determined without regard to this section).''' <br />
<br />
'''(e) Determination of adjusted gross income in case of estates and trusts. For purposes of this section, the adjusted gross income of an estate or trust shall be computed in the same manner as in the case of an individual, except that—'''<br />
<br />
''' (1) the deductions for costs which are paid or incurred in connection with the administration of the estate or trust and which would not have been incurred if the property were not held in such trust or estate, and'''<br />
<br />
''' (2) the deductions allowable under sections 642(b), 651, and 661,'''<br />
<br />
'''shall be treated as allowable in arriving at adjusted gross income. Under regulations, appropriate adjustments shall be made in the application of part I of subchapter J of this chapter to take into account the provisions of this section.''' <br />
<br />
'''(f) Coordination with other limitation. This section shall be applied before the application of the dollar limitation of the second sentence of section 162(a) (relating to trade or business expenses).'''<br />
<br />
'''(g) Suspension for taxable years 2018 through 2025. Notwithstanding subsection (a), no miscellaneous itemized deduction shall be allowed for any taxable year beginning after December 31, 2017, and before January 1, 2026.'''<br />
|} <br />
<br />
'''EXAMPLE''' → Calculating Taxable Income <br />
<br />
Problem: John and Jane Doe; married with no children; both work at ACME Corp.; additional income: rent out basement apartment to law student. <br />
<br />
{| class="wikitable"<br />
| colspan="2" |'''2018 Income and Expenses for John and Jane Doe'''<br />
|-<br />
|'''Combined Salaries --- $95,000'''<br />
|Mortgage Interest (§163) --- $16,000<br />
|-<br />
|'''Rental Income --- $5,000'''<br />
|'''Rental Expenses (§212) --- $2,000'''<br />
|-<br />
|'''Education Loan Interest (§221) --- $8,000'''<br />
|Charitable Contributions (§170) --- $500<br />
|-<br />
|Medical Expenses (§213) --- $2,000<br />
|Unreimbursed Work Expenses (§162) --- $1,000<br />
|-<br />
|Tax Preparation Fee (§212) --- $1,000<br />
| <br />
|} <br />
<br />
STEP ONE: '''Gross Income''' → $100,000 (combined salaries + rental income) <br />
<br />
STEP TWO: '''Deductions''' Under §62(a) → Education Loan Interest §62(a)(4) ABOVE THE LINE!<br />
<br />
Rental Expenses §62(a)(17)<br />
<br />
$10,000 <br />
<br />
ADJUSTED GROSS INCOME = $90,000 (gross income less deductions under §62(a)). <br />
<br />
STEP THREE: Less Qualified Business Income → N/A, not a qualified business under §199A <br />
<br />
STEP FOUR: Less Standard Deduction OR<br />
<br />
Less Itemized Deductions <br />
<br />
{| class="wikitable"<br />
|'''Standard Deduction'''<br />
|'''Itemized Deductions'''<br />
|-<br />
|Look to §63(c) → Basic Standard Deduction §63(c)(2) <br />
<br />
If married filing jointly, 200% of $3,000 §63(c)(2)(A)-(C) <br />
<br />
BUT look to '''SPECIAL RULES''':<br />
<br />
§63(c)(7)(A)(ii) → Special rules for 2018 <br />
<br />
Replace $3,000 with $12,000 above <br />
<br />
$12,000 x 200% = TOTAL STANDARD → '''<u>$24,000</u>'''<br />
|Regular v. Miscellaneous <br />
<br />
Regular → on the list in §67(b) <br />
<br />
Miscellaneous → anything not on list in §67(b) <br />
<br />
<u>Regular</u><br />
<br />
Mortgage Interest --- §67(b)(1) → $16, 000<br />
<br />
Charitable Contributions --- §67(b)(4) → $500<br />
<br />
Medical Expenses --- §67(b)(5) → $2,000 <br />
<br />
<u>Miscellaneous</u><br />
<br />
Accountant/Tax Prep. Fees → $1,000<br />
<br />
Unreimbursed Work Expenses → $1,000 <br />
<br />
''*normally, you’d add up misc. and reg. to get total itemized, but due to §67(g), no misc. at this time.'' <br />
<br />
''2% floor on miscellaneous, but currently inactive'' <br />
<br />
TOTAL ITEMIZED → '''<u>$18,500</u>'''<br />
|} <br />
<br />
'''STEP FIVE: TOTAL TAXABLE INCOME → $66,000''' (AGI less standard deduction) <br />
<br />
'''Tax Credits''' <br />
<br />
Tax credit → dollar for dollar reduction in the tax bill that you owe; typically, cannot bring tax owed below $0 (cannot cause a refund), but there are a few exceptions:<br />
<br />
● Credit for taxes withheld: money you already paid the government (anything in excess of actual tax owed will go back to the taxpayer<br />
<br />
● Earned income tax credit: to help low-income families with cash; you must be working and earning income to benefit from this tax credit <br />
<br />
Taxpayer preference for tax-reducing strategies:<br />
<br />
1) Tax credits (BEST, actual dollar for dollar reduction)<br />
<br />
2) Above the line deductions (preferred because percentage reduction in AGI)<br />
<br />
3) Below the line deductions (comes after AGI, least preferable, but still good!) <br />
<br />
Child Tax Credit → most subject to change currently; expanded with 2018 tax plan, used to replace eliminated personal exemption deduction<br />
<br />
● Changes “phase out” → you can make more before being phased out<br />
<br />
● Currently, only goes up to including 16 year olds<br />
<br />
● Expanded credit → neediest families are benefitting the least<br />
<br />
● You need an SSN to get the credit (children too), so no mixed-immigrant status families (must be a citizen, TINs are not enough)<br />
<br />
<br />
'''What is “Income”?''' <br />
<br />
Haig-Simons (NOT GOOD LAW) → Income = change in wealth + consumption<br />
<br />
Issues: no realization, phantom income, NOT THE CALCULATION WE USE <br />
<br />
Phantom income → cancellation of debt, loan forgiveness (increase in tax bill, no money to pay it) <br />
<br />
<u>Eisner v. Macomber (1920)</u> - SCOTUS [π owned stock that increased when company experienced growth]<br />
<br />
RULE: Under the 16th Amendment a stock dividend paid as additional shares of stock is not taxable income. <br />
<br />
Case Notes: '''no income until sale and realization of actual $'''<br />
<br />
● Income is payment, labor, or a combination of both<br />
<br />
● A stock dividend paid as additional shares is an adjustment to the taxpayer’s invested capital<br />
<br />
● A pro rate stock dividend paid by a corporation is not taxable if:<br />
<br />
1) Shareholders receive no cash;<br />
<br />
2) Proportionate ownership is not altered; and<br />
<br />
3) Shareholders do not realize income by sale of shares <br />
<br />
{| class="wikitable"<br />
|'''Recognition'''<br />
|'''Realization'''<br />
|-<br />
|A particular situation in the tax code exists; “we are putting it on a tax return” <br />
<br />
Realization is a prerequisite to recognition. If you have realization, then you have recognition.<br />
|realization requirement → where the taxpayer must receive or lose something of monetary value <br />
<br />
If you are engaged in the marketplace, you likely will have a realization event.<br />
|} <br />
<br />
'''Punitive Damages''' <br />
<br />
<u>Commissioner v. Glenshaw Glass (1955)</u> - SCOTUS [Ds collected punitive damages for fed. antitrust action]<br />
<br />
RULE: punitive damages are taxable as gross income. <br />
<br />
Case Notes: JUDICIAL DEFINITION: “income derived from any source whatsoever”<br />
<br />
● Congress implied no intent to exclude punitive damages<br />
<br />
● Section 22 of the 1939 Code describes gross income as “income derived from any source whatsoever” <br />
<br />
{| class="wikitable"<br />
|'''<u>Glenshaw Glass</u> Test (to determine “income”)''' <br />
<br />
# '''ASSESSED WEALTH'''<br />
# '''CLEARLY REALIZED'''<br />
# '''COMPLETE DOMINION'''<br />
|} <br />
<br />
'''Treasure Trove''' <br />
<br />
Cesarini v. United States (1969) - USDC [πs found cash in used piano purchased at auction]<br />
<br />
RULE: all income is subject to tax unless an express exemption applies. <br />
<br />
Case Notes: '''money is taxable when it is discovered, not when the treasure chest was purchased'''<br />
<br />
● REALIZATION EVENT is the finding of the treasure<br />
<br />
● Treas. Reg. §1.61-14 → treasure trove is gross income, tax code does not exempt found money from gross income<br />
<br />
● §61(a) → gross income is “all income from whatever source derived”<br />
<br />
● Treasure trove can be cash or items and is taxable income <br />
<br />
{| class="wikitable"<br />
|'''§ 1.61-14 Miscellaneous items of gross income.'''<br />
<br />
(a) In general. In addition to the items enumerated in section 61(a), there are many other kinds of gross income. <br />
<br />
For example, '''punitive damages''' such as treble damages under the antitrust laws and exemplary damages for fraud are gross income. Another person's payment of the taxpayer's income taxes constitutes gross income to the taxpayer unless excluded by law. '''Illegal gains''' constitute gross income. '''Treasure trove''', to the extent of its value in United States currency, constitutes gross income for the taxable year in which it is reduced to undisputed possession.<br />
<br />
(b) Cross references.<br />
<br />
(1) Prizes and awards, see section 74 and regulations thereunder;<br />
<br />
(2) Damages for personal injury or sickness, see section 104 and the regulations thereunder;<br />
<br />
(3) Income taxes paid by lessee corporation, see section 110 and regulations thereunder;<br />
<br />
(4) Scholarships and fellowship grants, see section 117 and regulations thereunder;<br />
<br />
(5) Miscellaneous exemptions under other acts of Congress, see section 122;<br />
<br />
(6) Tax-free covenant bonds, see section 1451 and regulations thereunder.<br />
<br />
(7) Notional principal contracts, see § 1.446-3.<br />
|} <br />
<br />
'''Circular 230''' → when giving legal advice, you must have substantial authority on anything you put on a tax return and chance of audit is <u>not</u> a factor in determining “substantial authority”; not putting something (omitting) on a tax return '''is''' taking a position. <br />
<br />
If client finds…<br />
<br />
● $500 → must report $500 of gross income<br />
<br />
● A diamond ring → must report gross income <br />
<br />
'''Bargain Purchase''' → if you buy a house, that includes anything in the home, and find a valuable painting, you got a painting and a house for the price of a house, but the value of the painting is '''<u>not</u>''' now taxable income to you. (i.e. bite into an oyster and find a pearl). <br />
<br />
'''Illegal Income''' <br />
<br />
<u>James v. United States (1961)</u> - SCOTUS [D acquired $738k through embezzlement, did not declare]<br />
<br />
RULE: Embezzlement gains and other illegal income are taxable under federal law. <br />
<br />
Case Notes: distinguishes <u>Wilcox</u>, which held that no claim of right = no taxable income.<br />
<br />
● A federal taxpayer must report illegally acquired income, including embezzled money, as taxable income<br />
<br />
● Statutorily, the recent Code includes all income however obtained, most case law treats all income as taxable, even if another person is legally entitled to recover the income from the recipient. <br />
<br />
'''Compensation for Services - Payments to Third Parties''' <br />
<br />
{| class="wikitable"<br />
|26 U.S. Code § 61 - Gross income defined<br />
<br />
(a) General definition. Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:<br />
<br />
(1) Compensation for services, including fees, commissions, fringe benefits, and similar items;<br />
|} <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 74 - Prizes and awards'''<br />
<br />
'''(a) General rule. Except as otherwise provided in this section or in section 117 (relating to qualified scholarships), gross income includes amounts received as prizes and awards.'''<br />
<br />
'''(b) Exception for certain prizes and awards transferred to charities. Gross income does not include amounts received as prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement, but only if—'''<br />
<br />
''' (1) the recipient was selected without any action on his part to enter the contest or proceeding;'''<br />
<br />
''' (2) the recipient is not required to render substantial future services as a condition to receiving the prize or award; and'''<br />
<br />
''' (3) the prize or award is transferred by the payor to a governmental unit or organization described in paragraph (1) or (2) of section 170(c) pursuant to a designation made by the recipient.''' <br />
<br />
'''(c) Exception for certain employee achievement awards'''<br />
<br />
''' (1) In general. Gross income shall not include the value of an employee achievement award (as defined in section 274(j)) received by the taxpayer if the cost to the employer of the employee achievement award does not exceed the amount allowable as a deduction to the employer for the cost of the employee achievement award.'''<br />
<br />
''' (2) Excess deduction award. If the cost to the employer of the employee achievement award received by the taxpayer exceeds the amount allowable as a deduction to the employer, then gross income includes the greater of—'''<br />
<br />
''' (A) an amount equal to the portion of the cost to the employer of the award that is not allowable as a deduction to the employer (but not in excess of the value of the award), or'''<br />
<br />
''' (B) the amount by which the value of the award exceeds the amount allowable as a deduction to the employer.''' <br />
<br />
'''The remaining portion of the value of such award shall not be included in the gross income of the recipient.'''<br />
<br />
'''(3) Treatment of tax-exempt employers''' <br />
<br />
'''In the case of an employer exempt from taxation under this subtitle, any reference in this subsection to the amount allowable as a deduction to the employer shall be treated as a reference to the amount which would be allowable as a deduction to the employer if the employer were not exempt from taxation under this subtitle.'''<br />
<br />
''' (4) Cross reference. For provisions excluding certain de minimis fringes from gross income, see section 132(e).'''<br />
<br />
'''(d) Exception for Olympic and Paralympic medals and prizes'''<br />
<br />
''' (1) In general. Gross income shall not include the value of any medal awarded in, or any prize money received from the United States Olympic Committee on account of, competition in the Olympic Games or Paralympic Games.'''<br />
<br />
''' (2) Limitation based on adjusted gross income'''<br />
<br />
''' (A) In general. Paragraph (1) shall not apply to any taxpayer for any taxable year if the adjusted gross income (determined without regard to this subsection) of such taxpayer for such taxable year exceeds $1,000,000 (half of such amount in the case of a married individual filing a separate return).'''<br />
<br />
''' (B) Coordination with other limitations. For purposes of sections 86, 135, 137, 219, 221, 222, and 469, adjusted gross income shall be determined after the application of paragraph (1) and before the application of subparagraph (A).'''<br />
|} <br />
<br />
<u>Old Colony Trust Co. v. Commissioner (1929)</u> - SCOTUS [D was president, resolution to pay officers income tax]<br />
<br />
RULE: Payment by an employer of an employee’s income taxes constitutes taxable gain to the employee <br />
<br />
Case Notes: discharging financial obligations is financial gain to the employee, and taxable<br />
<br />
● Any payment made for services rendered by an employee constitutes taxable income to the employee.<br />
<br />
● Whether the employer makes the payment directly to the employee or to a third party on behalf of the employee is inconsequential.<br />
<br />
● Taxes paid in consideration of employee services do not constitute a tax-free gift. <br />
<br />
<u>McCann v. United States (1981)</u> - Court of Claims [π qualified for all expenses trip based on sales numbers]<br />
<br />
RULE: Gross income includes all-expenses-paid trips rewarded to employees for exceptional services rendered. <br />
<br />
Case Notes: despite not being money, the trip was a financial benefit to the employee, and taxable<br />
<br />
● §74(a) provides that gross income includes prizes and awards<br />
<br />
● Fair market value of an all-expenses-paid trip should be included in gross income <br />
<br />
UNDER TCJA: Entertainment expenses are '''<u>not</u>''' deductible from 2018-2025; conferences included but tours and shows excluded <br />
<br />
<u>United States v. Gotcher (1968)</u> - 5th Cir. [π & wife went to Germany on biz trip to tour facilities and improve sales]<br />
<br />
RULE: If an employer sends and employee on an expenses-paid trip primarily so that the employee can better promote the employer’s business, the value of the trip is excluded from the employee’s gross income for federal tax purposes. <br />
<br />
Case Notes: P went for '''dominant purpose''' of employer; wife is gross income<br />
<br />
● Under §61 of the 1954 Code, the trip’s value is included in the employee’s gross income only if the employee gains economically from the trip by receiving a benefit without having to pay for it, and only if the trip is '''primarily for the employee’s benefit'''. <br />
<br />
● '''DOMINANT PURPOSE TEST''' → if the trip is for the employer, it is not taxable income<br />
<br />
● '''Primary purpose''' → incidental enjoyment by employee is OK so long as the primary benefit is to employer <br />
<br />
'''Meals and Lodging - Furnished on an Employer’s Premises''' <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 119 - Meals or lodging furnished for the convenience of the employer'''<br />
<br />
'''(a) Meals and lodging furnished to employee, his spouse, and his dependents, pursuant to employment. There shall be excluded from gross income of an employee the value of any meals or lodging furnished to him, his spouse, or any of his dependents by or on behalf of his employer for the convenience of the employer, but only if—'''<br />
<br />
''' (1) in the case of meals, the meals are furnished on the business premises of the employer, or'''<br />
<br />
''' (2) in the case of lodging, the employee is required to accept such lodging on the business premises of his employer as a condition of his employment.''' <br />
<br />
'''(b) Special rules. For purposes of subsection (a)—'''<br />
<br />
''' (1) Provisions of employment contract or State statute not to be determinative'''<br />
<br />
'''In determining whether meals or lodging are furnished for the convenience of the employer, the provisions of an employment contract or of a State statute fixing terms of employment shall not be determinative of whether the meals or lodging are intended as compensation.'''<br />
<br />
''' (2) Certain factors not taken into account with respect to meals'''<br />
<br />
'''In determining whether meals are furnished for the convenience of the employer, the fact that a charge is made for such meals, and the fact that the employee may accept or decline such meals, shall not be taken into account.'''<br />
<br />
''' (3) Certain fixed charges for meals'''<br />
<br />
''' (A) In general. If—'''<br />
<br />
''' (i) an employee is required to pay on a periodic basis a fixed charge for his meals, and'''<br />
<br />
''' (ii) such meals are furnished by the employer for the convenience of the employer,'''<br />
<br />
'''there shall be excluded from the employee’s gross income an amount equal to such fixed charge.'''<br />
<br />
''' (B) Application of subparagraph (A)Subparagraph (A) shall apply—'''<br />
<br />
''' (i) whether the employee pays the fixed charge out of his stated compensation or out of his own funds, and'''<br />
<br />
''' (ii) only if the employee is required to make the payment whether he accepts or declines the meals.'''<br />
<br />
''' (4) Meals furnished to employees on business premises where meals of most employees are otherwise excludable. All meals furnished on the business premises of an employer to such employer’s employees shall be treated as furnished for the convenience of the employer if, without regard to this paragraph, more than half of the employees to whom such meals are furnished on such premises are furnished such meals for the convenience of the employer.'''<br />
<br />
'''(c) Employees living in certain camps'''<br />
<br />
''' (1) In general. In the case of an individual who is furnished lodging in a camp located in a foreign country by or on behalf of his employer, such camp shall be considered to be part of the business premises of the employer.'''<br />
<br />
''' (2) Camp. For purposes of this section, a camp constitutes lodging which is—'''<br />
<br />
''' (A) provided by or on behalf of the employer for the convenience of the employer because the place at which such individual renders services is in a remote area where satisfactory housing is not available on the open market,'''<br />
<br />
''' (B) located, as near as practicable, in the vicinity of the place at which such individual renders services, and'''<br />
<br />
''' (C) furnished in a common area (or enclave) which is not available to the public and which normally accommodates 10 or more employees.''' <br />
<br />
'''(d) Lodging furnished by certain educational institutions to employees'''<br />
<br />
''' (1) In general. In the case of an employee of an educational institution, gross income shall not include the value of qualified campus lodging furnished to such employee during the taxable year.'''<br />
<br />
''' (2) Exception in cases of inadequate rent. Paragraph (1) shall not apply to the extent of the excess of—'''<br />
<br />
''' (A) the lesser of—'''<br />
<br />
''' (i) 5 percent of the appraised value of the qualified campus lodging, or'''<br />
<br />
''' (ii) the average of the rentals paid by individuals (other than employees or students of the educational institution) during such calendar year for lodging provided by the educational institution which is comparable to the qualified campus lodging provided to the employee, over'''<br />
<br />
''' (B) the rent paid by the employee for the qualified campus lodging during such calendar year.'''<br />
<br />
'''The appraised value under subparagraph (A)(i) shall be determined as of the close of the calendar year in which the taxable year begins, or, in the case of a rental period not greater than 1 year, at any time during the calendar year in which such period begins.'''<br />
<br />
''' (3) Qualified campus lodging. For purposes of this subsection, the term “qualified campus lodging” means lodging to which subsection (a) does not apply and which is—'''<br />
<br />
''' (A) located on, or in the proximity of, a campus of the educational institution, and'''<br />
<br />
''' (B) furnished to the employee, his spouse, and any of his dependents by or on behalf of such institution for use as a residence.'''<br />
<br />
''' (4) Educational institution, etc.For purposes of this subsection—'''<br />
<br />
''' (A) In general. The term “educational institution” means—'''<br />
<br />
''' (i) an institution described in section 170(b)(1)(A)(ii) (or an entity organized under State law and composed of public institutions so described), or'''<br />
<br />
''' (ii) an academic health center.'''<br />
<br />
''' (B) Academic health center. For purposes of subparagraph (A), the term “academic health center” means an entity—'''<br />
<br />
''' (i) which is described in section 170(b)(1)(A)(iii),'''<br />
<br />
''' (ii) which receives (during the calendar year in which the taxable year of the taxpayer begins) payments under subsection (d)(5)(B) or (h) of section 1886 of the Social Security Act (relating to graduate medical education), and'''<br />
<br />
''' (iii) which has as one of its principal purposes or functions the providing and teaching of basic and clinical medical science and research with the entity’s own faculty.'''<br />
|} <br />
<br />
Meals and Lodging - §119(a) <br />
<br />
{| class="wikitable"<br />
| <u>Meals</u><br />
| <u>Lodging</u><br />
|-<br />
|● Furnished by employer<br />
<br />
● For convenience of employer<br />
<br />
● On business premises of employer<br />
|● Furnished by employer<br />
<br />
● For convenience of employer<br />
<br />
● On business premises of employer<br />
<br />
● Employee required to accept as a condition of employment<br />
|} <br />
<br />
Dominant purpose → first ask, is the main purpose business or pleasure? <br />
<br />
Employee morale is '''<u>not</u>''' a valid reason for “employer convenience” <br />
<br />
<u>Commissioner v. Kowalski (1977)</u> - SCOTUS [state troopers given cash meal allowances when out on duty]<br />
<br />
RULE: Under federal tax law, cash meal allowances are included in gross income. <br />
<br />
Case Notes: Only §119 can be used to find an exception<br />
<br />
● Cash meal allowances are not excluded under §119 or the common-law convenience-of-the-employer doctrine (which did not survive the recent codification of federal law anyways)<br />
<br />
● §119 excludes meals provided by the employer directly, but not cash reimbursements, which must be included in gross income. <br />
<br />
<u>Adams v. United States (1978)</u> - Claims Court [π CEO in Japan req. to live in company-provided housing]<br />
<br />
RULE: Employer-provided housing is excludable from a taxpayer’s gross income if: (1) the employment is conditioned upon acceptance of the housing, (2) the housing is for the employer’s convenience, and (3) the housing is on the employer’s business premises. <br />
<br />
Case Notes: Japanese housing should be completely excluded from income<br />
<br />
● There must be a strong link between the residence and business interest to find “convenience of the employer” <br />
<br />
'''Statutory Fringe Benefits''' <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 132 - Certain fringe benefits'''<br />
<br />
'''(a) Exclusion from gross income. Gross income shall not include any fringe benefit which qualifies as a—'''<br />
<br />
''' (1) no-additional-cost service,'''<br />
<br />
''' (2) qualified employee discount,'''<br />
<br />
''' (3) working condition fringe,'''<br />
<br />
''' (4) de minimis fringe,'''<br />
<br />
''' (5) qualified transportation fringe,'''<br />
<br />
''' (6) qualified moving expense reimbursement,'''<br />
<br />
''' (7) qualified retirement planning services, or'''<br />
<br />
''' (8) qualified military base realignment and closure fringe.''' <br />
<br />
'''(b) No-additional-cost service defined. For purposes of this section, the term “no-additional-cost service” means any service provided by an employer to an employee for use by such employee if—'''<br />
<br />
''' (1) such service is offered for sale to customers in the ordinary course of the line of business of the employer in which the employee is performing services, and'''<br />
<br />
''' (2) the employer incurs no substantial additional cost (including forgone revenue) in providing such service to the employee (determined without regard to any amount paid by the employee for such service).''' <br />
<br />
'''(c) Qualified employee discount defined. For purposes of this section—'''<br />
<br />
''' (1) Qualified employee discount. The term “qualified employee discount” means any employee discount with respect to qualified property or services to the extent such discount does not exceed—'''<br />
<br />
''' (A) in the case of property, the gross profit percentage of the price at which the property is being offered by the employer to customers, or'''<br />
<br />
''' (B) in the case of services, 20 percent of the price at which the services are being offered by the employer to customers.'''<br />
<br />
''' (2) Gross profit percentage'''<br />
<br />
''' (A) In general. The term “gross profit percentage” means the percent which—'''<br />
<br />
''' (i) the excess of the aggregate sales price of property sold by the employer to customers over the aggregate cost of such property to the employer, is of'''<br />
<br />
''' (ii) the aggregate sale price of such property.'''<br />
<br />
''' (B) Determination of gross profit percentage. Gross profit percentage shall be determined on the basis of—'''<br />
<br />
''' (i) all property offered to customers in the ordinary course of the line of business of the employer in which the employee is performing services (or a reasonable classification of property selected by the employer), and'''<br />
<br />
''' (ii) the employer’s experience during a representative period.'''<br />
<br />
''' (3) Employee discount defined. The term “employee discount” means the amount by which—'''<br />
<br />
''' (A) the price at which the property or services are provided by the employer to an employee for use by such employee, is less than'''<br />
<br />
''' (B) the price at which such property or services are being offered by the employer to customers.'''<br />
<br />
''' (4) Qualified property or services. The term “qualified property or services” means any property (other than real property and other than personal property of a kind held for investment) or services which are offered for sale to customers in the ordinary course of the line of business of the employer in which the employee is performing services.'''<br />
<br />
'''(d) Working condition fringe defined. For purposes of this section, the term “working condition fringe” means any property or services provided to an employee of the employer to the extent that, if the employee paid for such property or services, such payment would be allowable as a deduction under section 162 or 167.'''<br />
<br />
'''(e) De minimis fringe defined. For purposes of this section—'''<br />
<br />
''' (1) In general. The term “de minimis fringe” means any property or service the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer’s employees) so small as to make accounting for it unreasonable or administratively impracticable.'''<br />
<br />
''' (2) Treatment of certain eating facilities. The operation by an employer of any eating facility for employees shall be treated as a de minimis fringe if—'''<br />
<br />
''' (A) such facility is located on or near the business premises of the employer, and'''<br />
<br />
''' (B) revenue derived from such facility normally equals or exceeds the direct operating costs of such facility.''' <br />
<br />
'''The preceding sentence shall apply with respect to any highly compensated employee only if access to the facility is available on substantially the same terms to each member of a group of employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of highly compensated employees. For purposes of subparagraph (B), an employee entitled under section 119 to exclude the value of a meal provided at such facility shall be treated as having paid an amount for such meal equal to the direct operating costs of the facility attributable to such meal.''' <br />
<br />
'''(f) Qualified transportation fringe'''<br />
<br />
''' (1) In general. For purposes of this section, the term “qualified transportation fringe” means any of the following provided by an employer to an employee:'''<br />
<br />
''' (A) Transportation in a commuter highway vehicle if such transportation is in connection with travel between the employee’s residence and place of employment.'''<br />
<br />
''' (B) Any transit pass.'''<br />
<br />
''' (C) Qualified parking.'''<br />
<br />
''' (D) Any qualified bicycle commuting reimbursement.'''<br />
<br />
''' (2) Limitation on exclusion. The amount of the fringe benefits which are provided by an employer to any employee and which may be excluded from gross income under subsection (a)(5) shall not exceed—'''<br />
<br />
''' (A) $175 per month in the case of the aggregate of the benefits described in subparagraphs (A) and (B) of paragraph (1),'''<br />
<br />
''' (B) $175 per month in the case of qualified parking, and'''<br />
<br />
''' (C) the applicable annual limitation in the case of any qualified bicycle commuting reimbursement.'''<br />
<br />
''' (3) Cash reimbursements. For purposes of this subsection, the term “qualified transportation fringe” includes a cash reimbursement by an employer to an employee for a benefit described in paragraph (1). The preceding sentence shall apply to a cash reimbursement for any transit pass only if a voucher or similar item which may be exchanged only for a transit pass is not readily available for direct distribution by the employer to the employee.'''<br />
<br />
''' (4) No constructive receipt. No amount shall be included in the gross income of an employee solely because the employee may choose between any qualified transportation fringe (other than a qualified bicycle commuting reimbursement) and compensation which would otherwise be includible in gross income of such employee.'''<br />
<br />
''' (5) Definitions. For purposes of this subsection—'''<br />
<br />
''' (A) Transit pass. The term “transit pass” means any pass, token, farecard, voucher, or similar item entitling a person to transportation (or transportation at a reduced price) if such transportation is—'''<br />
<br />
''' (i) on mass transit facilities (whether or not publicly owned), or'''<br />
<br />
''' (ii) provided by any person in the business of transporting persons for compensation or hire if such transportation is provided in a vehicle meeting the requirements of subparagraph (B)(i).'''<br />
<br />
''' (B) Commuter highway vehicle. The term “commuter highway vehicle” means any highway vehicle—'''<br />
<br />
''' (i) the seating capacity of which is at least 6 adults (not including the driver), and'''<br />
<br />
''' (ii) at least 80 percent of the mileage use of which can reasonably be expected to be—'''<br />
<br />
''' (I) for purposes of transporting employees in connection with travel between their residences and their place of employment, and'''<br />
<br />
''' (II) on trips during which the number of employees transported for such purposes is at least ½ of the adult seating capacity of such vehicle (not including the driver).'''<br />
<br />
''' (C) Qualified parking. The term “qualified parking” means parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work by transportation described in subparagraph (A), in a commuter highway vehicle, or by carpool. Such term shall not include any parking on or near property used by the employee for residential purposes.'''<br />
<br />
''' (D) Transportation provided by employer'''<br />
<br />
'''Transportation referred to in paragraph (1)(A) shall be considered to be provided by an employer if such transportation is furnished in a commuter highway vehicle operated by or for the employer.'''<br />
<br />
''' (E) Employee'''<br />
<br />
'''For purposes of this subsection, the term “employee” does not include an individual who is an employee within the meaning of section 401(c)(1).'''<br />
<br />
''' (F) Definitions related to bicycle commuting reimbursement'''<br />
<br />
''' (i) Qualified bicycle commuting reimbursement. The term “qualified bicycle commuting reimbursement” means, with respect to any calendar year, any employer reimbursement during the 15-month period beginning with the first day of such calendar year for reasonable expenses incurred by the employee during such calendar year for the purchase of a bicycle and bicycle improvements, repair, and storage, if such bicycle is regularly used for travel between the employee’s residence and place of employment.'''<br />
<br />
''' (ii) Applicable annual limitation. The term “applicable annual limitation” means, with respect to any employee for any calendar year, the product of $20 multiplied by the number of qualified bicycle commuting months during such year.'''<br />
<br />
''' (iii) Qualified bicycle commuting month. The term “qualified bicycle commuting month” means, with respect to any employee, any month during which such employee—'''<br />
<br />
''' (I) regularly uses the bicycle for a substantial portion of the travel between the employee’s residence and place of employment, and'''<br />
<br />
''' (II) does not receive any benefit described in subparagraph (A), (B), or (C) of paragraph (1).'''<br />
<br />
''' (6) Inflation adjustment'''<br />
<br />
''' (A) In general. In the case of any taxable year beginning in a calendar year after 1999, the dollar amounts contained in subparagraphs (A) and (B) of paragraph (2) shall be increased by an amount equal to—'''<br />
<br />
''' (i) such dollar amount, multiplied by'''<br />
<br />
''' (ii) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting “calendar year 1998” for “calendar year 2016” in subparagraph (A)(ii) thereof.''' <br />
<br />
'''In the case of any taxable year beginning in a calendar year after 2002, clause (ii) shall be applied by substituting “calendar year 2001” for “calendar year 1998” for purposes of adjusting the dollar amount contained in paragraph (2)(A).'''<br />
<br />
''' (B) Rounding. If any increase determined under subparagraph (A) is not a multiple of $5, such increase shall be rounded to the next lowest multiple of $5.'''<br />
<br />
''' (7) Coordination with other provisions. For purposes of this section, the terms “working condition fringe” and “de minimis fringe” shall not include any qualified transportation fringe (determined without regard to paragraph (2)).'''<br />
<br />
''' (8) Suspension of qualified bicycle commuting reimbursement exclusion. Paragraph (1)(D) shall not apply to any taxable year beginning after December 31, 2017, and before January 1, 2026.'''<br />
<br />
'''(g) Qualified moving expense reimbursement. For purposes of this section—'''<br />
<br />
''' (1) In general. The term “qualified moving expense reimbursement” means any amount received (directly or indirectly) by an individual from an employer as a payment for (or a reimbursement of) expenses which would be deductible as moving expenses under section 217 if directly paid or incurred by the individual. Such term shall not include any payment for (or reimbursement of) an expense actually deducted by the individual in a prior taxable year.'''<br />
<br />
''' (2) Suspension for taxable years 2018 through 2025. Except in the case of a member of the Armed Forces of the United States on active duty who moves pursuant to a military order and incident to a permanent change of station, subsection (a)(6) shall not apply to any taxable year beginning after December 31, 2017, and before January 1, 2026.'''<br />
<br />
'''(h) Certain individuals treated as employees for purposes of subsections (a)(1) and (2)For purposes of paragraphs (1) and (2) of subsection (a)—'''<br />
<br />
''' (1) Retired and disabled employees and surviving spouse of employee treated as employee. With respect to a line of business of an employer, the term “employee” includes—'''<br />
<br />
''' (A) any individual who was formerly employed by such employer in such line of business and who separated from service with such employer in such line of business by reason of retirement or disability, and'''<br />
<br />
''' (B) any widow or widower of any individual who died while employed by such employer in such line of business or while an employee within the meaning of subparagraph (A).'''<br />
<br />
''' (2) Spouse and dependent children'''<br />
<br />
''' (A) In general. Any use by the spouse or a dependent child of the employee shall be treated as use by the employee.'''<br />
<br />
''' (B) Dependent child. For purposes of subparagraph (A), the term “dependent child” means any child (as defined in section 152(f)(1)) of the employee—'''<br />
<br />
''' (i) who is a dependent of the employee, or'''<br />
<br />
''' (ii) both of whose parents are deceased and who has not attained age 25.''' <br />
<br />
'''For purposes of the preceding sentence, any child to whom section 152(e) applies shall be treated as the dependent of both parents.'''<br />
<br />
''' (3) Special rule for parents in the case of air transportation. Any use of air transportation by a parent of an employee (determined without regard to paragraph (1)(B)) shall be treated as use by the employee.'''<br />
<br />
'''(i) Reciprocal agreements. For purposes of paragraph (1) of subsection (a), any service provided by an employer to an employee of another employer shall be treated as provided by the employer of such employee if—'''<br />
<br />
''' (1) such service is provided pursuant to a written agreement between such employers, and'''<br />
<br />
''' (2) neither of such employers incurs any substantial additional costs (including foregone revenue) in providing such service or pursuant to such agreement.''' <br />
<br />
'''(j) Special rules'''<br />
<br />
''' (1) Exclusions under subsection (a)(1) and (2) apply to highly compensated employees only if no discrimination. Paragraphs (1) and (2) of subsection (a) shall apply with respect to any fringe benefit described therein provided with respect to any highly compensated employee only if such fringe benefit is available on substantially the same terms to each member of a group of employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of highly compensated employees.'''<br />
<br />
''' (2) Special rule for leased sections of department stores'''<br />
<br />
''' (A) In general. For purposes of paragraph (2) of subsection (a), in the case of a leased section of a department store—'''<br />
<br />
''' (i) such section shall be treated as part of the line of business of the person operating the department store, and'''<br />
<br />
''' (ii) employees in the leased section shall be treated as employees of the person operating the department store.'''<br />
<br />
''' (B) Leased section of department store. For purposes of subparagraph (A), a leased section of a department store is any part of a department store where over-the-counter sales of property are made under a lease or similar arrangement where it appears to the general public that individuals making such sales are employed by the person operating the department store.'''<br />
<br />
''' (3) Auto salesmen'''<br />
<br />
''' (A) In general. For purposes of subsection (a)(3), qualified automobile demonstration use shall be treated as a working condition fringe.'''<br />
<br />
''' (B) Qualified automobile demonstration use. For purposes of subparagraph (A), the term “qualified automobile demonstration use” means any use of an automobile by a full-time automobile salesman in the sales area in which the automobile dealer’s sales office is located if—'''<br />
<br />
''' (i) such use is provided primarily to facilitate the salesman’s performance of services for the employer, and'''<br />
<br />
''' (ii) there are substantial restrictions on the personal use of such automobile by such salesman.'''<br />
<br />
''' (4) On-premises gyms and other athletic facilities'''<br />
<br />
''' (A) In general. Gross income shall not include the value of any on-premises athletic facility provided by an employer to his employees.'''<br />
<br />
''' (B) On-premises athletic facility. For purposes of this paragraph, the term “on-premises athletic facility” means any gym or other athletic facility—'''<br />
<br />
''' (i) which is located on the premises of the employer,'''<br />
<br />
''' (ii) which is operated by the employer, and'''<br />
<br />
''' (iii) substantially all the use of which is by employees of the employer, their spouses, and their dependent children (within the meaning of subsection (h)).'''<br />
<br />
''' (5) Special rule for affiliates of airlines'''<br />
<br />
''' (A) In general. If—'''<br />
<br />
''' (i) a qualified affiliate is a member of an affiliated group another member of which operates an airline, and'''<br />
<br />
''' (ii) employees of the qualified affiliate who are directly engaged in providing airline-related services are entitled to no-additional-cost service with respect to air transportation provided by such other member, then, for purposes of applying paragraph (1) of subsection (a) to such no-additional-cost service provided to such employees, such qualified affiliate shall be treated as engaged in the same line of business as such other member.'''<br />
<br />
''' (B) Qualified affiliate. For purposes of this paragraph, the term “qualified affiliate” means any corporation which is predominantly engaged in airline-related services.'''<br />
<br />
''' (C) Airline-related services. For purposes of this paragraph, the term “airline-related services” means any of the following services provided in connection with air transportation:'''<br />
<br />
''' (i) Catering.'''<br />
<br />
''' (ii) Baggage handling.'''<br />
<br />
''' (iii) Ticketing and reservations.'''<br />
<br />
''' (iv) Flight planning and weather analysis.'''<br />
<br />
''' (v) Restaurants and gift shops located at an airport.'''<br />
<br />
''' (vi) Such other similar services provided to the airline as the Secretary may prescribe.'''<br />
<br />
''' (D) Affiliated group. For purposes of this paragraph, the term “affiliated group” has the meaning given such term by section 1504(a).'''<br />
<br />
''' (6) Highly compensated employee. For purposes of this section, the term “highly compensated employee” has the meaning given such term by section 414(q).'''<br />
<br />
''' (7) Air cargo. For purposes of subsection (b), the transportation of cargo by air and the transportation of passengers by air shall be treated as the same service.'''<br />
<br />
''' (8) Application of section to otherwise taxable educational or training benefits. Amounts paid or expenses incurred by the employer for education or training provided to the employee which are not excludable from gross income under section 127 shall be excluded from gross income under this section if (and only if) such amounts or expenses are a working condition fringe.'''<br />
<br />
'''(k) Customers not to include employees. For purposes of this section (other than subsection (c)(2)), the term “customers” shall only include customers who are not employees.'''<br />
<br />
'''(l) Section not to apply to fringe benefits expressly provided for elsewhere. This section (other than subsections (e) and (g)) shall not apply to any fringe benefits of a type the tax treatment of which is expressly provided for in any other section of this chapter.'''<br />
<br />
'''(m) Qualified retirement planning services'''<br />
<br />
''' (1) In general. For purposes of this section, the term “qualified retirement planning services” means any retirement planning advice or information provided to an employee and his spouse by an employer maintaining a qualified employer plan.'''<br />
<br />
''' (2) Nondiscrimination rule. Subsection (a)(7) shall apply in the case of highly compensated employees only if such services are available on substantially the same terms to each member of the group of employees normally provided education and information regarding the employer’s qualified employer plan.'''<br />
<br />
''' (3) Qualified employer plan. For purposes of this subsection, the term “qualified employer plan” means a plan, contract, pension, or account described in section 219(g)(5).'''<br />
<br />
'''(n) Qualified military base realignment and closure fringe. For purposes of this section—'''<br />
<br />
''' (1) In general. The term “qualified military base realignment and closure fringe” means 1 or more payments under the authority of section 1013 of the Demonstration Cities and Metropolitan Development Act of 1966 (42 U.S.C. 3374) (as in effect on the date of the enactment of the American Recovery and Reinvestment Tax Act of 2009).'''<br />
<br />
''' (2) Limitation. With respect to any property, such term shall not include any payment referred to in paragraph (1) to the extent that the sum of all of such payments related to such property exceeds the maximum amount described in subsection (c) of such section (as in effect on such date).'''<br />
<br />
'''(o) Regulations. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.'''<br />
|} <br />
<br />
Statutory Fringe Benefits → §132(a) lists eight types of employee fringe benefits specifically excluded from gross income:<br />
<br />
1) No-additional-cost service → space available; business is already offering something, no customer took it (i.e. airline tickets for employees, unbooked hotel rooms available to employee for a night for free); '''no substantial additional cost to employer'''<br />
<br />
2) Qualified employee discount → gross profit % or 20% cap on services; qualified property or services: offered for sale to customers in the '''ordinary course or line of business''' in which the employee is performing the services (i.e. can’t offer discounted massage to retail employee)<br />
<br />
3) Working condition fringe → normally deductible under §162 or §167; does not include transportation costs<br />
<br />
4) De minimis fringe (holiday gifts) → infrequent, small value, administratively not feasible/impractical to claim; does not include transportation costs<br />
<br />
5) Qualified transportation fringe → limitation on qualified transportation expenses, typically $175 <br />
<br />
6) Qualified moving expense reimbursement<br />
<br />
7) Qualified retirement planning services<br />
<br />
8) Qualified military base realignment and closure fringe<br />
<br />
**Other sections of the Code provide other fringe benefit exclusions as well.<br />
<br />
<br />
'''Property Received for Services''' <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 83 - Property transferred in connection with performance of services'''<br />
<br />
'''(a) General rule If, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the excess of—'''<br />
<br />
''' (1) the fair market value of such property (determined without regard to any restriction other than a restriction which by its terms will never lapse) at the first time the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, over'''<br />
<br />
''' (2) the amount (if any) paid for such property, shall be included in the gross income of the person who performed such services in the first taxable year in which the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever is applicable. The preceding sentence shall not apply if such person sells or otherwise disposes of such property in an arm’s length transaction before his rights in such property become transferable or not subject to a substantial risk of forfeiture.''' <br />
<br />
'''(b) Election to include in gross income in year of transfer'''<br />
<br />
''' (1) In general. Any person who performs services in connection with which property is transferred to any person may elect to include in his gross income for the taxable year in which such property is transferred, the excess of—'''<br />
<br />
''' (A) the fair market value of such property at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse), over'''<br />
<br />
''' (B) the amount (if any) paid for such property. If such election is made, subsection (a) shall not apply with respect to the transfer of such property, and if such property is subsequently forfeited, no deduction shall be allowed in respect of such forfeiture.'''<br />
<br />
''' (2) Election An election under paragraph (1) with respect to any transfer of property shall be made in such manner as the Secretary prescribes and shall be made not later than 30 days after the date of such transfer. Such election may not be revoked except with the consent of the Secretary.'''<br />
<br />
'''(c) Special rules. For purposes of this section—'''<br />
<br />
''' (1) Substantial risk of forfeiture. The rights of a person in property are subject to a substantial risk of forfeiture if such person’s rights to full enjoyment of such property are conditioned upon the future performance of substantial services by any individual.'''<br />
<br />
''' (2) Transferability of property. The rights of a person in property are transferable only if the rights in such property of any transferee are not subject to a substantial risk of forfeiture.'''<br />
<br />
''' (3) Sales which may give rise to suit under section 16(b) of the Securities Exchange Act of 1934. So long as the sale of property at a profit could subject a person to suit under section 16(b) of the Securities Exchange Act of 1934, such person’s rights in such property are—'''<br />
<br />
''' (A) subject to a substantial risk of forfeiture, and'''<br />
<br />
''' (B) not transferable.'''<br />
<br />
''' (4) For purposes of determining an individual’s basis in property transferred in connection with the performance of services, rules similar to the rules of section 72(w) shall apply.''' <br />
<br />
'''(d) Certain restrictions which will never lapse'''<br />
<br />
''' (1) Valuation. In the case of property subject to a restriction which by its terms will never lapse, and which allows the transferee to sell such property only at a price determined under a formula, the price so determined shall be deemed to be the fair market value of the property unless established to the contrary by the Secretary, and the burden of proof shall be on the Secretary with respect to such value.'''<br />
<br />
''' (2) Cancellation If, in the case of property subject to a restriction which by its terms will never lapse, the restriction is canceled, then, unless the taxpayer establishes—'''<br />
<br />
''' (A) that such cancellation was not compensatory, and'''<br />
<br />
''' (B) that the person, if any, who would be allowed a deduction if the cancellation were treated as compensatory, will treat the transaction as not compensatory, as evidenced in such manner as the Secretary shall prescribe by regulations, the excess of the fair market value of the property (computed without regard to the restrictions) at the time of cancellation over the sum of—'''<br />
<br />
''' (C) the fair market value of such property (computed by taking the restriction into account) immediately before the cancellation, and'''<br />
<br />
''' (D) the amount, if any, paid for the cancellation, shall be treated as compensation for the taxable year in which such cancellation occurs.''' <br />
<br />
'''(e) Applicability of section. This section shall not apply to—'''<br />
<br />
''' (1) a transaction to which section 421 applies,'''<br />
<br />
''' (2) a transfer to or from a trust described in section 401(a) or a transfer under an annuity plan which meets the requirements of section 404(a)(2),'''<br />
<br />
''' (3) the transfer of an option without a readily ascertainable fair market value,'''<br />
<br />
''' (4) the transfer of property pursuant to the exercise of an option with a readily ascertainable fair market value at the date of grant, or'''<br />
<br />
''' (5) group-term life insurance to which section 79 applies.''' <br />
<br />
'''(f) Holding period. In determining the period for which the taxpayer has held property to which subsection (a) applies, there shall be included only the period beginning at the first time his rights in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier.'''<br />
<br />
'''(g) Certain exchanges. If property to which subsection (a) applies is exchanged for property subject to restrictions and conditions substantially similar to those to which the property given in such exchange was subject, and if section 354, 355, 356, or 1036 (or so much of section 1031 as relates to section 1036) applied to such exchange, or if such exchange was pursuant to the exercise of a conversion privilege—'''<br />
<br />
''' (1) such exchange shall be disregarded for purposes of subsection (a), and'''<br />
<br />
''' (2) the property received shall be treated as property to which subsection (a) applies.''' <br />
<br />
'''(h) Deduction by employer. In the case of a transfer of property to which this section applies or a cancellation of a restriction described in subsection (d), there shall be allowed as a deduction under section 162, to the person for whom were performed the services in connection with which such property was transferred, an amount equal to the amount included under subsection (a), (b), or (d)(2) in the gross income of the person who performed such services. Such deduction shall be allowed for the taxable year of such person in which or with which ends the taxable year in which such amount is included in the gross income of the person who performed such services.'''<br />
<br />
'''(i) Qualified equity grants'''<br />
<br />
''' (1) In general. For purposes of this subtitle—'''<br />
<br />
''' (A) Timing of inclusion. If qualified stock is transferred to a qualified employee who makes an election with respect to such stock under this subsection, subsection (a) shall be applied by including the amount determined under such subsection with respect to such stock in income of the employee in the taxable year determined under subparagraph (B) in lieu of the taxable year described in subsection (a).'''<br />
<br />
''' (B) Taxable year determined. The taxable year determined under this subparagraph is the taxable year of the employee which includes the earliest of—'''<br />
<br />
''' (i) the first date such qualified stock becomes transferable (including, solely for purposes of this clause, becoming transferable to the employer),'''<br />
<br />
''' (ii) the date the employee first becomes an excluded employee,'''<br />
<br />
''' (iii) the first date on which any stock of the corporation which issued the qualified stock becomes readily tradable on an established securities market (as determined by the Secretary, but not including any market unless such market is recognized as an established securities market by the Secretary for purposes of a provision of this title other than this subsection),'''<br />
<br />
''' (iv) the date that is 5 years after the first date the rights of the employee in such stock are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, or'''<br />
<br />
''' (v) the date on which the employee revokes (at such time and in such manner as the Secretary provides) the election under this subsection with respect to such stock.'''<br />
<br />
''' (2) Qualified stock'''<br />
<br />
''' (A) In general. For purposes of this subsection, the term “qualified stock” means, with respect to any qualified employee, any stock in a corporation which is the employer of such employee, if—'''<br />
<br />
''' (i) such stock is received—'''<br />
<br />
''' (I) in connection with the exercise of an option, or'''<br />
<br />
''' (II) in settlement of a restricted stock unit, and'''<br />
<br />
''' (ii) such option or restricted stock unit was granted by the corporation—'''<br />
<br />
''' (I) in connection with the performance of services as an employee, and'''<br />
<br />
''' (II) during a calendar year in which such corporation was an eligible corporation.'''<br />
<br />
''' (B) Limitation. The term “qualified stock” shall not include any stock if the employee may sell such stock to, or otherwise receive cash in lieu of stock from, the corporation at the time that the rights of the employee in such stock first become transferable or not subject to a substantial risk of forfeiture.'''<br />
<br />
''' (C) Eligible corporation. For purposes of subparagraph (A)(ii)(II)—'''<br />
<br />
''' (i) In general. The term “eligible corporation” means, with respect to any calendar year, any corporation if—'''<br />
<br />
''' (I) no stock of such corporation (or any predecessor of such corporation) is readily tradable on an established securities market (as determined under paragraph (1)(B)(iii)) during any preceding calendar year, and'''<br />
<br />
''' (II) such corporation has a written plan under which, in such calendar year, not less than 80 percent of all employees who provide services to such corporation in the United States (or any possession of the United States) are granted stock options, or are granted restricted stock units, with the same rights and privileges to receive qualified stock.'''<br />
<br />
''' (ii) Same rights and privileges. For purposes of clause (i)(II)—'''<br />
<br />
''' (I) except as provided in subclauses (II) and (III), the determination of rights and privileges with respect to stock shall be made in a similar manner as under section 423(b)(5),'''<br />
<br />
''' (II) employees shall not fail to be treated as having the same rights and privileges to receive qualified stock solely because the number of shares available to all employees is not equal in amount, so long as the number of shares available to each employee is more than a de minimis amount, and'''<br />
<br />
''' (III) rights and privileges with respect to the exercise of an option shall not be treated as the same as rights and privileges with respect to the settlement of a restricted stock unit.'''<br />
<br />
''' (iii) Employee. For purposes of clause (i)(II), the term “employee” shall not include any employee described in section 4980E(d)(4) or any excluded employee.'''<br />
<br />
''' (iv) Special rule for calendar years before 2018. In the case of any calendar year beginning before January 1, 2018, clause (i)(II) shall be applied without regard to whether the rights and privileges with respect to the qualified stock are the same.'''<br />
<br />
''' (3) Qualified employee; excluded employee. For purposes of this subsection—'''<br />
<br />
''' '''<br />
<br />
''' (A) In general. The term “qualified employee” means any individual who—'''<br />
<br />
''' (i) is not an excluded employee, and'''<br />
<br />
''' (ii) agrees in the election made under this subsection to meet such requirements as are determined by the Secretary to be necessary to ensure that the withholding requirements of the corporation under chapter 24 with respect to the qualified stock are met.'''<br />
<br />
''' (B) Excluded employee. The term “excluded employee” means, with respect to any corporation, any individual—'''<br />
<br />
''' (i) who is a 1-percent owner (within the meaning of section 416(i)(1)(B)(ii)) at any time during the calendar year or who was such a 1 percent owner at any time during the 10 preceding calendar years,'''<br />
<br />
''' (ii) who is or has been at any prior time—'''<br />
<br />
''' (I) the chief executive officer of such corporation or an individual acting in such a capacity, or'''<br />
<br />
''' (II) the chief financial officer of such corporation or an individual acting in such a capacity,'''<br />
<br />
'''(iii) who bears a relationship described in section 318(a)(1) to any individual described in subclause (I) or (II) of clause (ii), or'''<br />
<br />
''' (iv) who is one of the 4 highest compensated officers of such corporation for the taxable year, or was one of the 4 highest compensated officers of such corporation for any of the 10 preceding taxable years, determined with respect to each such taxable year on the basis of the shareholder disclosure rules for compensation under the Securities Exchange Act of 1934 (as if such rules applied to such corporation).'''<br />
<br />
''' (4) Election'''<br />
<br />
''' (A) Time for making election. An election with respect to qualified stock shall be made under this subsection no later than 30 days after the first date the rights of the employee in such stock are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, and shall be made in a manner similar to the manner in which an election is made under subsection (b).'''<br />
<br />
''' (B) Limitations. No election may be made under this section with respect to any qualified stock if—'''<br />
<br />
''' (i) the qualified employee has made an election under subsection (b) with respect to such qualified stock,'''<br />
<br />
''' (ii) any stock of the corporation which issued the qualified stock is readily tradable on an established securities market (as determined under paragraph (1)(B)(iii)) at any time before the election is made, or'''<br />
<br />
''' (iii) such corporation purchased any of its outstanding stock in the calendar year preceding the calendar year which includes the first date the rights of the employee in such stock are transferable or are not subject to a substantial risk of forfeiture, unless—'''<br />
<br />
''' (I) not less than 25 percent of the total dollar amount of the stock so purchased is deferral stock, and'''<br />
<br />
''' (II) the determination of which individuals from whom deferral stock is purchased is made on a reasonable basis.'''<br />
<br />
''' (C) Definitions and special rules related to limitation on stock redemptions'''<br />
<br />
''' (i) Deferral stock. For purposes of this paragraph, the term “deferral stock” means stock with respect to which an election is in effect under this subsection.'''<br />
<br />
''' (ii) Deferral stock with respect to any individual not taken into account if individual holds deferral stock with longer deferral period. Stock purchased by a corporation from any individual shall not be treated as deferral stock for purposes of subparagraph (B)(iii) if such individual (immediately after such purchase) holds any deferral stock with respect to which an election has been in effect under this subsection for a longer period than the election with respect to the stock so purchased.'''<br />
<br />
''' (iii) Purchase of all outstanding deferral stock. The requirements of subclauses (I) and (II) of subparagraph (B)(iii) shall be treated as met if the stock so purchased includes all of the corporation’s outstanding deferral stock.'''<br />
<br />
''' (iv) Reporting. Any corporation which has outstanding deferral stock as of the beginning of any calendar year and which purchases any of its outstanding stock during such calendar year shall include on its return of tax for the taxable year in which, or with which, such calendar year ends the total dollar amount of its outstanding stock so purchased during such calendar year and such other information as the Secretary requires for purposes of administering this paragraph.'''<br />
<br />
''' (5) Controlled groups. For purposes of this subsection, all persons treated as a single employer under section 414(b) shall be treated as 1 corporation.'''<br />
<br />
''' (6) Notice requirement. Any corporation which transfers qualified stock to a qualified employee shall, at the time that (or a reasonable period before) an amount attributable to such stock would (but for this subsection) first be includible in the gross income of such employee—'''<br />
<br />
''' (A) certify to such employee that such stock is qualified stock, and'''<br />
<br />
''' (B) notify such employee—'''<br />
<br />
''' (i) that the employee may be eligible to elect to defer income on such stock under this subsection, and'''<br />
<br />
''' (ii) that, if the employee makes such an election—'''<br />
<br />
''' (I) the amount of income recognized at the end of the deferral period will be based on the value of the stock at the time at which the rights of the employee in such stock first become transferable or not subject to substantial risk of forfeiture, notwithstanding whether the value of the stock has declined during the deferral period,'''<br />
<br />
''' (II) the amount of such income recognized at the end of the deferral period will be subject to withholding under section 3401(i) at the rate determined under section 3402(t), and'''<br />
<br />
''' (III) the responsibilities of the employee (as determined by the Secretary under paragraph (3)(A)(ii)) with respect to such withholding.'''<br />
<br />
''' (7) Restricted stock units. This section (other than this subsection), including any election under subsection (b), shall not apply to restricted stock units.'''<br />
|} <br />
<br />
'''Contingent Compensation''' → “golden handcuffs”; consideration, the full enjoyment of which is conditioned upon performance of additional services in the future; frequently come in the form of stock or equity interest. <br />
<br />
Deferred Compensation →<br />
<br />
● 401K/403B plans<br />
<br />
● Incentive stock options → restrictive stock agreement<br />
<br />
● Pension plans <br />
<br />
§83 Election is '''irrevocable''' - must be made within 30 days of the stock grant. <br />
<br />
Substantial risk of forfeiture → voluntary term → yes; “for cause” termination → no (involuntary) <br />
<br />
'''Gifts and Bequests''' <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 102 - Gifts and inheritances'''<br />
<br />
'''(a) General rule. Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.'''<br />
<br />
'''(b) Income. Subsection (a) shall not exclude from gross income—'''<br />
<br />
''' (1) the income from any property referred to in subsection (a); or'''<br />
<br />
''' (2) where the gift, bequest, devise, or inheritance is of income from property, the amount of such income.'''<br />
<br />
'''Where, under the terms of the gift, bequest, devise, or inheritance, the payment, crediting, or distribution thereof is to be made at intervals, then, to the extent that it is paid or credited or to be distributed out of income from property, it shall be treated for purposes of paragraph (2) as a gift, bequest, devise, or inheritance of income from property. Any amount included in the gross income of a beneficiary under subchapter J shall be treated for purposes of paragraph (2) as a gift, bequest, devise, or inheritance of income from property.''' <br />
<br />
'''(c) Employee gifts'''<br />
<br />
''' (1) In general. Subsection (a) shall not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, an employee.'''<br />
<br />
''' (2) Cross references. For provisions excluding certain employee achievement awards from gross income, see section 74(c).'''<br />
<br />
'''For provisions excluding certain de minimis fringes from gross income, see section 132(e).'''<br />
|} <br />
<br />
Gifts and Bequests - §102(a) → gross income does not include the value of property acquired by gift, bequest, devise, or inheritance <br />
<br />
A → $50,000 wages → federal income tax on wages '''VIOLATES HORIZONTAL'''<br />
<br />
B → $50,000 gift → no taxes '''EQUITY''' <br />
<br />
Reasoning for gift exclusion:<br />
<br />
● Administrative convenience - hard to track, imposes into family affairs, difficult to determine value<br />
<br />
● Federal wealth transfer taxes - gifted amounts already subject to tax at the hands of the donor, excessive taxation<br />
<br />
● Encourage generosity - donors are more willing to give if no tax <br />
<br />
'''Tax consequences to the donor''' → the transfer of property by gift is seen as personal consumption by the donor, so there is no deduction; appreciated property will '''not''' result in any tax consequences for the donor (current value higher than what donor paid originally) <br />
<br />
Gifts of Income - §102(b) <br />
<br />
What is a “gift”? Code and Regulations are unclear - look to case law. <br />
<br />
<u>Commissioner v. Duberstein (1960)</u> - SCOTUS [D got car after helping biz; Δ left church and got “pension”]<br />
<br />
RULE: A transfer is not a gift if made out of obligation or anticipation of future benefits <br />
<br />
Case Notes: '''<u>DUBERSTEIN</u> STANDARD → detached and disinterested generosity''' (determines if “gift”)<br />
<br />
● The transfer must be entirely voluntary, but the transferor must lack any ulterior motive or desire to secure a benefit<br />
<br />
● Transferor’s mere characterization of a transfer as a gift is insufficient<br />
<br />
● Controlling factor is transferor’s intent - courts must look to the transferor's “dominant purpose” when determining the intent; case by case determination, great deference to the factfinder. <br />
<br />
{| class="wikitable"<br />
|'''<u>DUBERSTEIN</u> STANDARD'''<br />
<br />
'''“Detached and disinterested generosity”''' <br />
<br />
● Donors intent to gift contemplated,, but more than just an intent to give, many factors considered<br />
<br />
● There cannot be a legal or moral obligation for the gift<br />
<br />
● Gift is not taxable income to recipient but also cannot be claimed as a deduction by the giver, either<br />
|} <br />
<br />
Employee Gifts - §102(c) <br />
<br />
<u>Olk v. United States (1976)</u> - 9th Cir. [π craps dealer rec’d tokes from players]<br />
<br />
RULE: A federal taxpayer receives taxable gross income when a donor voluntarily gives the taxpayer money for the taxpayer’s personal service to the donor.<br />
<br />
Case Notes: Considered commercial gratuity - taxable if:<br />
<br />
# Service included some personal or functional conduct<br />
# Gratuity conformed to local practices<br />
# Gratuity is easily valued <br />
<br />
§102(a) Exclusion → applies to both '''inter vivos transfers''' and '''transfers made at death'''. <br />
<br />
<u>Wolder v. Commissioner (1974)</u> - 2nd Cir. [D promised legal services for life in exch. for securities from merger]<br />
<br />
RULE: A bequest made in return for lifetime legal services constitutes taxable income <br />
<br />
Case Notes: if the purpose of the bequest is to compensate for services, then it is taxable<br />
<br />
● Property acquired by bequest does not constitute taxable income, but where a bequest is made in return for services rendered, that bequest should constitute taxable gain. <br />
<br />
'''Revenue Ruling 67-375 (1967)''' → a distribution of property under the terms of a will in satisfaction of a written agreement under which the taxpayers were required to perform services for the testator is compensation for services, includable in their gross income in the taxable year of receipt.<br />
'''Loans and the Cancellation of Debt''' <br />
<br />
Basic rules of loans:<br />
<br />
(1) A loan is '''not''' gross income to the borrower<br />
<br />
(2) The lender may not deduct the amount of the loan<br />
<br />
(3) The amount paid to satisfy the loan obligation is not deductive by the borrower<br />
<br />
(4) Repayment of the loan is '''not''' gross income to the lender<br />
<br />
(5) Interest paid to the lender '''is included''' in the lender’s gross income<br />
<br />
(6) Interest paid to the lender '''may be deductible''' by the borrower <br />
<br />
Cancellation of Debt → if a lender forgives or cancels an outstanding debt, there may be income tax consequences to the borrower. <br />
<br />
<u>United States v. Kirby Lumber Co. (1931)</u> - SCOTUS [π issued bonds but bought them back that year for less]<br />
<br />
RULE: A corporation that buys back a bond at less than its issuing price realizes taxable income <br />
<br />
Case Notes: π did not experience any loss, only gain<br />
<br />
● This practice essentially discharges a portion of the outstanding debt. <br />
<br />
{| class="wikitable"<br />
|26 U.S. Code § 61 - Gross income defined<br />
<br />
(a) General definition. Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:<br />
<br />
(12) Income from discharge of indebtedness;<br />
|} <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 108 - Income from discharge of indebtedness'''<br />
<br />
'''(a) Exclusion from gross income'''<br />
<br />
''' (1) In general. Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if—'''<br />
<br />
''' (A) the discharge occurs in a title 11 case,'''<br />
<br />
''' (B) the discharge occurs when the taxpayer is insolvent,'''<br />
<br />
''' (C) the indebtedness discharged is qualified farm indebtedness,'''<br />
<br />
''' (D) in the case of a taxpayer other than a C corporation, the indebtedness discharged is qualified real property business indebtedness, or'''<br />
<br />
''' (E) the indebtedness discharged is qualified principal residence indebtedness which is discharged—'''<br />
<br />
''' (i) before January 1, 2018, or'''<br />
<br />
''' (ii) subject to an arrangement that is entered into and evidenced in writing before January 1, 2018.''' <br />
<br />
'''…..''' <br />
<br />
'''(d) Meaning of terms; special rules relating to certain provisions'''<br />
<br />
''' (1) Indebtedness of taxpayer For purposes of this section, the term “indebtedness of the taxpayer” means any indebtedness—'''<br />
<br />
''' (A) for which the taxpayer is liable, or'''<br />
<br />
''' (B) subject to which the taxpayer holds property.'''<br />
|} <br />
<br />
Example: B owes A $50,000 loan repayment; A agrees to accept $45,000 from various sources: compensation for services income of 10k, gain on property of 15k - basis of 20k, discharge of indebtedness income 5k<br />
<br />
Gain on transfer of property → 15k COUNTS AS INCOME<br />
<br />
Discharge of indebtedness → 5k<br />
<br />
Services → 10k<br />
<br />
IF YOU WORK OFF DEBT - it counts as income <br />
<br />
'''Contested Liability Theory''' <br />
<br />
<u>Zarin v. Commissioner (1990)</u> - 3rd Cir. [π got credit line at casino, after lawsuit, owed less]<br />
<br />
RULE: The discharge of indebtedness resulting from a settlement fixing the amount of a disputed debt is not taxable as income.<br />
<br />
Case Notes: Where a taxpayer contests his amount of debt in good faith, the resulting settlement is regarded as the amount of the debt, with no other tax consequences for the taxpayer<br />
<br />
● Under §108 and §61(a)(12), a taxpayer who is discharged from indebtedness realizes income in that amount where:<br />
<br />
(1) Taxpayer is liable for the indebtedness; or<br />
<br />
(2) Taxpayer has an indebtedness by which he holds property <br />
<br />
Contested Liability Doctrine → if a taxpayer, in good faith, disputed the amount of debt, a subsequent settlement would be treated as the amount of debt cognizable for tax purposes. <br />
<br />
'''Gains from Dealing in Property''' <br />
<br />
A got stock worth 10k, by end of year was worth 18k<br />
<br />
No gain on appreciation of stock unless there is a SALE - $10,000 FMV is the INCOME and the BASIS. <br />
<br />
{| class="wikitable"<br />
|26 U.S. Code § 61 - Gross income defined<br />
<br />
(a) General definition. Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:<br />
<br />
(3) Gains derived from dealings in property;<br />
|} <br />
<br />
<u>Doyle v. Mitchell</u> → no gross income until recovery of capital investment<br />
<br />
● In order to determine whether there has been a '''gain''' or '''loss''', and the amount of the gain or loss, withdraw from the gross proceeds an amount sufficient to restore the capital value that existed at the start <br />
<br />
'''Computation of Gain or Loss''' <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 1001 - Determination of amount of and recognition of gain or loss'''<br />
<br />
'''(a) Computation of gain or loss. The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 1011 for determining gain, and the loss shall be the excess of the adjusted basis provided in such section for determining loss over the amount realized.'''<br />
<br />
'''(b) Amount realized. The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received. In determining the amount realized—'''<br />
<br />
''' (1) there shall not be taken into account any amount received as reimbursement for real property taxes which are treated under section 164(d) as imposed on the purchaser, and'''<br />
<br />
''' (2) there shall be taken into account amounts representing real property taxes which are treated under section 164(d) as imposed on the taxpayer if such taxes are to be paid by the purchaser.''' <br />
<br />
'''(c) Recognition of gain or loss. Except as otherwise provided in this subtitle, the entire amount of the gain or loss, determined under this section, on the sale or exchange of property shall be recognized.'''<br />
<br />
'''(d) Installment sales. Nothing in this section shall be construed to prevent (in the case of property sold under contract providing for payment in installments) the taxation of that portion of any installment payment representing gain or profit in the year in which such payment is received.'''<br />
<br />
'''(e) Certain term interests'''<br />
<br />
''' (1) In general. In determining gain or loss from the sale or other disposition of a term interest in property, that portion of the adjusted basis of such interest which is determined pursuant to section 1014, 1015, or 1041 (to the extent that such adjusted basis is a portion of the entire adjusted basis of the property) shall be disregarded.'''<br />
<br />
''' (2) Term interest in property defined. For purposes of paragraph (1), the term “term interest in property” means—'''<br />
<br />
''' (A) a life interest in property,'''<br />
<br />
''' (B) an interest in property for a term of years, or'''<br />
<br />
''' (C) an income interest in a trust.'''<br />
<br />
''' (3) Exception. Paragraph (1) shall not apply to a sale or other disposition which is a part of a transaction in which the entire interest in property is transferred to any person or persons.'''<br />
|} <br />
<br />
<u>GAIN</u><br />
<br />
excess of '''amount realized''' over '''adjusted basis''' in the property exchanged <br />
<br />
<u>LOSS</u><br />
<br />
excess of '''adjusted basis''' over '''amount realized''' in the property exchanged <br />
<br />
Adjusted basis → the cost of what the taxpayer gives up in exchange<br />
<br />
Amount realized → value of what the taxpayer receives in the exchange <br />
<br />
{| class="wikitable"<br />
|'''Realized Gain (RG)'''<br />
|'''Realized Loss (RL)'''<br />
|-<br />
|Amount Realized (AR) - Adjusted Basis (AB)<br />
|Adjusted Basis (AB) - Amount Realized (AR)<br />
|} <br />
<br />
Examples: AR is 300K, anything in excess of AB is a '''gain'''<br />
<br />
● Taxpayer sells building for $300K cash<br />
<br />
● Taxpayer sells building for $250K and car for $50k<br />
<br />
● Taxpayer sells building for $100K, another for $100K, and securities for $100K <br />
<br />
Realization event → creates an opportunity to tax a gain (or take a loss); can be a death, sale or exchange, or statutory event like the end of a taxable year; '''RECOGNIZE WHEN AN EXCHANGE HAS OCCURRED''' <br />
<br />
'''EXAMPLES:'''<br />
<br />
<u>Helvering v. Bruun (1940)</u> - SCOTUS [tenant built improvements on landlord P’s property, evicted]<br />
<br />
RULE: Under federal tax law, a taxpayer realizes a taxable gain from land improvements at the end of a lease agreement. <br />
<br />
Case Notes: just because P’s gain was in the form of property received, doesn’t exclude it as a gain<br />
<br />
● Realization does not have to occur as a cash gain from the sale of an asset, it can also occur from profit obtained at the end of a transaction<br />
<br />
● A lease agreement is a transaction <br />
<br />
{| class="wikitable"<br />
| <u>Bruun</u> Realization Triggering Events →<br />
<br />
(1) A property exchange (surrender interest)<br />
<br />
(2) Relief of a legal obligation owed to a third party (<u>Old Colony</u>)<br />
<br />
(3) Relief of a legal obligation owed to the party receiving property (<u>Kirby Lumber</u>)<br />
<br />
(4) “other “ profit transactions (<u>Bruun</u>)<br />
|} <br />
<br />
BRUUN is now '''<u>OVERRULED</u>''' by §109 and §1019 <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 109 - Improvements by lessee on lessor’s property'''<br />
<br />
'''Gross income does not include income (other than rent) derived by a lessor of real property on the termination of a lease, representing the value of such property attributable to buildings erected or other improvements made by the lessee.'''<br />
|} <br />
{| class="wikitable"<br />
|'''26 U.S. Code § 1019 - Property on which lessee has made improvements'''<br />
<br />
'''Neither the basis nor the adjusted basis of any portion of real property shall, in the case of the lessor of such property, be increased or diminished on account of income derived by the lessor in respect of such property and excludable from gross income under section 109 (relating to improvements by lessee on lessor’s property).'''<br />
|} <br />
<br />
BUT, still good law from <u>Bruun</u> → the repossession of an asset with an enhanced value from a transaction with another party '''<u>is</u>''' gross income. <br />
<br />
'''Adjusted Basis''' <br />
<br />
Adjusted basis → per §1011(a), adjusted basis is a taxpayer’s basis, as adjusted <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 1011 - Adjusted basis for determining gain or loss'''<br />
<br />
'''(a) General rule. The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis (determined under section 1012 or other applicable sections of this subchapter and subchapters C (relating to corporate distributions and adjustments), K (relating to partners and partnerships), and P (relating to capital gains and losses)), adjusted as provided in section 1016.'''<br />
<br />
'''(b) Bargain sale to a charitable organization. If a deduction is allowable under section 170 (relating to charitable contributions) by reason of a sale, then the adjusted basis for determining the gain from such sale shall be that portion of the adjusted basis which bears the same ratio to the adjusted basis as the amount realized bears to the fair market value of the property.'''<br />
|} <br />
<br />
STEP ONE: §1012 - what is “basis”? <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 1012 - Basis of property—cost'''<br />
<br />
'''(a) In general. The basis of property shall be the cost of such property, except as otherwise provided in this subchapter and subchapters C (relating to corporate distributions and adjustments), K (relating to partners and partnerships), and P (relating to capital gains and losses).'''<br />
<br />
'''(b) Special rule for apportioned real estate taxes. The cost of real property shall not include any amount in respect of real property taxes which are treated under section 164(d) as imposed on the taxpayer.'''<br />
<br />
'''(c) Determinations by account'''<br />
<br />
''' (1) In general. In the case of the sale, exchange, or other disposition of a specified security on or after the applicable date, the conventions prescribed by regulations under this section shall be applied on an account by account basis.'''<br />
<br />
''' (2) Application to certain regulated investment companies'''<br />
<br />
''' (A) In general. Except as provided in subparagraph (B), any stock for which an average basis method is permissible under this section which is acquired before January 1, 2012, shall be treated as a separate account from any such stock acquired on or after such date.'''<br />
<br />
''' (B) Election for treatment as single account. If a regulated investment company described in subparagraph (A) elects to have this subparagraph apply with respect to one or more of its stockholders—'''<br />
<br />
''' (i) subparagraph (A) shall not apply with respect to any stock in such regulated investment company held by such stockholders, and'''<br />
<br />
''' (ii) all stock in such regulated investment company which is held by such stockholders shall be treated as covered securities described in section 6045(g)(3) without regard to the date of the acquisition of such stock.'''<br />
<br />
'''A rule similar to the rule of the preceding sentence shall apply with respect to a broker holding such stock as a nominee.'''<br />
<br />
''' (3) Definitions. For purposes of this section, the terms “specified security” and “applicable date” shall have the meaning given such terms in section 6045(g).'''<br />
<br />
'''(d) Average basis for stock acquired pursuant to a dividend reinvestment plan'''<br />
<br />
''' (1) In general. In the case of any stock acquired after December 31, 2011, in connection with a dividend reinvestment plan, the basis of such stock while held as part of such plan shall be determined using one of the methods which may be used for determining the basis of stock in a regulated investment company.'''<br />
<br />
''' (2) Treatment after transfer. In the case of the transfer to another account of stock to which paragraph (1) applies, such stock shall have a cost basis in such other account equal to its basis in the dividend reinvestment plan immediately before such transfer (properly adjusted for any fees or other charges taken into account in connection with such transfer).'''<br />
<br />
''' (3) Separate accounts; election for treatment as single account'''<br />
<br />
''' (A) In general. Rules similar to the rules of subsection (c)(2) shall apply for purposes of this subsection.'''<br />
<br />
''' (B) Average basis method. Notwithstanding paragraph (1), in the case of an election under rules similar to the rules of subsection (c)(2)(B) with respect to stock held in connection with a dividend reinvestment plan, the average basis method is permissible with respect to all such stock without regard to the date of the acquisition of such stock.'''<br />
<br />
''' (4) Dividend reinvestment plan. For purposes of this subsection—'''<br />
<br />
''' (A) In general. The term “dividend reinvestment plan” means any arrangement under which dividends on any stock are reinvested in stock identical to the stock with respect to which the dividends are paid.'''<br />
<br />
''' (B) Initial stock acquisition treated as acquired in connection with plan. Stock shall be treated as acquired in connection with a dividend reinvestment plan if such stock is acquired pursuant to such plan or if the dividends paid on such stock are subject to such plan.'''<br />
|} <br />
<br />
STEP TWO: Taxpayer’s cost basis is then adjusted under §1016 <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 1016 - Adjustments to basis'''<br />
<br />
'''(a) General rule. Proper adjustment in respect of the property shall in all cases be made—'''<br />
<br />
''' (1) for expenditures, receipts, losses, or other items, properly chargeable to capital account, but no such adjustment shall be made—'''<br />
<br />
''' (A) for—'''<br />
<br />
''' (i) taxes or other carrying charges described in section 266; or'''<br />
<br />
''' (ii) expenditures described in section 173 (relating to circulation expenditures),'''<br />
<br />
'''for which deductions have been taken by the taxpayer in determining taxable income for the taxable year or prior taxable years; or'''<br />
<br />
''' (B) for mortality, expense, or other reasonable charges incurred under an annuity or life insurance contract;'''<br />
<br />
''' (2) in respect of any period since February 28, 1913, for exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent of the amount—'''<br />
<br />
''' (A) allowed as deductions in computing taxable income under this subtitle or prior income tax laws, and'''<br />
<br />
''' (B) resulting (by reason of the deductions so allowed) in a reduction for any taxable year of the taxpayer’s taxes under this subtitle (other than chapter 2, relating to tax on self-employment income), or prior income, war-profits, or excess-profits tax laws, but not less than the amount allowable under this subtitle or prior income tax laws. Where no method has been adopted under section 167 (relating to depreciation deduction), the amount allowable shall be determined under the straight line method. Subparagraph (B) of this paragraph shall not apply in respect of any period since February 28, 1913, and before January 1, 1952, unless an election has been made under section 1020 (as in effect before the date of the enactment of the Tax Reform Act of 1976). Where for any taxable year before the taxable year 1932 the depletion allowance was based on discovery value or a percentage of income, then the adjustment for depletion for such year shall be based on the depletion which would have been allowable for such year if computed without reference to discovery value or a percentage of income;'''<br />
<br />
''' (3) in respect of any period—'''<br />
<br />
''' (A) before March 1, 1913,'''<br />
<br />
''' (B) since February 28, 1913, during which such property was held by a person or an organization not subject to income taxation under this chapter or prior income tax laws,'''<br />
<br />
''' (C) since February 28, 1913, and before January 1, 1958, during which such property was held by a person subject to tax under part I of subchapter L (or the corresponding provisions of prior income tax laws), to the extent that paragraph (2) does not apply, and'''<br />
<br />
''' (D) since February 28, 1913, during which such property was held by a person subject to tax under part II [1] of subchapter L (or the corresponding provisions of prior income tax laws), to the extent that paragraph (2) does not apply,'''<br />
<br />
'''for exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent sustained;'''<br />
<br />
''' (4) in the case of stock (to the extent not provided for in the foregoing paragraphs) for the amount of distributions previously made which, under the law applicable to the year in which the distribution was made, either were tax-free or were applicable in reduction of basis (not including distributions made by a corporation which was classified as a personal service corporation under the provisions of the Revenue Act of 1918 (40 Stat. 1057), or the Revenue Act of 1921 (42 Stat. 227), out of its earnings or profits which were taxable in accordance with the provisions of section 218 of the Revenue Act of 1918 or 1921);'''<br />
<br />
''' (5) in the case of any bond (as defined in section 171(d)) the interest on which is wholly exempt from the tax imposed by this subtitle, to the extent of the amortizable bond premium disallowable as a deduction pursuant to section 171(a)(2), and in the case of any other bond (as defined in section 171(d)) to the extent of the deductions allowable pursuant to section 171(a)(1) (or the amount applied to reduce interest payments under section 171(e)(2)) with respect thereto;'''<br />
<br />
''' (6) in the case of any municipal bond (as defined in section 75(b)), to the extent provided in section 75(a)(2);'''<br />
<br />
''' (7) in the case of a residence the acquisition of which resulted, under section 1034 (as in effect on the day before the date of the enactment of the Taxpayer Relief Act of 1997), in the nonrecognition of any part of the gain realized on the sale, exchange, or involuntary conversion of another residence, to the extent provided in section 1034(e) (as so in effect);'''<br />
<br />
''' (8) in the case of property pledged to the Commodity Credit Corporation, to the extent of the amount received as a loan from the Commodity Credit Corporation and treated by the taxpayer as income for the year in which received pursuant to section 77, and to the extent of any deficiency on such loan with respect to which the taxpayer has been relieved from liability;'''<br />
<br />
''' '''<br />
<br />
''' (9) for amounts allowed as deductions as deferred expenses under section 616(b) (relating to certain expenditures in the development of mines) and resulting in a reduction of the taxpayer’s taxes under this subtitle, but not less than the amounts allowable under such section for the taxable year and prior years;'''<br />
<br />
''' [(10) Repealed. Pub. L. 94–455, title XIX, § 1901(b)(21)(G), Oct. 4, 1976, 90 Stat. 1798]'''<br />
<br />
''' (11) for deductions to the extent disallowed under section 268 (relating to sale of land with unharvested crops), notwithstanding the provisions of any other paragraph of this subsection;'''<br />
<br />
''' [(12) Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(75), Dec. 19, 2014, 128 Stat. 4049]'''<br />
<br />
''' [(13) Repealed. Pub. L. 108–357, title IV, § 413(c)(19), Oct. 22, 2004, 118 Stat. 1509]'''<br />
<br />
''' (14) for amounts allowed as deductions as deferred expenses under section 174(b)(1) 1 (relating to research and experimental expenditures) and resulting in a reduction of the taxpayers’ taxes under this subtitle, but not less than the amounts allowable under such section for the taxable year and prior years;'''<br />
<br />
''' (15) for deductions to the extent disallowed under section 272 (relating to disposal of coal or domestic iron ore), notwithstanding the provisions of any other paragraph of this subsection;'''<br />
<br />
''' (16) in the case of any evidence of indebtedness referred to in section 811(b) (relating to amortization of premium and accrual of discount in the case of life insurance companies), to the extent of the adjustments required under section 811(b) (or the corresponding provisions of prior income tax laws) for the taxable year and all prior taxable years;'''<br />
<br />
''' (17) to the extent provided in section 1367 in the case of stock of, and indebtedness owed to, shareholders of an S corporation;'''<br />
<br />
''' (18) to the extent provided in section 961 in the case of stock in controlled foreign corporations (or foreign corporations which were controlled foreign corporations) and of property by reason of which a person is considered as owning such stock;'''<br />
<br />
''' (19) to the extent provided in section 50(c), in the case of expenditures with respect to which a credit has been allowed under section 38;'''<br />
<br />
''' (20) for amounts allowed as deductions under section 59(e) (relating to optional 10-year writeoff of certain tax preferences);'''<br />
<br />
''' (21) to the extent provided in section 1059 (relating to reduction in basis for extraordinary dividends);'''<br />
<br />
''' (22) in the case of qualified replacement property the acquisition of which resulted under section 1042 in the nonrecognition of any part of the gain realized on the sale or exchange of any property, to the extent provided in section 1042(d),[2]'''<br />
<br />
''' (23) in the case of property the acquisition of which resulted under section 1043, 1045, or 1397B in the nonrecognition of any part of the gain realized on the sale of other property, to the extent provided in section 1043(c), 1045(b)(3), or 1397B(b)(4), as the case may be,2'''<br />
<br />
''' [(24) Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(34)(G), Dec. 19, 2014, 128 Stat. 4042]'''<br />
<br />
''' [(25) Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(2)(D), Dec. 19, 2014, 128 Stat. 4037]'''<br />
<br />
''' (26) to the extent provided in sections 23(g) and 137(e),2'''<br />
<br />
''' (27) in the case of a residence with respect to which a credit was allowed under section 1400C, to the extent provided in section 1400C(h),2'''<br />
<br />
''' (28) in the case of a facility with respect to which a credit was allowed under section 45F, to the extent provided in section 45F(f)(1),2'''<br />
<br />
''' (29) in the case of railroad track with respect to which a credit was allowed under section 45G, to the extent provided in section 45G(e)(3),2'''<br />
<br />
''' (30) to the extent provided in section 179B(c),2'''<br />
<br />
''' (31) to the extent provided in section 179D(e),2'''<br />
<br />
''' (32) to the extent provided in section 45L(e), in the case of amounts with respect to which a credit has been allowed under section 45L,2'''<br />
<br />
''' (33) to the extent provided in section 25C(f), in the case of amounts with respect to which a credit has been allowed under section 25C,2'''<br />
<br />
''' (34) to the extent provided in section 25D(f), in the case of amounts with respect to which a credit has been allowed under section 25D,2'''<br />
<br />
''' (35) to the extent provided in section 30B(h)(4),2'''<br />
<br />
''' (36) to the extent provided in section 30C(e)(1),2'''<br />
<br />
''' (37) to the extent provided in section 30D(f)(1),2 and'''<br />
<br />
''' (38) to the extent provided in subsections (b)(2) and (c) of section 1400Z–2.''' <br />
<br />
'''(b) Substituted basis. Whenever it appears that the basis of property in the hands of the taxpayer is a substituted basis, then the adjustments provided in subsection (a) shall be made after first making in respect of such substituted basis proper adjustments of a similar nature in respect of the period during which the property was held by the transferor, donor, or grantor, or during which the other property was held by the person for whom the basis is to be determined. A similar rule shall be applied in the case of a series of substituted bases.'''<br />
<br />
'''(c) Increase in basis of property on which additional estate tax is imposed'''<br />
<br />
''' (1) Tax imposed with respect to entire interest. If an additional estate tax is imposed under section 2032A(c)(1) with respect to any interest in property and the qualified heir makes an election under this subsection with respect to the imposition of such tax, the adjusted basis of such interest shall be increased by an amount equal to the excess of—'''<br />
<br />
''' (A) the fair market value of such interest on the date of the decedent’s death (or the alternate valuation date under section 2032, if the executor of the decedent’s estate elected the application of such section), over'''<br />
<br />
''' (B) the value of such interest determined under section 2032A(a).'''<br />
<br />
''' (2) Partial dispositions'''<br />
<br />
''' (A) In general. In the case of any partial disposition for which an election under this subsection is made, the increase in basis under paragraph (1) shall be an amount—'''<br />
<br />
''' (i) which bears the same ratio to the increase which would be determined under paragraph (1) (without regard to this paragraph) with respect to the entire interest, as'''<br />
<br />
''' (ii) the amount of the tax imposed under section 2032A(c)(1) with respect to such disposition bears to the adjusted tax difference attributable to the entire interest (as determined under section 2032A(c)(2)(B)).'''<br />
<br />
''' (B) Partial disposition. For purposes of subparagraph (A), the term “partial disposition” means any disposition or cessation to which subsection (c)(2)(D), (h)(1)(B), or (i)(1)(B) of section 2032A applies.'''<br />
<br />
''' (3) Time adjustment made. Any increase in basis under this subsection shall be deemed to have occurred immediately before the disposition or cessation resulting in the imposition of the tax under section 2032A(c)(1).'''<br />
<br />
''' (4) Special rule in the case of substituted property. If the tax under section 2032A(c)(1) is imposed with respect to qualified replacement property (as defined in section 2032A(h)(3)(B)) or qualified exchange property (as defined in section 2032A(i)(3)), the increase in basis under paragraph (1) shall be made by reference to the property involuntarily converted or exchanged (as the case may be).'''<br />
<br />
''' (5) Election'''<br />
<br />
''' (A) In general. An election under this subsection shall be made at such time and in such manner as the Secretary shall by regulations prescribe. Such an election, once made, shall be irrevocable.'''<br />
<br />
''' (B) Interest on recaptured amount. If an election is made under this subsection with respect to any additional estate tax imposed under section 2032A(c)(1), for purposes of section 6601 (relating to interest on underpayments), the last date prescribed for payment of such tax shall be deemed to be the last date prescribed for payment of the tax imposed by section 2001 with respect to the estate of the decedent (as determined for purposes of section 6601).'''<br />
<br />
'''(d) Reduction in basis of automobile on which gas guzzler tax was imposed. If—'''<br />
<br />
''' (1) the taxpayer acquires any automobile with respect to which a tax was imposed by section 4064, and'''<br />
<br />
''' (2) the use of such automobile by the taxpayer begins not more than 1 year after the date of the first sale for ultimate use of such automobile, the basis of such automobile shall be reduced by the amount of the tax imposed by section 4064 with respect to such automobile. In the case of importation, if the date of entry or withdrawal from warehouse for consumption is later than the date of the first sale for ultimate use, such later date shall be substituted for the date of such first sale in the preceding sentence.''' <br />
<br />
'''(e) Cross reference. For treatment of separate mineral interests as one property, see section 614.'''<br />
|} <br />
<br />
'''Depreciation''' → the amount a taxpayer can take as a deduction for the wear and tear of an asset in a particular year; not based on “actual” or “economic” but instead on statutorily created schedules. <br />
<br />
Example → taxpayer owns personal residence originally acquired for $200,000<br />
<br />
● Taxpayer constructs attached deck, cost of improvement is added to taxpayer’s basis in the residence (now $225,000)<br />
<br />
● Taxpayer cannot deduct the $25,000 used for materials <br />
<br />
Example → taxpayer spends $10,000 for business copier with a useful life of 5 years<br />
<br />
● Can taxpayer deduct entire amount up front, or must they depreciate the cost over the expected life of the property?<br />
<br />
● If they must '''depreciate''' → they are entitled to deduct a portion of the cost over the 5 year period; as this is done, basis should be reduced each year by the amount of the depreciation deduction (total cost divided by usable life = $2,000 per year). This allows taxpayer to gradually get their money back in the form of a deduction. <br />
<br />
'''Adjusted Basis''' → reflects the taxpayer’s ongoing investment in an asset from a tax perspective; when the asset is sold or exchanged, the adjusted basis tells us how much unrecovered “cost” the taxpayer continues to have in the property; only to the extent the amount realized exceeds the unrecovered cost should the taxpayer have taxable gain. <br />
<br />
'''TP generally cannot deduct the cost in year one because the copier will provide a benefit beyond the taxable year (so depreciation deduction).''' <br />
<br />
Example (copier cont.) → depreciation schedule <br />
<br />
{| class="wikitable"<br />
|'''Year 1'''<br />
|$10,000 FMV<br />
|-<br />
|'''Year 2'''<br />
|$8,000 adjusted basis<br />
|-<br />
|'''Year 3'''<br />
|$6,000 adjusted basis<br />
|-<br />
|'''Year 4'''<br />
|$4,000 adjusted basis<br />
|-<br />
|'''Year 5'''<br />
|$2,000 adjusted basis<br />
|-<br />
|'''Value after 5 Years'''<br />
|$0 ($2,000 depreciation deduction each year)<br />
|} <br />
<br />
If business sold copier in year 6 for $1,000, the taxpayer would be taxed on $1,000 of gain (the amount realized of $1,000 less the adjusted basis of $0). <br />
<br />
{| class="wikitable"<br />
|26 U.S. Code § 1001 - Determination of amount of and recognition of gain or loss <br />
<br />
(c) Recognition of gain or loss. Except as otherwise provided in this subtitle, the entire amount of the gain or loss, determined under this section, on the sale or exchange of property shall be recognized.<br />
|} <br />
<br />
Per §1012 → taxpayer’s basis in the property is their “cost” <br />
<br />
<u>Philadelphia Park Amusement Co. v. United States (1954)</u> - Claims [50 year franchise in exch. for bridge built]<br />
<br />
RULE: The cost basis of property received in a taxable exchange is the fair market value of the property received. <br />
<br />
Case Notes: in order to prevent distorted assessments of liability against taxpayers, cost basis of property received should be the fair market value of property received<br />
<br />
● Taxpayer’s basis in the property received is equal to the property’s FMV<br />
<br />
● Each taxable year stands alone<br />
<br />
● If the value of property received is hard to value, taxpayer can look to the value of the property surrendered <br />
<br />
# Following a taxable exchange, the taxpayer’s basis in property received in the exchange is always equal to the FMV of the property received<br />
## Any gain recognized in the exchange is part of the “cost” to acquire the property received in the exchange<br />
## Example: TP sells $20 painting in exchange for $100 rug → TP '''realizes''' and '''recognizes''' $80 gain (rug cost minus painting value - basis); IF TP sells rug for $100 the next day, do they realize another gain? '''NO'''; TP’s “cost” is giving up the $20 painting and the tax-cost of an $80 gain. <br />
<br />
# Each taxable year stands alone<br />
## Base current year tax consequences on what should have happened in the prior year<br />
## Example: <u>Philadelphia Park</u>; exchange of bridge and franchise occurred the year prior to the year where the depreciation deduction was sought -- TP should have recognized gain in prior year; TP had FMV basis in franchise received in exchange; they did not include in gross income but treated as though they did <br />
<br />
# Determining value of difficult property <br />
## If unclear or hard to determine, assume the value is equal to the value of the property you gave in exchange<br />
## Assume all transactions were at arm’s length, absent facts to the contrary <br />
<br />
'''Special Basis Rules''' <br />
<br />
'''Basis of Property Received by Gift, Bequest, Devise, or Inheritance''' <br />
<br />
Inter Vivos gifts →<br />
<br />
● Donee takes the donor’s adjusted basis in the property<br />
<br />
● A gives B asset worth $5,000 in which A has a basis of $3,000<br />
<br />
● B will include nothing in gross income and have basis of $3,000<br />
<br />
● Transferred basis, carryover basis <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 1015 - Basis of property acquired by gifts and transfers in trust'''<br />
<br />
'''(a) Gifts after December 31, 1920. If the property was acquired by gift after December 31, 1920, the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift, except that if such basis (adjusted for the period before the date of the gift as provided in section 1016) is greater than the fair market value of the property at the time of the gift, then for the purpose of determining loss the basis shall be such fair market value. If the facts necessary to determine the basis in the hands of the donor or the last preceding owner are unknown to the donee, the Secretary shall, if possible, obtain such facts from such donor or last preceding owner, or any other person cognizant thereof. If the Secretary finds it impossible to obtain such facts, the basis in the hands of such donor or last preceding owner shall be the fair market value of such property as found by the Secretary as of the date or approximate date at which, according to the best information that the Secretary is able to obtain, such property was acquired by such donor or last preceding owner.'''<br />
<br />
'''(b) Transfer in trust after December 31, 1920. If the property was acquired after December 31, 1920, by a transfer in trust (other than by a transfer in trust by a gift, bequest, or devise), the basis shall be the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on such transfer under the law applicable to the year in which the transfer was made.'''<br />
<br />
'''(c) Gift or transfer in trust before January 1, 1921. If the property was acquired by gift or transfer in trust on or before December 31, 1920, the basis shall be the fair market value of such property at the time of such acquisition.'''<br />
<br />
'''(d) Increased basis for gift tax paid'''<br />
<br />
''' (1) In general. If—'''<br />
<br />
''' (A) the property is acquired by gift on or after September 2, 1958, the basis shall be the basis determined under subsection (a), increased (but not above the fair market value of the property at the time of the gift) by the amount of gift tax paid with respect to such gift, or'''<br />
<br />
''' (B) the property was acquired by gift before September 2, 1958, and has not been sold, exchanged, or otherwise disposed of before such date, the basis of the property shall be increased on such date by the amount of gift tax paid with respect to such gift, but such increase shall not exceed an amount equal to the amount by which the fair market value of the property at the time of the gift exceeded the basis of the property in the hands of the donor at the time of the gift.'''<br />
<br />
''' (2) Amount of tax paid with respect to gift. For purposes of paragraph (1), the amount of gift tax paid with respect to any gift is an amount which bears the same ratio to the amount of gift tax paid under chapter 12 with respect to all gifts made by the donor for the calendar year (or preceding calendar period) in which such gift is made as the amount of such gift bears to the taxable gifts (as defined in section 2503(a) but computed without the deduction allowed by section 2521) made by the donor during such calendar year or period. For purposes of the preceding sentence, the amount of any gift shall be the amount included with respect to such gift in determining (for the purposes of section 2503(a)) the total amount of gifts made during the calendar year or period, reduced by the amount of any deduction allowed with respect to such gift under section 2522 (relating to charitable deduction) or under section 2523 (relating to marital deduction).'''<br />
<br />
''' (3) Gifts treated as made one-half by each spouse. For purposes of paragraph (1), where the donor and his spouse elected, under section 2513 to have the gift considered as made one-half by each, the amount of gift tax paid with respect to such gift under chapter 12 shall be the sum of the amounts of tax paid with respect to each half of such gift (computed in the manner provided in paragraph (2)).'''<br />
<br />
''' (4) Treatment as adjustment to basis. For purposes of section 1016(b), an increase in basis under paragraph (1) shall be treated as an adjustment under section 1016(a).'''<br />
<br />
''' (5) Application to gifts before 1955. With respect to any property acquired by gift before 1955, references in this subsection to any provision of this title shall be deemed to refer to the corresponding provision of the Internal Revenue Code of 1939 or prior revenue laws which was effective for the year in which such gift was made.'''<br />
<br />
''' (6) Special rule for gifts made after December 31, 1976'''<br />
<br />
''' (A) In general. In the case of any gift made after December 31, 1976, the increase in basis provided by this subsection with respect to any gift for the gift tax paid under chapter 12 shall be an amount (not in excess of the amount of tax so paid) which bears the same ratio to the amount of tax so paid as—'''<br />
<br />
''' (i) the net appreciation in value of the gift, bears to'''<br />
<br />
''' (ii) the amount of the gift.'''<br />
<br />
''' (B) Net appreciation. For purposes of paragraph (1), the net appreciation in value of any gift is the amount by which the fair market value of the gift exceeds the donor’s adjusted basis immediately before the gift.'''<br />
<br />
'''(e) Gifts between spouses. In the case of any property acquired by gift in a transfer described in section 1041(a), the basis of such property in the hands of the transferee shall be determined under section 1041(b)(2) and not this section.'''<br />
|} <br />
<br />
Applicable Basis rules under §1015(a) → <br />
<br />
{| class="wikitable"<br />
| <br />
|Donee Basis for computing '''GAIN'''<br />
|Donee basis for computing '''LOSS'''<br />
|-<br />
|FMV <u>></u> donor’s adjusted basis at the time of the gift<br />
|Donor’s adjusted basis<br />
|Donor’s adjusted basis<br />
|-<br />
|FMV < donor’s adjusted basis at the time of gift<br />
|Donor’s adjusted basis<br />
|FMV (loss does not carry over<br />
|}<br />
Property acquired from a decedent → §1014 <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 1014 - Basis of property acquired from a decedent'''<br />
<br />
'''(a) In general. Except as otherwise provided in this section, the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall, if not sold, exchanged, or otherwise disposed of before the decedent’s death by such person, be—'''<br />
<br />
''' (1) the fair market value of the property at the date of the decedent’s death,'''<br />
<br />
''' (2) in the case of an election under section 2032, its value at the applicable valuation date prescribed by such section,'''<br />
<br />
''' (3) in the case of an election under section 2032A, its value determined under such section, or'''<br />
<br />
''' (4) to the extent of the applicability of the exclusion described in section 2031(c), the basis in the hands of the decedent.''' <br />
<br />
'''(b) Property acquired from the decedent. For purposes of subsection (a), the following property shall be considered to have been acquired from or to have passed from the decedent:'''<br />
<br />
''' (1) Property acquired by bequest, devise, or inheritance, or by the decedent’s estate from the decedent;'''<br />
<br />
''' (2) Property transferred by the decedent during his lifetime in trust to pay the income for life to or on the order or direction of the decedent, with the right reserved to the decedent at all times before his death to revoke the trust;'''<br />
<br />
''' (3) In the case of decedents dying after December 31, 1951, property transferred by the decedent during his lifetime in trust to pay the income for life to or on the order or direction of the decedent with the right reserved to the decedent at all times before his death to make any change in the enjoyment thereof through the exercise of a power to alter, amend, or terminate the trust;'''<br />
<br />
''' (4) Property passing without full and adequate consideration under a general power of appointment exercised by the decedent by will;'''<br />
<br />
''' (5) In the case of decedents dying after August 26, 1937, and before January 1, 2005, property acquired by bequest, devise, or inheritance or by the decedent’s estate from the decedent, if the property consists of stock or securities of a foreign corporation, which with respect to its taxable year next preceding the date of the decedent’s death was, under the law applicable to such year, a foreign personal holding company. In such case, the basis shall be the fair market value of such property at the date of the decedent’s death or the basis in the hands of the decedent, whichever is lower;'''<br />
<br />
''' (6) In the case of decedents dying after December 31, 1947, property which represents the surviving spouse’s one-half share of community property held by the decedent and the surviving spouse under the community property laws of any State, or possession of the United States or any foreign country, if at least one-half of the whole of the community interest in such property was includible in determining the value of the decedent’s gross estate under chapter 11 of subtitle B (section 2001 and following, relating to estate tax) or section 811 of the Internal Revenue Code of 1939;'''<br />
<br />
''' [(7) , (8) Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(74)(B), Dec. 19, 2014, 128 Stat. 4049]'''<br />
<br />
''' (9) In the case of decedents dying after December 31, 1953, property acquired from the decedent by reason of death, form of ownership, or other conditions (including property acquired through the exercise or non-exercise of a power of appointment), if by reason thereof the property is required to be included in determining the value of the decedent’s gross estate under chapter 11 of subtitle B or under the Internal Revenue Code of 1939. In such case, if the property is acquired before the death of the decedent, the basis shall be the amount determined under subsection (a) reduced by the amount allowed to the taxpayer as deductions in computing taxable income under this subtitle or prior income tax laws for exhaustion, wear and tear, obsolescence, amortization, and depletion on such property before the death of the decedent. Such basis shall be applicable to the property commencing on the death of the decedent. This paragraph shall not apply to—'''<br />
<br />
''' (A) annuities described in section 72;'''<br />
<br />
''' (B) property to which paragraph (5) would apply if the property had been acquired by bequest; and'''<br />
<br />
''' (C) property described in any other paragraph of this subsection.'''<br />
<br />
''' (10) Property includible in the gross estate of the decedent under section 2044 (relating to certain property for which marital deduction was previously allowed). In any such case, the last 3 sentences of paragraph (9) shall apply as if such property were described in the first sentence of paragraph (9).''' <br />
<br />
'''(c) Property representing income in respect of a decedent. This section shall not apply to property which constitutes a right to receive an item of income in respect of a decedent under section 691.'''<br />
<br />
'''(d) Special rule with respect to DISC stock. If stock owned by a decedent in a DISC or former DISC (as defined in section 992(a)) acquires a new basis under subsection (a), such basis (determined before the application of this subsection) shall be reduced by the amount (if any) which would have been included in gross income under section 995(c) as a dividend if the decedent had lived and sold the stock at its fair market value on the estate tax valuation date. In computing the gain the decedent would have had if he had lived and sold the stock, his basis shall be determined without regard to the last sentence of section 996(e)(2) (relating to reductions of basis of DISC stock). For purposes of this subsection, the estate tax valuation date is the date of the decedent’s death or, in the case of an election under section 2032, the applicable valuation date prescribed by that section.'''<br />
<br />
'''(e) Appreciated property acquired by decedent by gift within 1 year of death'''<br />
<br />
''' (1) In general. In the case of a decedent dying after December 31, 1981, if—'''<br />
<br />
''' (A) appreciated property was acquired by the decedent by gift during the 1-year period ending on the date of the decedent’s death, and'''<br />
<br />
''' (B) such property is acquired from the decedent by (or passes from the decedent to) the donor of such property (or the spouse of such donor), the basis of such property in the hands of such donor (or spouse) shall be the adjusted basis of such property in the hands of the decedent immediately before the death of the decedent.'''<br />
<br />
''' (2) Definitions. For purposes of paragraph (1)—'''<br />
<br />
''' (A) Appreciated property. The term “appreciated property” means any property if the fair market value of such property on the day it was transferred to the decedent by gift exceeds its adjusted basis.'''<br />
<br />
''' (B) Treatment of certain property sold by estate. In the case of any appreciated property described in subparagraph (A) of paragraph (1) sold by the estate of the decedent or by a trust of which the decedent was the grantor, rules similar to the rules of paragraph (1) shall apply to the extent the donor of such property (or the spouse of such donor) is entitled to the proceeds from such sale.'''<br />
<br />
'''(f) Basis must be consistent with estate tax return. For purposes of this section—'''<br />
<br />
''' (1) In general. The basis of any property to which subsection (a) applies shall not exceed—'''<br />
<br />
''' (A) in the case of property the final value of which has been determined for purposes of the tax imposed by chapter 11 on the estate of such decedent, such value, and'''<br />
<br />
''' (B) in the case of property not described in subparagraph (A) and with respect to which a statement has been furnished under section 6035(a) identifying the value of such property, such value.'''<br />
<br />
''' (2) Exception. Paragraph (1) shall only apply to any property whose inclusion in the decedent’s estate increased the liability for the tax imposed by chapter 11 (reduced by credits allowable against such tax) on such estate.'''<br />
<br />
''' (3) Determination. For purposes of paragraph (1), the basis of property has been determined for purposes of the tax imposed by chapter 11 if—'''<br />
<br />
''' (A) the value of such property is shown on a return under section 6018 and such value is not contested by the Secretary before the expiration of the time for assessing a tax under chapter 11,'''<br />
<br />
''' (B) in a case not described in subparagraph (A), the value is specified by the Secretary and such value is not timely contested by the executor of the estate, or'''<br />
<br />
''' (C) the value is determined by a court or pursuant to a settlement agreement with the Secretary.'''<br />
<br />
''' '''<br />
<br />
''' (4) Regulations. The Secretary may by regulations provide exceptions to the application of this subsection.'''<br />
|} <br />
<br />
“Stepped-up” basis → <br />
<br />
● Basis is stepped-down to fair market value<br />
<br />
● A dies holding asset worth $20,000, B’s basis is $20,000 regardless of A’s adjusted basis in asset<br />
<br />
● §1014(a) → such property shall have a basis to the recipient equal to the value of the property at the date of the decedent’s death<br />
<br />
● §1014(f) → limits if an estate tax return is required <br />
<br />
Transfers in satisfaction of an obligation - other “accessions to wealth” can constitute part of an “amount realized” → <u>Kenan v. Commissioner</u> - trustee transferred appreciated stock; trust had a real and recognized gain. <br />
<br />
<u>United States v. Davis (1962)</u> - SCOTUS [π transf. appreciated shares to ex wife purs. to div. agmt]<br />
<br />
RULE: for purpose of federal tax law, a transfer of property incident to a divorce is a taxable event <br />
<br />
Case Notes: taxable gain should be equal to the value of the stock on the date of transfer<br />
<br />
● A transfer of property between spouses pursuant to a divorce agreement is a taxable event.<br />
<br />
● In common-law property states, spouses typically have inchoate statutory rights in one another’s separate property in the event of death or divorce<br />
<br />
● When one spouse transfers property to the other spouse in exchange for a release from his statutory obligations, the property transfer is an income-realization event<br />
<br />
● The transferring spouse is released from the personal liability associated with his former marital obligations and realizes a difficult-to-ascertain gain<br />
<br />
● Because a divorce is an arm’s length transaction, the value of the release of liability is presumably equal to the amount the transferring spouse paid to obtain it <br />
<br />
Flavor of Income<br />
<br />
● Capital gains → receive favorable tax treatment (wealthy: 15-20%, less affluent: 0%)<br />
<br />
● “Capital gain” → gain from the sale or exchange of “capital assets” held for '''more than one year'''. <br />
<br />
“Capital asset” → property held for investment or for personal use; §1221(a) provides '''negative definitions''' (what is NOT a capital asset):<br />
<br />
(1) Stock in trade of taxpayer, held primarily for sale in course of business<br />
<br />
(2) Property used in trade or business<br />
<br />
(3) Intellectual property by taxpayer’s personal efforts<br />
<br />
(4) Accounts or notes receivable acquired in ordinary course of business for services or property<br />
<br />
(5) Publication of US government<br />
<br />
(6) Any commodities derivative financial instrument held by a dealer of commodities<br />
<br />
(7) Hedging transactions<br />
<br />
(8) Supplies regularly used by taxpayer in the ordinary course of business <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 1221 - Capital asset defined'''<br />
<br />
'''(a) In general. For purposes of this subtitle, the term “capital asset” means property held by the taxpayer (whether or not connected with his trade or business), but does not include—'''<br />
<br />
''' (1) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;'''<br />
<br />
''' (2) property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in section 167, or real property used in his trade or business;'''<br />
<br />
''' (3) a patent, invention, model or design (whether or not patented), a secret formula or process, a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by—'''<br />
<br />
''' (A) a taxpayer whose personal efforts created such property,'''<br />
<br />
''' (B) in the case of a letter, memorandum, or similar property, a taxpayer for whom such property was prepared or produced, or'''<br />
<br />
''' (C) a taxpayer in whose hands the basis of such property is determined, for purposes of determining gain from a sale or exchange, in whole or part by reference to the basis of such property in the hands of a taxpayer described in subparagraph (A) or (B);'''<br />
<br />
''' (4) accounts or notes receivable acquired in the ordinary course of trade or business for services rendered or from the sale of property described in paragraph (1);'''<br />
<br />
''' (5) a publication of the United States Government (including the Congressional Record) which is received from the United States Government or any agency thereof, other than by purchase at the price at which it is offered for sale to the public, and which is held by—'''<br />
<br />
''' (A) a taxpayer who so received such publication, or'''<br />
<br />
''' (B) a taxpayer in whose hands the basis of such publication is determined, for purposes of determining gain from a sale or exchange, in whole or in part by reference to the basis of such publication in the hands of a taxpayer described in subparagraph (A);'''<br />
<br />
''' (6) any commodities derivative financial instrument held by a commodities derivatives dealer, unless—'''<br />
<br />
''' (A) it is established to the satisfaction of the Secretary that such instrument has no connection to the activities of such dealer as a dealer, and'''<br />
<br />
''' (B) such instrument is clearly identified in such dealer’s records as being described in subparagraph (A) before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe);'''<br />
<br />
''' (7) any hedging transaction which is clearly identified as such before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe); or'''<br />
<br />
''' (8) supplies of a type regularly used or consumed by the taxpayer in the ordinary course of a trade or business of the taxpayer.''' <br />
<br />
'''(b) Definitions and special rules'''<br />
<br />
''' (1) Commodities derivative financial instruments. For purposes of subsection (a)(6)—'''<br />
<br />
''' (A) Commodities derivatives dealer. The term “commodities derivatives dealer” means a person which [1] regularly offers to enter into, assume, offset, assign, or terminate positions in commodities derivative financial instruments with customers in the ordinary course of a trade or business.'''<br />
<br />
''' (B) Commodities derivative financial instrument'''<br />
<br />
''' (i) In general. The term “commodities derivative financial instrument” means any contract or financial instrument with respect to commodities (other than a share of stock in a corporation, a beneficial interest in a partnership or trust, a note, bond, debenture, or other evidence of indebtedness, or a section 1256 contract (as defined in section 1256(b))), the value or settlement price of which is calculated by or determined by reference to a specified index.'''<br />
<br />
''' (ii) Specified index. The term “specified index” means any one or more or any combination of—'''<br />
<br />
''' (I) a fixed rate, price, or amount, or'''<br />
<br />
''' (II) a variable rate, price, or amount, which is based on any current, objectively determinable financial or economic information with respect to commodities which is not within the control of any of the parties to the contract or instrument and is not unique to any of the parties’ circumstances.'''<br />
<br />
''' (2) Hedging transaction'''<br />
<br />
''' (A) In general. For purposes of this section, the term “hedging transaction” means any transaction entered into by the taxpayer in the normal course of the taxpayer’s trade or business primarily—'''<br />
<br />
''' (i) to manage risk of price changes or currency fluctuations with respect to ordinary property which is held or to be held by the taxpayer,'''<br />
<br />
''' (ii) to manage risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, by the taxpayer, or'''<br />
<br />
''' (iii) to manage such other risks as the Secretary may prescribe in regulations.'''<br />
<br />
''' (B) Treatment of nonidentification or improper identification of hedging transactions. Notwithstanding subsection (a)(7), the Secretary shall prescribe regulations to properly characterize any income, gain, expense, or loss arising from a transaction—'''<br />
<br />
''' (i) which is a hedging transaction but which was not identified as such in accordance with subsection (a)(7), or'''<br />
<br />
''' (ii) which was so identified but is not a hedging transaction.'''<br />
<br />
''' (3) Sale or exchange of self-created musical works. At the election of the taxpayer, paragraphs (1) and (3) of subsection (a) shall not apply to musical compositions or copyrights in musical works sold or exchanged by a taxpayer described in subsection (a)(3).'''<br />
<br />
''' (4) Regulations. The Secretary shall prescribe such regulations as are appropriate to carry out the purposes of paragraph (6) and (7) of subsection (a) in the case of transactions involving related parties.'''<br />
|} <br />
<br />
Personal property → if not used for business, usually qualifies as a capital asset<br />
<br />
Rationale for preferential treatment of capital gains:<br />
<br />
● Inflation → necessary to account for taxing gains due to inflation<br />
<br />
● Bunching → all gains from asset bunched into year of sale<br />
<br />
● Stimulate savings and investment activities<br />
<br />
● Cure lock-up problem → encourages sale rather than holding until ones death <br />
<br />
American Taxpayer Relief Act of 2012 (ATRA) - extended preferential rates to “qualified dividend income” → aiming to alleviate corporate double taxation (corporations are individuals, and thus taxed at the business level and again at the shareholder level); double taxation justifiable because tax is paid by two different “people”. <br />
<br />
'''Qualified dividend income''' → most dividends from domestic corporations; no requirement that dividends come from earnings that were previously subject to tax or attributable to dates prior to enactment. <br />
<br />
'''Timing of Income''' <br />
<br />
Timing → Preference is to put off or defer paying tax on gross income for as long as possible. <br />
<br />
{| class="wikitable"<br />
|'''Claim of right doctrine''' → causes a taxpayer to recognize income if they receive the income even if they do not have a fixed right to the income<br />
|} <br />
<br />
<u>North American Oil Consolidated v. Burnet (1932)</u> - SCOTUS [π oil land appointed to rec’vr; won case, got profits]<br />
<br />
RULE: Net profits earned on a property held in receivership are taxable to the taxpayer (and not the received) in the year the taxpayer unconditionally receives the earnings. <br />
<br />
Case Notes: receiver only controlled portion of property; don’t want double filing.<br />
<br />
● When a receiver holds only <u>part</u> of a company’s property, the net income on that property will be taxable to the company in the year it is unconditionally received<br />
<br />
● Rev. Act of 1916 §13(c) - receivers who operate property on behalf of a company must file returns for taxable income just as the company ordinarily would<br />
<br />
● This statute only applies where the receiver operates '''<u>all</u>''' of the company’s property and essentially takes the place of the corporation<br />
<br />
● Companies are not required to file returns for income they may never receive - filing is only required for income a company has actually or constructively received <br />
<br />
● Income is taxable in the year that the taxpayer receives it '''without restriction''' <br />
<br />
{| class="wikitable"<br />
|Rev. Act of 1916 §13(c) - RETURNS <br />
<br />
(c) In cases wherein receivers, trustees in bankruptcy, or assignees are operating the property or business of corporations, joint-stock signees, companies or associations, or insurance companies, subject to tax imposed by this title, such receivers, trustees, or assignees shall make returns of net income as and for such corporations, joint stock companies or associations, and insurance companies, in the same manner and form as such organizations are hereinbefore required to make returns, and any income tax due on the basis of such returns made by receivers, trustees, or assingees shall be assessed and collected in the same manner as if assessed directly against the organizations of whose businesses or properties they have custody and control;<br />
|} <br />
<br />
'''Advance Payments and the Issue of Deposits''' <br />
<br />
<u>Commissioner v. Indianapolis Power & Light Company (1990)</u> - SCOTUS [π collected deposit from customers]<br />
<br />
RULE: a federal taxpayer has complete dominion over a deposit which subjects the deposit to income tax as an advance payment, if a taxpayer has a '''guaranteed right''' to keep the money. <br />
<br />
Case Notes: without a guaranteed right to keep the money, no advanced payment and no income tax<br />
<br />
● Advance payments are taxable in the year of receipt; loans and security deposits are not taxable income<br />
<br />
● The key distinction is whether the taxpayer had complete dominion over the money <br />
<br />
● Complete dominion exists where the taxpayer has a guaranteed right to keep the money <br />
<br />
'''Assignment of Income''' <br />
<br />
'''Income from services''' → income from services is generally taxed to the party who performed the services (<u>Lucas</u>). <br />
<br />
<u>Lucas v. Earl (1930)</u> - SCOTUS [π and wife agreed any income held as joint-tenants; wife didn’t have income]<br />
<br />
RULE: a taxpayer cannot anticipatorily divert earned income to another individual, so as to avoid tax liability <br />
<br />
Case Notes: the Rev. Act taxes the income of the individual who '''earns it'''. <br />
<br />
Teschner v. Commissioner (1962) - Tax Court [π entered education annuity contest for daughter and won]<br />
<br />
RULE: Under federal tax law, a taxpayer does not earn income if he never had a right to the income despite performing services to acquire it for another. <br />
<br />
Case Notes: if the taxpayer is ineligible for the prize, they never had a right to it; here, taxable to daughter. <br />
<br />
'''Income from Property''' <br />
<br />
<u>Helvering v. Horst (1940)</u> - SCOTUS [π gifted coupons of negotiable bonds to son before they were due]<br />
<br />
RULE: a gift of interest coupons detached from bonds amounts to realized income to the donor. <br />
<br />
Case Notes: the one who determines how the money is used is the one who realizes the income<br />
<br />
● Coupons → bearer bonds, presented to debtor for payment<br />
<br />
● Securing the right to receive income is not a taxable event because income is not taxed until it is realized - realization occurs upon receipt or when taxpayer has control over how it is used<br />
<br />
● Whether taxpayer gives income before or after receipt, the income is realized because taxpayer exercises control over it<br />
<br />
● Interest from property is distinguished from interest from earnings and coupons → <br />
<br />
○ Property: interest due to property owner and tax liability follows the owner<br />
<br />
○ Earnings and coupons: interest due to the earner or bond holders personally <br />
<br />
Transferring trees with ripe fruit → <u>Horst</u>: transfers of fruit may not be effective to shift the tax on such fruit to another, but transfers of the entire tree may. <br />
<br />
<u>Salvatore v. Commissioner (1970)</u> - Tax Court [π inherited biz, let sons run]<br />
<br />
RULE: The federal tax consequences of a property sale are determined by the substance, not the form, of the transaction <br />
<br />
Case Notes: substance over form → Court Holding Co.: substance depends not only on the legal means of transferring title but also every step of sale from negotiations to transfer.<br />
<br />
● When π accepted offer to sell biz, she was sole owner<br />
<br />
● Transfer to children without consideration was an “artificial and intermediate step”<br />
<br />
● $ determined not on interest but on need <br />
<br />
'''Tax Planning and Tax Avoidance''' <br />
<br />
<u>Estate of Stranahan v. Commissioner (1973)</u> - 6th Cir. [π exchanged stock to son to take full adv. of int. deduction]<br />
<br />
RULE: a taxpayer may escape tax liability for future income from property if he assigns the future income in a bonafide sale for valuable consideration <br />
<br />
Case Notes: a bona fide sale for current stock value and consideration existed, π is not liable for the dividends paid out to son.<br />
<br />
● <u>Horst</u> → typically, cannot avoid tax liability by transferring or assigning income <br />
<br />
<u>Commissioner v. Banks Commissioner v. Banaitis (2005)</u> - SCOTUS [π rec’d settle, claimed amt after atty fees]<br />
<br />
RULE: the portion of a money judgment or settlement paid to a P’s attorney under a contingent fee agreement is income to the P. <br />
<br />
Case Notes: A contingent fee agreement is essentially an anticipatory assignment of a plaintiff’s income, and any income transferred as a result of the agreement remains taxable to the plaintiff.<br />
<br />
● Income is taxed to the one who earns it. Thus, a taxpayer cannot avoid income tax by anticipatorily assigning his income to another. <br />
<br />
● Tax liability attaches to the one who has dominion or control over the source of the income. <br />
<br />
● In the litigation context, the plaintiff might realize income in the form of a money judgment or settlement. <br />
<br />
● The income-producing asset is the lawsuit itself, and a plaintiff exercises complete dominion and control over this asset throughout the course of litigation. <br />
<br />
● Any income derived from the lawsuit, therefore, is taxable to the plaintiff. <br />
<br />
'''Tax Treatment of Taxpayer Costs''' <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code §161 - Allowance of deductions'''<br />
<br />
'''In computing taxable income under section 63, there shall be allowed as deductions the items specified in this part, subject to the exceptions provided in part IX (sec. 261 and following, relating to items not deductible).'''<br />
|} <br />
<br />
Deductibility Factors:<br />
<br />
1) Depends on the ''nature'' of the cost: “capital expenditure” or an “expense”<br />
<br />
2) Depends on the type of ''activity'' to which that cost related: business, investment, personal <br />
<br />
Capital expenditure → those costs that provide a long-term benefit to the taxpayer, either because they are incurred to acquire a new asset or because they materially add to the value or useful life of some pre-existing asset (costs that should be “capitalized”); generally '''ADD''' to or '''CREATE''' basis. <br />
<br />
Expense → costs that do not acquire, improve, or prolong the life of an asset; generally spent on items that last for a short period of time (less than a year); taxpayers may be able to deduct. <br />
<br />
Nature of Activity:<br />
<br />
● Expenses paid or incurred with respect to business and investment are generally deductible (§§162 and 212)<br />
<br />
● Expenses related to personal activities are generally not deductible (§262) <br />
<br />
Handling Capital Expenditures → if a taxpayer must capitalize a cost, they can recover ultimately upon the sale or disposition of the asset (capitalized cost makes up all or part of the adjusted basis in the underlying asset); taxpayer doesn’t always have to wait to recover, and the cost can be recovered over a period of years roughly equivalent to the useful life of the asset:<br />
<br />
● '''Depreciation''' → tangible property; the property must (among other things) be subject to wear and tear in the hands of the taxpayer (§§617 and 168)<br />
<br />
● '''Amortization''' → intangible property; statutory requirements in §197. <br />
<br />
{| class="wikitable"<br />
| <br />
|'''Personal'''<br />
|'''Business'''<br />
|'''Investment'''<br />
|-<br />
|Capital Expenditures<br />
<br />
(those that: (1) are used to acquire an asset or some other long-lasting benefit; or (2) permanently improve or extend the useful life of that asset or benefit)<br />
|NO DEDUCTION<br />
<br />
§263(a)<br />
<br />
(taxpayer gets basis)<br />
|NO DEDUCTION<br />
<br />
§263(a)<br />
<br />
(taxpayer gets basis) <br />
<br />
But the taxpayer may be able to recover the cost up front or over time <br />
<br />
§§167(a); 168; 179; 197<br />
|NO DEDUCTION<br />
<br />
§263(a)<br />
<br />
(taxpayer gets basis) <br />
<br />
But taxpayer may be able to recover the cost up front or over time <br />
<br />
§§167(a); 168; 197<br />
|-<br />
|Expenses (outlays that are not capital expenditures)<br />
|Generally, NO DEDUCTION<br />
<br />
§262<br />
<br />
[But see Chapter 9]<br />
|DEDUCTION<br />
<br />
§162(a)<br />
|DEDUCTION<br />
<br />
§212<br />
|-<br />
|Realized Losses (loss recognized upon the sale, exchange, or other disposition of an asset)<br />
|Generally, NO DEDUCTION<br />
<br />
§262<br />
<br />
[But see §165(c)(3)]<br />
|DEDUCTION<br />
<br />
§165(c)(1)<br />
|DEDUCTION<br />
<br />
§165(c)(2)<br />
|}<br />
<br />
<br />
'''EXAMPLE OF DEPRECIATION'''<br />
<br />
Building → Basis of $100,000 with a 20 year useful life <br />
<br />
$100,000/20 = $5k depreciation per year <br />
<br />
<u>Commissioner v. Idaho Power Co. (1974)</u> - SCOTUS<br />
<br />
RULE: A federal taxpayer is not entitled to a deduction from gross income for depreciation on equipment that the taxpayer owns and uses in the construction of his own capital facilities. <br />
<br />
Case Notes: <br />
<br />
● The depreciation cost of using an asset must be attributed to the tax periods that are benefitted by the use.<br />
<br />
● If a taxpayer uses an asset for one year to produce income for the same year, the asset’s one-year depreciation is a business expense under § 167(a), for which the taxpayer can take a depreciation deduction in the same tax year to help replace the asset when it wears out.<br />
<br />
● However, if an asset is used in one year to make a capital improvement that will produce income over many years, the accounting focus shifts from the depreciation of the asset to the cost of replacing the capital improvement itself.<br />
<br />
● Under general accounting principles, capital-improvement costs are computed, or capitalized, over the useful life of the capital improvement.<br />
<br />
● Section 263(a)(1) requires “amounts paid out” for capital improvements to be capitalized, and this section takes precedence over the business-expense deduction provisions of § 167(a).<br />
<br />
● Treasury Regulations §§ 1.263(a) and 2(a) and longstanding Internal Revenue Service policy treat capital-construction-related depreciation as one of the amounts paid out for capital improvements. <br />
<br />
'''UNICAP Rules → § 263A (DIFFERENT FROM 263(a))''': rules require the capitalization of all direct costs and certain indirect costs allocable to real property and tangible personal property produced by the taxpayer. For purposes of the uniform capitalization rules, to “produce” means to construct, build, install, manufacture, develop, improve, create, raise or grow. Self-constructed assets and property built under contract are treated as property “produced” by the taxpayer and the rules under § 263A(a) govern.<br />
<br />
● If you fall under § 263A, capitalize everything <br />
<br />
● Exception: small business exception in § 263A(i) - any taxpayer who meets the test will be exempt from § 263A. ($25M gross receipts).<br />
<br />
● § 263A requires everything to be recovered over time, not deducted NOW. <br />
<br />
STEP ONE: Does § 263A apply? If so, capitalize everything (taxpayers don’t want this). Do we fit into an exception?<br />
<br />
Improvement = capitalized, capitalized = don’t recover cost right away <br />
<br />
'''Improvements to Tangible Property''' <br />
<br />
Taxpayers must capitalize costs to improve tangible property if the costs “better” the property, restore the property to a “like-new” condition, or adapt the property to a new or different use. <br />
<br />
{| class="wikitable"<br />
|'''Reg. § 1.263(a)-3 Amounts paid to improve tangible property.''' <br />
<br />
'''(d) Requirement to capitalize amounts paid for improvements.''' <br />
<br />
'''Except as provided in paragraph (h) or paragraph (n) of this section or under § 1.263(a)-1(f), a taxpayer generally must capitalize the related amounts (as defined in paragraph (g)(3) of this section) paid to improve a unit of property owned by the taxpayer. However, paragraph (f) of this section applies to the treatment of amounts paid to improve leased property. Section 263A provides the requirement to capitalize the direct and allocable indirect costs of property produced by the taxpayer and property acquired for resale. Section 1016 provides for the addition of capitalized amounts to the basis of the property, and section 168 governs the treatment of additions or improvements for depreciation purposes. For purposes of this section, a unit of property is improved if the amounts paid for activities performed after the property is placed in service by the taxpayer -'''<br />
<br />
''' (1) Are for a betterment to the unit of property (see paragraph (j) of this section);'''<br />
<br />
''' (2) Restore the unit of property (see paragraph (k) of this section); or'''<br />
<br />
''' (3) Adapt the unit of property to a new or different use (see paragraph (l) of this section).'''<br />
|} <br />
<br />
<u>Fedex Corp. v. United States (2003)</u> - Tennessee [engine shop visit to repair engine, deducted]<br />
<br />
RULE: Under federal tax law, a taxpayer must capitalize expenses used to materially add value to property or restore property to a like-new condition. <br />
<br />
Case Notes:<br />
<br />
● Expenses that materially add value to property or return property to a like-new condition must be capitalized on tax returns.<br />
<br />
● For material valuation purposes, the unit of property in question must be determined by looking at four factors: <br />
<br />
○ (1) whether the smaller unit is treated as part of a larger unit, <br />
<br />
○ (2) whether the economic life of the smaller property is essential for the economic life of the larger property, <br />
<br />
○ (3) whether the larger and smaller units can function separately, and <br />
<br />
○ (4) whether the smaller unit can be maintained without removal from the larger unit. <br />
<br />
'''Betterments (Additions to Value)''' → taxpayers must capitalize costs of betterments, which generally includes costs that materially increase the value of property.<br />
<br />
(1) PRE EXISTING DEFECTS: The cost ameliorates a condition or defect that existed prior to the property’s acquisition or production by the taxpayer, no matter whether the taxpayer knew of this condition or defect at the time<br />
<br />
(2) BETTERMENTS: the cost results in “betterment” of the property or a material addition to the property. This includes costs that improve the property’s quality or strength, or cause the property to be expanded or enlarged<br />
<br />
(3) INCREASED PRODUCTIVITY: The cost results in a material increase in the property’s capacity, productivity, or efficiency <br />
<br />
'''Revenue Ruling 2004-62'''<br />
<br />
● It is well established that the costs incurred for silvicultural practices performed in established timber stands are deductible business expenses because they do not materially add value to the timber stand, substantially prolong its useful life or adapt the timber stand to a new or different use.<br />
<br />
● There is no established rule with respect to fertilization.<br />
<br />
● The Service rules that a deduction for fertilization costs is proper, for post-establishment fertilization is akin to the deductible post-establishment silvicultural practices in that it does not add to value of the timber or prolong the useful life of any of the taxpayer’s assets (the land and the trees). <br />
<br />
'''Restorations v. Repairs →''' taxpayers must capitalize costs that “restore” a unit or property <br />
<br />
{| class="wikitable"<br />
|'''Reg. § 1.263(a)-3 Amounts paid to improve tangible property.''' <br />
<br />
'''(k) Capitalization of restorations -'''<br />
<br />
''' (1) In general. A taxpayer must capitalize as an improvement an amount paid to restore a unit of property, including an amount paid to make good the exhaustion for which an allowance is or has been made. An amount restores a unit of property only if it -'''<br />
<br />
''' (i) Is for the replacement of a component of a unit of property for which the taxpayer has properly deducted a loss for that component, other than a casualty loss under § 1.165-7;'''<br />
<br />
''' (ii) Is for the replacement of a component of a unit of property for which the taxpayer has properly taken into account the adjusted basis of the component in realizing gain or loss resulting from the sale or exchange of the component;'''<br />
<br />
''' (iii) Is for the restoration of damage to a unit of property for which the taxpayer is required to take a basis adjustment as a result of a casualty loss under section 165, or relating to a casualty event described in section 165, subject to the limitation in paragraph (k)(4) of this section;'''<br />
<br />
''' (iv) Returns the unit of property to its ordinarily efficient operating condition if the property has deteriorated to a state of disrepair and is no longer functional for its intended use;'''<br />
<br />
''' (v) Results in the rebuilding of the unit of property to a like-new condition as determined under paragraph (k)(5) of this section after the end of its class life as defined in paragraph (i)(4) of this section; or'''<br />
<br />
''' (vi) Is for the replacement of a part or combination of parts that comprise a major component or a substantial structural part of a unit of property as determined under paragraph (k)(6) of this section.'''<br />
|} <br />
<br />
Restoration costs → generally either return property to its “ordinarily efficient operating condition” after the unit of property has deteriorated so much that it no longer functions as intended, or the cost returns property to a like-new condition.<br />
<br />
● When a taxpayer has previously taken a deduction for a loss on a component, costs to replace that component must be capitalized<br />
<br />
● Amounts paid for repairs or maintenance to tangible property can be treated as expenses. <br />
<br />
{| class="wikitable"<br />
|'''Reg. § 1.162-4 Repairs.''' <br />
<br />
'''(a) In general. A taxpayer may deduct amounts paid for repairs and maintenance to tangible property if the amounts paid are not otherwise required to be capitalized. Optionally, § 1.263(a)-3(n) provides an election to capitalize amounts paid for repair and maintenance consistent with the taxpayer's books and records.'''<br />
|} <br />
<br />
If the costs are deemed “repairs” then the taxpayer gets an immediate deduction under §162 or §212, assuming the costs relate to a business or investment activity. If the costs are “restorations” or “improvements”, the deduction is deferred because the cost is added to the property’s basis. <br />
<br />
<u>Midland Empire Packing Company v. Commissioner (1950)</u> - Tax Court<br />
<br />
RULE: An expenditure is currently deductible as a repair to property if it is made solely to keep the property in an ordinarily efficient operating condition. <br />
<br />
Case Notes:<br />
<br />
● Expenditures to repair property are deductible as an ordinary and necessary business expense. <br />
<br />
● On the other hand, expenditures for capital outlay are capitalized and deducted in installments over the capital asset’s useful life. <br />
<br />
● In order to determine whether expenditures are repairs or capital outlay, courts must look to the purpose of the expenditure. <br />
<br />
● If the expenditure is a replacement of the property in whole or in part, or if it is an improvement intended to add to the property’s value, prolong its life, or change its use, then it is a capital outlay.<br />
<br />
● Necessary v. ordinary → ordinary does not necessarily mean regular or frequent, and that even a one-time payment can be ordinary if it is a common and accepted manner of dealing with a particular threat to a business (<u>Welch v. Helvering</u>). <br />
<br />
{| class="wikitable"<br />
|'''Repairs'''<br />
|'''Improvements'''<br />
|-<br />
|Keep property in ordinary efficient working condition<br />
|Add to value or appreciably prolong the property’s useful life<br />
|} <br />
<br />
<u>Mt, Morris Drive-In Theatre Co. v. Commissioner (1955)</u> - Tax Court<br />
<br />
RULE: Under federal tax law, in determining whether construction expenses are deductible business expenses or non-deductible capital expenses, the decisive test is the character of the transaction that gives rise to the expenses. <br />
<br />
Case Notes:<br />
<br />
● In determining whether construction expenses are deductible ordinary and necessary business expenses or non-deductible capital expenses, the decisive test is the character of the transaction that gives rise to the expenses.<br />
<br />
● A business-expense deduction has been allowed in past cases for the costs of addressing an unforeseeable physical fault or external factor.<br />
<br />
● The business deduction has also been allowed where a farm spent money to adopt farming techniques that were not in use when the farm began operations.<br />
<br />
● The business deduction might also be allowed for the expenses of restoring or rearranging an existing capital asset. <br />
<br />
'''Adaptations''' → taxpayers must capitalize costs that adapt a property to a new or different use. <br />
<br />
{| class="wikitable"<br />
|'''§ 1.263(a)-3 Amounts paid to improve tangible property.''' <br />
<br />
'''(l) Capitalization of amounts to adapt property to a new or different use -'''<br />
<br />
''' (1) In general. A taxpayer must capitalize as an improvement an amount paid to adapt a unit of property to a new or different use. In general, an amount is paid to adapt a unit of property to a new or different use if the adaptation is not consistent with the taxpayer's ordinary use of the unit of property at the time originally placed in service by the taxpayer.'''<br />
<br />
''' (2) Application of adaption rule to buildings. In the case of a building, an amount is paid to improve a building if it is paid to adapt to a new or different use a property specified under paragraph (e)(2)(ii) (building), paragraph (e)(2)(iii)(B) (condominium), paragraph (e)(2)(iv)(B) (cooperative), or paragraph (e)(2)(v)(B) (leased building or leased portion of building) of this section. For example, an amount is paid to improve a building if it is paid to adapt the building structure or any one of its buildings systems to a new or different use.'''<br />
<br />
''' (3) Examples. The following examples illustrate the application of this paragraph (l) only and do not address whether capitalization is required under another provision of this section or under another provision of the Code (for example, section 263A). Unless otherwise stated, assume that the taxpayer has not properly deducted a loss for any unit of property, asset, or component of a unit of property that is removed and replaced.'''<br />
|} <br />
<br />
{| class="wikitable"<br />
|'''Betterments'''<br />
|'''Restorations'''<br />
|'''Adaptations'''<br />
|-<br />
|PRE EXISTING DEFECTS. The cost ameliorates a condition or defect that existed prior to the property’s acquisition of production by the taxpayer, no matter whether the taxpayer knew of this condition or defect at the time.<br />
<br />
Reg. §1.263(a)-3(j)(1)(i).<br />
|PREVIOUS DEDUCTION OR SALE. The cost is for the replacement of a component when the taxpayer has already deducted the costs of the original item or accounted for the basis of the item as a part of a sale or exchange.<br />
<br />
Reg. §1.263(a)-3(k)(1)(i), (ii), (iii)<br />
|DIFFERENT USE. The cost produces a change that is not consistent with the intended original use of the property.<br />
<br />
Reg. §1.263(a)-3(i)<br />
|-<br />
|MATERIAL ADDITION. The cost results in a material addition, including enlargement, expansion, or extension of the property.<br />
<br />
Reg. §1.263(a)-3(j)(1)(ii).<br />
|RETURNS TO ORDINARY OPERATION. The cost returns the property to its ordinarily efficient operating condition and the property has deteriorated so much that it is no longer functional for its intended use.<br />
<br />
Reg. §1.263(a)-3(k)(1)(iv)<br />
| <br />
|-<br />
|INCREASED PRODUCTIVITY. The cost results in a material increase in the property’s capacity, productivity, efficiency, strength, or quality.<br />
<br />
Reg. §1.263(a)-3(j)(1)(iii)<br />
|REBUILD TO LIKE-NEW CONDITION. The cost returns the property to a new, rebuilt, remanufactured condition.<br />
<br />
Reg. §1.263(a)-3(k)(3).<br />
| <br />
|-<br />
| <br />
|REPLACEMENT OF A MAJOR COMPONENT. The cost replaces a substantial structural part of the property. This includes components that are a large part of the structure or that perform a discrete and critical function.<br />
<br />
Reg. §1.263(a)-3(k)(4).<br />
| <br />
|} <br />
<br />
Problem Example → <br />
<br />
K and F own commercial building, lease space as sole business activity; in taxable year, K and F incurred costs below, all directly related to building; current deduction or capitalized costs: <br />
<br />
(a) $50,000 to remove asbestos (did not affect building operations) '''→''' '''IRC 263(a)-3(j)(3) Example 2; DEDUCTIBLE'''<br />
<br />
(b) $3,000 to restore awning that originally cost $1,000 to construct and install, current cost to construct and install is $10,000 → '''case by case basis'''<br />
<br />
(c) $22,000 to repair the driveway providing access from the main road to parking lot → capitalization of betterments<br />
<br />
(d) $5,000 to add safety equipment to elevators<br />
<br />
(e) $2,500 to fix leak<br />
<br />
'''Costs Related to <u>Intangible</u> Assets''' <br />
<br />
<u>INDOPCO, Inc. v. Commissioner (1992)</u> - SCOTUS <br />
<br />
RULE: Corporate expenses incurred for the purpose of changing the corporate structure in order to receive future benefits are not deductible as ordinary and necessary business expenses. <br />
<br />
Case Notes:<br />
<br />
● Section 162 of the Internal Revenue Code allows current deductions for ordinary and necessary business expenses incurred during the taxable year while carrying on a trade or business.<br />
<br />
● On the other hand, § 263 disallows deductions for capital expenditures that are intended to create or enhance an asset or to create a future benefit.<br />
<br />
● Instead, such expenditures must be amortized and depreciated over a related asset’s useful life or taken as a loss upon dissolution of the entire business.<br />
<br />
● Deductions are only allowable if the taxpayer can clearly demonstrate an enumerated right to claim a deduction; otherwise, capitalization of expenses is the norm.<br />
<br />
● In Commissioner v. Lincoln Savings & Loan Association, 403 U.S. 345 (1971), this Court held that a taxpayer’s expenditures that create or enhance a distinct asset should be capitalized.<br />
<br />
● However, the ruling does not mean that capital expenditures are limited to only those that create or enhance a distinct asset.<br />
<br />
● This Court also stated in Lincoln Savings that the presence of some future benefit is not necessarily a controlling factor that determines whether an expenditure should be capitalized.<br />
<br />
● However, that ruling does not preclude a court’s reliance on the presence of a significant future benefit in order to designate an expenditure as a capital outlay. <br />
<br />
The test from <u>INDOPCO</u> is sometimes referred to as the “significant future benefits test.” If an expenditure creates a significant future benefit, it should be capitalized. <br />
<br />
Revenue Ruling 92-80 → advertising expenses still deductible<br />
<br />
Revenue Ruling 94-38 → hazardous waste clean-up costs still deductible, except that construction of groundwater treatment facilities would capitalized<br />
<br />
Revenue Ruling 94-77 → severance benefits still deductible<br />
<br />
Revenue Ruling 95-32 → certain conservation expenditures still deductible<br />
<br />
Revenue Ruling 96-62 → training costs still deductible <br />
<br />
The INDOPCO Regulations → generally require capitalization of certain amounts paid to acquire or create intangible assets, and require capitalization of expenses that create or enhance a separate and distinct capital asset. <br />
<br />
'''Deduction for Expenses''' <br />
<br />
STEP ONE: Is it an expense or capital expenditure? <br />
<br />
STEP TWO: assuming it is an expense, is that expense deductible? Find specific provision<br />
<br />
STEP THREE: assuming there is a deduction, where on the tax ladder can the deduction come in?<br />
<br />
STEP FOUR: check 263A and then 263(a) <br />
<br />
Look to Sec. 62(a) → tells you where on the tax ladder the deduction falls, but you still need to look to the specific deduction’s provision to see if you qualify.<br />
<br />
● Above the line deductions always preferable (second to tax credits)<br />
<br />
● If not under 62(a), look at ITEMIZED DEDUCTIONS <br />
<br />
No catch-all for deductions, need to find a specific deduction existing in the code; all in different provisions, no master list <br />
<br />
In general →<br />
<br />
● Expenses are deductible if they relate to a taxpayer’s “trade or business” activity, or if the expense is paid or incurred in the production or collection of income from an activity that does not rise to the level of a trade or business (an “investment activity”). <br />
<br />
'''Trade or Business Expenses''' <br />
<br />
{| class="wikitable"<br />
|'''§ 162(a) - Trade or business expenses''' <br />
<br />
'''(a) In general. There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including—'''<br />
<br />
''' (1) a reasonable allowance for salaries or other compensation for personal services actually rendered;'''<br />
<br />
''' (2) traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business; and'''<br />
<br />
''' (3) rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.''' <br />
<br />
'''For purposes of the preceding sentence, the place of residence of a Member of Congress (including any Delegate and Resident Commissioner) within the State, congressional district, or possession which he represents in Congress shall be considered his home, but amounts expended by such Members within each taxable year for living expenses shall not be deductible for income tax purposes. For purposes of paragraph (2), the taxpayer shall not be treated as being temporarily away from home during any period of employment if such period exceeds 1 year. The preceding sentence shall not apply to any Federal employee during any period for which such employee is certified by the Attorney General (or the designee thereof) as traveling on behalf of the United States in temporary duty status to investigate or prosecute, or provide support services for the investigation or prosecution of, a Federal crime.'''<br />
|} <br />
<br />
Six elements required for a deduction →<br />
<br />
1) It must be an '''ordinary'''<br />
<br />
2) And '''necessary'''<br />
<br />
3) '''Expense'''<br />
<br />
4) That was '''paid or incurred during the taxable year'''<br />
<br />
5) '''In carrying on'''<br />
<br />
6) A '''trade or business''' activity <br />
<br />
'''Ordinary and Necessary''' → routine and directly related to the business activity; can be extraordinary and unusual, but the expense must have a business purpose and be related to the activity. <br />
<br />
<u>Welch v. Helvering (1933)</u> - SCOTUS [π grain co. secretary repaid company debts and deducted]<br />
<br />
RULE: Expenditures for ordinary and necessary business expenses may be deducted from gross income if incurred while carrying on a trade or business. <br />
<br />
Case Notes:<br />
<br />
● Section 162 of the Tax Code states that expenses for ordinary and necessary business expenses may be deducted from gross income if incurred while carrying on a trade or business.<br />
<br />
● Many payments may be deemed a necessary expense, but not all necessary payments are ordinary.<br />
<br />
● An expense does not need to be a regular and recurring event in order to be ordinary.<br />
<br />
● Even one-time payments can be ordinary -- For instance, if a company defends itself in a lawsuit by hiring an attorney, the attorney’s fees is probably an ordinary expense within the meaning of § 162.<br />
<br />
● But ultimately, whether an expense is both necessary and ordinary is a determination based on the specific facts at hand. <br />
<br />
<u>Jenkins v. Commissioner (1983)</u> - Tax Court [twitty burger failed, repaid investors]<br />
<br />
RULE: Under federal tax law, a taxpayer may deduct payments for expenses incurred by another if the taxpayer’s primary motivation is business in nature and there is a sufficient relationship between the expenses and the taxpayer’s business. <br />
<br />
Case Notes: <br />
<br />
● A taxpayer may deduct an expense if it is an ordinary and necessary expense of the taxpayer’s business.<br />
<br />
● Generally, a taxpayer may not deduct the expenses of another.<br />
<br />
● However, an exception exists for expenses that are primarily motivated by business and have a sufficient relationship with the taxpayer’s business. <br />
<br />
<u>Lohrke</u> Test: A payment may be deducted if it is an ordinary and necessary expense of a trade or business of the shareholder. <br />
<br />
'''In carrying on''' → continuing business; start-up costs not entirely deductible, a portion of such costs may be deducted in the year in which the new business begins and the balance of such costs are to be amortized (deducted on a pro rata basis) over 15 years. <br />
<br />
<u>Estate of Rockefeller v. Commissioner (1985)</u> - 2nd Cir. [deducted costs rel. to commissioned position]<br />
<br />
RULE: A federal taxpayer may deduct business expenses incurred to change positions with substantially similar job duties within the same trade or business. <br />
<br />
Case Notes:<br />
<br />
● A taxpayer may deduct business expenses used to carry on a trade or business, even if the expenses are not for his current position.<br />
<br />
● The new position sought by the taxpayer must have substantially similar job duties to his current position.<br />
<br />
● An unemployed taxpayer is still viewed as carrying on the trade or business of his most recent position, unless there is a significant lack of continuity.<br />
<br />
● For there to be a lack of continuity, the taxpayer must demonstrate an intent to return to a position with substantially similar duties.<br />
<br />
● The time lapse cannot be too great. <br />
<br />
'''Trade or business''' → if an activity is not a “trade or business” it is either an “investment” activity or a “personal” activity. <br />
<br />
<u>Commissioner v. Groetzinger (1987)</u> - SCOTUS [lived on gambling wages, loss was tablable]<br />
<br />
RULE: A federal taxpayer’s expenses are tax deductible if they arise from a trade or business that the taxpayer conducts primarily for income or profit, and not from an activity in which the taxpayer engages sporadically, or as a hobby, or for amusement. <br />
<br />
Case Notes:<br />
<br />
● A federal taxpayer’s expenses are tax deductible if the facts show that those expenses arise from a trade or business that the taxpayer conducts primarily for income or profit, and not from an activity in which the taxpayer engages sporadically, or as a hobby, or for amusement. <br />
<br />
● This Court now makes this rule explicit because the federal tax code lacks any clear definition of “trade or business,” even though this phrase appears many times throughout the tax code. <br />
<br />
● Also, this Court’s earlier trade-or-business tests are not fully satisfactory. <br />
<br />
● In <u>Higgins v. Commissioner, 312 U.S. 212 (1941)</u>, this Court held that the existence of a trade or business must be determined on the facts of each case, and that a trade or business must be engaged in for profit. <br />
<br />
● A year earlier in <u>Deputy v. DuPont, 308 U.S. 488 (1940)</u>, this Court assumed that trade or business expenses could include a taxpayer’s expenses from simply managing his or her own estate. <br />
<br />
● <u>Higgins</u>, however, specifically found that personal estate-management expenses did not amount to a trade or business. <br />
<br />
● Justice Frankfurter suggested in his <u>DuPont</u> concurrence that trade or business necessarily “involves holding oneself out to others as engaged in selling goods and services.” <br />
<br />
● However, Justice Frankfurter’s concurrence has never been adopted by this Court. <br />
<br />
● In this case, Justice Frankfurter’s test is rejected because the meanings of “holding oneself out,” “goods,” and “services” are too vague to be useful.<br />
<br />
'''Treatment of Capital Expenditures''' <br />
<br />
'''Cost Recovery''' <br />
<br />
A taxpayer generally cannot recover the cost of a capital expenditure for federal income tax purposes until the improved property is sold, exchanged, or otherwise disposed of in some form. <br />
<br />
{| class="wikitable"<br />
|'''Depreciation'''<br />
|'''Amortization'''<br />
|-<br />
|● Tangible assets (i.e. real property)<br />
<br />
● Cost recovery system governed by §167 and §168<br />
<br />
● Eligible tangible property must be described in §167(a)<br />
<br />
● Property must be held for use in a trade or business or for the production of income; personal-use property is not eligible for cost recovery over its useful life<br />
|● Intangible assets (i.e. loans)<br />
<br />
● Cost recovery system governed by §191<br />
<br />
● Eligible intangible property must be described in §197(c)(1) and §197(d)<br />
<br />
● Property must be held for use in a trade or business or for the production of income; personal-use property is not eligible for cost recovery over its useful life<br />
|} <br />
<br />
'''Depreciation of Tangible Property''' <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 167 - Depreciation'''<br />
<br />
'''(a) General rule. There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence)—'''<br />
<br />
''' (1) of property used in the trade or business, or'''<br />
<br />
''' (2) of property held for the production of income.''' <br />
<br />
'''(b) Cross reference. For determination of depreciation deduction in case of property to which section 168 applies, see section 168.'''<br />
<br />
'''(c) Basis for depreciation'''<br />
<br />
''' (1) In general. The basis on which exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the adjusted basis provided in section 1011, for the purpose of determining the gain on the sale or other disposition of such property.'''<br />
<br />
''' (2) Special rule for property subject to lease. If any property is acquired subject to a lease—'''<br />
<br />
''' (A) no portion of the adjusted basis shall be allocated to the leasehold interest, and'''<br />
<br />
''' (B) the entire adjusted basis shall be taken into account in determining the depreciation deduction (if any) with respect to the property subject to the lease.''' <br />
<br />
'''(d) Life tenants and beneficiaries of trusts and estates. In the case of property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust, the allowable deduction shall be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income allocable to each. In the case of an estate, the allowable deduction shall be apportioned between the estate and the heirs, legatees, and devisees on the basis of the income of the estate allocable to each.'''<br />
<br />
'''(e) Certain term interests not depreciable'''<br />
<br />
''' (1) In general. No depreciation deduction shall be allowed under this section (and no depreciation or amortization deduction shall be allowed under any other provision of this subtitle) to the taxpayer for any term interest in property for any period during which the remainder interest in such property is held (directly or indirectly) by a related person.'''<br />
<br />
''' (2) Coordination with other provisions'''<br />
<br />
''' (A) Section 273. This subsection shall not apply to any term interest to which section 273 applies.'''<br />
<br />
''' (B) Section 305(e). This subsection shall not apply to the holder of the dividend rights which were separated from any stripped preferred stock to which section 305(e)(1) applies.'''<br />
<br />
''' (3) Basis adjustments. If, but for this subsection, a depreciation or amortization deduction would be allowable to the taxpayer with respect to any term interest in property—'''<br />
<br />
''' (A) the taxpayer’s basis in such property shall be reduced by any depreciation or amortization deductions disallowed under this subsection, and'''<br />
<br />
''' (B) the basis of the remainder interest in such property shall be increased by the amount of such disallowed deductions (properly adjusted for any depreciation deductions allowable under subsection (d) to the taxpayer).'''<br />
<br />
''' (4) Special rules'''<br />
<br />
''' (A) Denial of increase in basis of remainderman. No increase in the basis of the remainder interest shall be made under paragraph (3)(B) for any disallowed deductions attributable to periods during which the term interest was held—'''<br />
<br />
''' (i) by an organization exempt from tax under this subtitle, or'''<br />
<br />
''' (ii) by a nonresident alien individual or foreign corporation but only if income from the term interest is not effectively connected with the conduct of a trade or business in the United States.'''<br />
<br />
''' (B) Coordination with subsection (d). If, but for this subsection, a depreciation or amortization deduction would be allowable to any person with respect to any term interest in property, the principles of subsection (d) shall apply to such person with respect to such term interest.'''<br />
<br />
''' (5) Definitions. For purposes of this subsection—'''<br />
<br />
''' (A) Term interest in property. The term “term interest in property” has the meaning given such term by section 1001(e)(2).'''<br />
<br />
''' (B) Related person. The term “related person” means any person bearing a relationship to the taxpayer described in subsection (b) or (e) of section 267.'''<br />
<br />
''' (6) Regulations. The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection, including regulations preventing avoidance of this subsection through cross-ownership arrangements or otherwise.'''<br />
<br />
'''(f) Treatment of certain property excluded from section 197'''<br />
<br />
''' (1) Computer software'''<br />
<br />
''' (A) In general. If a depreciation deduction is allowable under subsection (a) with respect to any computer software, such deduction shall be computed by using the straight line method and a useful life of 36 months.'''<br />
<br />
''' (B) Computer software. For purposes of this section, the term “computer software” has the meaning given to such term by section 197(e)(3)(B); except that such term shall not include any such software which is an amortizable section 197 intangible.'''<br />
<br />
''' (C) Tax-exempt use property subject to lease. In the case of computer software which would be tax-exempt use property as defined in subsection (h) of section 168 if such section applied to computer software, the useful life under subparagraph (A) shall not be less than 125 percent of the lease term (within the meaning of section 168(i)(3)).'''<br />
<br />
''' (2) Certain interests or rights acquired separately. If a depreciation deduction is allowable under subsection (a) with respect to any property described in subparagraph (B), (C), or (D) of section 197(e)(4), such deduction shall be computed in accordance with regulations prescribed by the Secretary. If such property would be tax-exempt use property as defined in subsection (h) of section 168 if such section applied to such property, the useful life under such regulations shall not be less than 125 percent of the lease term (within the meaning of section 168(i)(3)).'''<br />
<br />
''' (3) Mortgage servicing rights. If a depreciation deduction is allowable under subsection (a) with respect to any right described in section 197(e)(6), such deduction shall be computed by using the straight line method and a useful life of 108 months.'''<br />
<br />
'''(g) Depreciation under income forecast method'''<br />
<br />
''' (1) In general. If the depreciation deduction allowable under this section to any taxpayer with respect to any property is determined under the income forecast method or any similar method—'''<br />
<br />
''' (A) the income from the property to be taken into account in determining the depreciation deduction under such method shall be equal to the amount of income earned in connection with the property before the close of the 10th taxable year following the taxable year in which the property was placed in service,'''<br />
<br />
''' (B) the adjusted basis of the property shall only include amounts with respect to which the requirements of section 461(h) are satisfied,'''<br />
<br />
''' (C) the depreciation deduction under such method for the 10th taxable year beginning after the taxable year in which the property was placed in service shall be equal to the adjusted basis of such property as of the beginning of such 10th taxable year, and'''<br />
<br />
''' (D) such taxpayer shall pay (or be entitled to receive) interest computed under the look-back method of paragraph (2) for any recomputation year.'''<br />
<br />
''' (2) Look-back method. The interest computed under the look-back method of this paragraph for any recomputation year shall be determined by—'''<br />
<br />
''' (A) first determining the depreciation deductions under this section with respect to such property which would have been allowable for prior taxable years if the determination of the amounts so allowable had been made on the basis of the sum of the following (instead of the estimated income from such property)—'''<br />
<br />
''' (i) the actual income earned in connection with such property for periods before the close of the recomputation year, and'''<br />
<br />
''' (ii) an estimate of the future income to be earned in connection with such property for periods after the recomputation year and before the close of the 10th taxable year following the taxable year in which the property was placed in service,'''<br />
<br />
''' (B) second, determining (solely for purposes of computing such interest) the overpayment or underpayment of tax for each such prior taxable year which would result solely from the application of subparagraph (A), and'''<br />
<br />
''' (C) then using the adjusted overpayment rate (as defined in section 460(b)(7)), compounded daily, on the overpayment or underpayment determined under subparagraph (B).'''<br />
<br />
'''For purposes of the preceding sentence, any cost incurred after the property is placed in service (which is not treated as a separate property under paragraph (5)) shall be taken into account by discounting (using the Federal mid-term rate determined under section 1274(d) as of the time such cost is incurred) such cost to its value as of the date the property is placed in service. The taxpayer may elect with respect to any property to have the preceding sentence not apply to such property.'''<br />
<br />
''' (3) Exception from look-back method. Paragraph (1)(D) shall not apply with respect to any property which had a cost basis of $100,000 or less.'''<br />
<br />
''' (4) Recomputation year. For purposes of this subsection, except as provided in regulations, the term “recomputation year” means, with respect to any property, the 3d and the 10th taxable years beginning after the taxable year in which the property was placed in service, unless the actual income earned in connection with the property for the period before the close of such 3d or 10th taxable year is within 10 percent of the income earned in connection with the property for such period which was taken into account under paragraph (1)(A).'''<br />
<br />
''' (5) Special rules'''<br />
<br />
''' (A) Certain costs treated as separate property. For purposes of this subsection, the following costs shall be treated as separate properties:'''<br />
<br />
''' (i) Any costs incurred with respect to any property after the 10th taxable year beginning after the taxable year in which the property was placed in service.'''<br />
<br />
''' (ii) Any costs incurred after the property is placed in service and before the close of such 10th taxable year if such costs are significant and give rise to a significant increase in the income from the property which was not included in the estimated income from the property.'''<br />
<br />
''' (B) Syndication income from television series. In the case of property which is 1 or more episodes in a television series, income from syndicating such series shall not be required to be taken into account under this subsection before the earlier of—'''<br />
<br />
''' (i) the 4th taxable year beginning after the date the first episode in such series is placed in service, or'''<br />
<br />
''' (ii) the earliest taxable year in which the taxpayer has an arrangement relating to the future syndication of such series.'''<br />
<br />
''' (C) Special rules for financial exploitation of characters, etc. For purposes of this subsection, in the case of television and motion picture films, the income from the property shall include income from the exploitation of characters, designs, scripts, scores, and other incidental income associated with such films, but only to the extent that such income is earned in connection with the ultimate use of such items by, or the ultimate sale of merchandise to, persons who are not related persons (within the meaning of section 267(b)) to the taxpayer.'''<br />
<br />
''' (D) Collection of interest. For purposes of subtitle F (other than sections 6654 and 6655), any interest required to be paid by the taxpayer under paragraph (1) for any recomputation year shall be treated as an increase in the tax imposed by this chapter for such year.'''<br />
<br />
''' (E) Treatment of distribution costs. For purposes of this subsection, the income with respect to any property shall be the taxpayer’s gross income from such property.'''<br />
<br />
''' (F) Determinations. For purposes of paragraph (2), determinations of the amount of income earned in connection with any property shall be made in the same manner as for purposes of applying the income forecast method; except that any income from the disposition of such property shall be taken into account.'''<br />
<br />
''' (G) Treatment of pass-thru entities. Rules similar to the rules of section 460(b)(4) shall apply for purposes of this subsection.'''<br />
<br />
''' (6) Limitation on property for which income forecast method may be used. The depreciation deduction allowable under this section may be determined under the income forecast method or any similar method only with respect to—'''<br />
<br />
''' (A) property described in paragraph (3) or (4) of section 168(f),'''<br />
<br />
''' (B) copyrights,'''<br />
<br />
''' (C) books,'''<br />
<br />
''' (D) patents, and'''<br />
<br />
''' (E) other property specified in regulations. Such methods may not be used with respect to any amortizable section 197 intangible (as defined in section 197(c)).'''<br />
<br />
''' (7) Treatment of participations and residuals'''<br />
<br />
''' (A) In general. For purposes of determining the depreciation deduction allowable with respect to a property under this subsection, the taxpayer may include participations and residuals with respect to such property in the adjusted basis of such property for the taxable year in which the property is placed in service, but only to the extent that such participations and residuals relate to income estimated (for purposes of this subsection) to be earned in connection with the property before the close of the 10th taxable year referred to in paragraph (1)(A).'''<br />
<br />
''' (B) Participations and residuals. For purposes of this paragraph, the term “participations and residuals” means, with respect to any property, costs the amount of which by contract varies with the amount of income earned in connection with such property.'''<br />
<br />
''' (C) Special rules relating to recomputation years. If the adjusted basis of any property is determined under this paragraph, paragraph (4) shall be applied by substituting “for each taxable year in such period” for “for such period”.'''<br />
<br />
''' (D) Other special rules'''<br />
<br />
''' (i) Participations and residuals. Notwithstanding subparagraph (A), the taxpayer may exclude participations and residuals from the adjusted basis of such property and deduct such participations and residuals in the taxable year that such participations and residuals are paid.'''<br />
<br />
''' (ii) Coordination with other rules. Deductions computed in accordance with this paragraph shall be allowable notwithstanding paragraph (1)(B), section 263, 263A, 404, 419, or 461(h).'''<br />
<br />
''' (E) Authority to make adjustments. The Secretary shall prescribe appropriate adjustments to the basis of property and to the look-back method for the additional amounts allowable as a deduction solely by reason of this paragraph.'''<br />
<br />
''' (8) Special rules for certain musical works and copyrights'''<br />
<br />
''' (A) In general. If an election is in effect under this paragraph for any taxable year, then, notwithstanding paragraph (1), any expense which—'''<br />
<br />
''' (i) is paid or incurred by the taxpayer in creating or acquiring any applicable musical property placed in service during the taxable year, and'''<br />
<br />
''' (ii) is otherwise properly chargeable to capital account,'''<br />
<br />
'''shall be amortized ratably over the 5-year period beginning with the month in which the property was placed in service. The preceding sentence shall not apply to any expense which, without regard to this paragraph, would not be allowable as a deduction.'''<br />
<br />
''' (B) Exclusive method. Except as provided in this paragraph, no depreciation or amortization deduction shall be allowed with respect to any expense to which subparagraph (A) applies.'''<br />
<br />
''' (C) Applicable musical property. For purposes of this paragraph—'''<br />
<br />
''' (i) In general. The term “applicable musical property” means any musical composition (including any accompanying words), or any copyright with respect to a musical composition, which is property to which this subsection applies without regard to this paragraph.'''<br />
<br />
''' (ii) Exceptions. Such term shall not include any property—'''<br />
<br />
''' (I) with respect to which expenses are treated as qualified creative expenses to which section 263A(h) applies,'''<br />
<br />
''' (II) to which a simplified procedure established under section 263A(i)(2) [1] applies, or'''<br />
<br />
''' (III) which is an amortizable section 197 intangible (as defined in section 197(c)).'''<br />
<br />
''' (D) Election. An election under this paragraph shall be made at such time and in such form as the Secretary may prescribe and shall apply to all applicable musical property placed in service during the taxable year for which the election applies.'''<br />
<br />
''' (E) Termination. An election may not be made under this paragraph for any taxable year beginning after December 31, 2010.'''<br />
<br />
'''(h) Amortization of geological and geophysical expenditures'''<br />
<br />
''' (1) In general. Any geological and geophysical expenses paid or incurred in connection with the exploration for, or development of, oil or gas within the United States (as defined in section 638) shall be allowed as a deduction ratably over the 24-month period beginning on the date that such expense was paid or incurred.'''<br />
<br />
''' (2) Half-year convention. For purposes of paragraph (1), any payment paid or incurred during the taxable year shall be treated as paid or incurred on the mid-point of such taxable year.'''<br />
<br />
''' (3) Exclusive method. Except as provided in this subsection, no depreciation or amortization deduction shall be allowed with respect to such payments.'''<br />
<br />
''' (4) Treatment upon abandonment. If any property with respect to which geological and geophysical expenses are paid or incurred is retired or abandoned during the 24-month period described in paragraph (1), no deduction shall be allowed on account of such retirement or abandonment and the amortization deduction under this subsection shall continue with respect to such payment.'''<br />
<br />
''' (5) Special rule for major integrated oil companies'''<br />
<br />
''' (A) In general. In the case of a major integrated oil company, paragraphs (1) and (4) shall be applied by substituting “7-year” for “24 month”.'''<br />
<br />
''' (B) Major integrated oil company. For purposes of this paragraph, the term “major integrated oil company” means, with respect to any taxable year, a producer of crude oil—'''<br />
<br />
''' (i) which has an average daily worldwide production of crude oil of at least 500,000 barrels for the taxable year,'''<br />
<br />
''' (ii) which had gross receipts in excess of $1,000,000,000 for its last taxable year ending during calendar year 2005, and'''<br />
<br />
''' (iii) to which subsection (c) of section 613A does not apply by reason of paragraph (4) of section 613A(d), determined—'''<br />
<br />
''' (I) by substituting “15 percent” for “5 percent” each place it occurs in paragraph (3) of section 613A(d), and'''<br />
<br />
''' (II) without regard to whether subsection (c) of section 613A does not apply by reason of paragraph (2) of section 613A(d).''' <br />
<br />
'''For purposes of clauses (i) and (ii), all persons treated as a single employer under subsections (a) and (b) of section 52 shall be treated as 1 person and, in case of a short taxable year, the rule under section 448(c)(3)(B) shall apply.''' <br />
<br />
'''(i) Cross references'''<br />
<br />
''' (1) For additional rule applicable to depreciation of improvements in the case of mines, oil and gas wells, other natural deposits, and timber, see section 611.'''<br />
<br />
''' (2) For amortization of goodwill and certain other intangibles, see section 197.'''<br />
|} <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 168 - Accelerated cost recovery system'''<br />
<br />
'''(a) General rule. Except as otherwise provided in this section, the depreciation deduction provided by section 167(a) for any tangible property shall be determined by using—'''<br />
<br />
''' (1) the applicable depreciation method,'''<br />
<br />
''' (2) the applicable recovery period, and'''<br />
<br />
''' (3) the applicable convention.''' <br />
<br />
'''(b) Applicable depreciation method. For purposes of this section—'''<br />
<br />
''' (1) In general. Except as provided in paragraphs (2) and (3), the applicable depreciation method is—'''<br />
<br />
''' (A) the 200 percent declining balance method,'''<br />
<br />
''' (B) switching to the straight line method for the 1st taxable year for which using the straight line method with respect to the adjusted basis as of the beginning of such year will yield a larger allowance.'''<br />
<br />
''' (2) 150 percent declining balance method in certain cases. Paragraph (1) shall be applied by substituting “150 percent” for “200 percent” in the case of—'''<br />
<br />
''' (A) any 15-year or 20-year property not referred to in paragraph (3),'''<br />
<br />
''' (B) any property (other than property described in paragraph (3)) which is a qualified smart electric meter or qualified smart electric grid system, or'''<br />
<br />
''' (C) any property (other than property described in paragraph (3)) with respect to which the taxpayer elects under paragraph (5) to have the provisions of this paragraph apply.'''<br />
<br />
''' (3) Property to which straight line method applies. The applicable depreciation method shall be the straight line method in the case of the following property:'''<br />
<br />
''' (A) Nonresidential real property.'''<br />
<br />
''' (B) Residential rental property.'''<br />
<br />
''' (C) Any railroad grading or tunnel bore.'''<br />
<br />
''' (D) Property with respect to which the taxpayer elects under paragraph (5) to have the provisions of this paragraph apply.'''<br />
<br />
''' (E) Property described in subsection (e)(3)(D)(ii).'''<br />
<br />
''' (F) Water utility property described in subsection (e)(5).'''<br />
<br />
''' (G) Qualified improvement property described in subsection (e)(6).'''<br />
<br />
''' (4) Salvage value treated as zero. Salvage value shall be treated as zero.'''<br />
<br />
''' (5) Election. An election under paragraph (2)(D) or (3)(D) may be made with respect to 1 or more classes of property for any taxable year and once made with respect to any class shall apply to all property in such class placed in service during such taxable year. Such an election, once made, shall be irrevocable.'''<br />
<br />
'''(c) Applicable recovery period. For purposes of this section, the applicable recovery period shall be determined in accordance with the following table: In the case of _____ the applicable recovery period is:'''<br />
<br />
'''3-year property -- 3 years '''<br />
<br />
'''5-year property -- 5 years '''<br />
<br />
'''7-year property -- 7 years '''<br />
<br />
'''10-year property -- 10 years '''<br />
<br />
'''15-year property -- 15 years '''<br />
<br />
'''20-year property -- 20 years '''<br />
<br />
'''Water utility property -- 25 years '''<br />
<br />
'''Residential rental property -- 27.5 years '''<br />
<br />
'''Nonresidential real property -- 39 years.'''<br />
<br />
'''Any railroad grading or tunnel bore -- 50 years.'''<br />
<br />
'''(d) Applicable convention. For purposes of this section—'''<br />
<br />
''' (1) In general. Except as otherwise provided in this subsection, the applicable convention is the half-year convention.'''<br />
<br />
''' (2) Real property. In the case of—'''<br />
<br />
''' (A) nonresidential real property,'''<br />
<br />
''' (B) residential rental property, and'''<br />
<br />
''' (C) any railroad grading or tunnel bore, the applicable convention is the mid-month convention.'''<br />
<br />
''' (3) Special rule where substantial property placed in service during last 3 months of taxable year'''<br />
<br />
''' (A) In general. Except as provided in regulations, if during any taxable year—'''<br />
<br />
''' (i) the aggregate bases of property to which this section applies placed in service during the last 3 months of the taxable year, exceed'''<br />
<br />
''' (ii) 40 percent of the aggregate bases of property to which this section applies placed in service during such taxable year, the applicable convention for all property to which this section applies placed in service during such taxable year shall be the mid-quarter convention.'''<br />
<br />
''' (B) Certain property not taken into account. For purposes of subparagraph (A), there shall not be taken into account—'''<br />
<br />
''' (i) any nonresidential real property [1] residential rental property, and railroad grading or tunnel bore, and'''<br />
<br />
''' (ii) any other property placed in service and disposed of during the same taxable year.'''<br />
<br />
''' (4) Definitions'''<br />
<br />
''' (A) Half-year convention. The half-year convention is a convention which treats all property placed in service during any taxable year (or disposed of during any taxable year) as placed in service (or disposed of) on the mid-point of such taxable year.'''<br />
<br />
''' (B) Mid-month convention. The mid-month convention is a convention which treats all property placed in service during any month (or disposed of during any month) as placed in service (or disposed of) on the mid-point of such month.'''<br />
<br />
''' (C) Mid-quarter convention. The mid-quarter convention is a convention which treats all property placed in service during any quarter of a taxable year (or disposed of during any quarter of a taxable year) as placed in service (or disposed of) on the mid-point of such quarter.'''<br />
<br />
'''(e) Classification of property. For purposes of this section—'''<br />
<br />
''' (1) In general. Except as otherwise provided in this subsection, property shall be classified under the following table: Property shall be treated as _____ if such property has a class life (in years) of ____'''<br />
<br />
'''3-year property -- 4 or less'''<br />
<br />
'''5-year property -- More than 4 but less than 10'''<br />
<br />
'''7-year property -- 10 or more but less than 16'''<br />
<br />
'''10-year property -- 16 or more but less than 20'''<br />
<br />
'''15-year property -- 20 or more but less than 25'''<br />
<br />
'''20-year property -- 25 or more.'''<br />
<br />
''' (2) Residential rental or nonresidential real property'''<br />
<br />
''' (A) Residential rental property'''<br />
<br />
''' (i) Residential rental property. The term “residential rental property” means any building or structure if 80 percent or more of the gross rental income from such building or structure for the taxable year is rental income from dwelling units.'''<br />
<br />
''' (ii) Definitions. For purposes of clause (i)—'''<br />
<br />
''' (I) the term “dwelling unit” means a house or apartment used to provide living accommodations in a building or structure, but does not include a unit in a hotel, motel, or other establishment more than one-half of the units in which are used on a transient basis, and'''<br />
<br />
''' (II) if any portion of the building or structure is occupied by the taxpayer, the gross rental income from such building or structure shall include the rental value of the portion so occupied.'''<br />
<br />
''' (B) Nonresidential real property. The term “nonresidential real property” means section 1250 property which is not—'''<br />
<br />
''' (i) residential rental property, or'''<br />
<br />
''' (ii) property with a class life of less than 27.5 years.'''<br />
<br />
''' (3) Classification of certain property'''<br />
<br />
''' (A) 3-year property. The term “3-year property” includes—'''<br />
<br />
''' (i) any race horse—'''<br />
<br />
''' (I) which is placed in service before January 1, 2018, and'''<br />
<br />
''' (II) which is placed in service after December 31, 2017, and which is more than 2 years old at the time such horse is placed in service by such purchaser,'''<br />
<br />
''' (ii) any horse other than a race horse which is more than 12 years old at the time it is placed in service, and'''<br />
<br />
''' (iii) any qualified rent-to-own property.'''<br />
<br />
''' (B) 5-year property. The term “5-year property” includes—'''<br />
<br />
''' (i) any automobile or light general purpose truck,'''<br />
<br />
''' (ii) any semiconductor manufacturing equipment,'''<br />
<br />
''' (iii) any computer-based telephone central office switching equipment,'''<br />
<br />
''' (iv) any qualified technological equipment,'''<br />
<br />
''' (v) any section 1245 property used in connection with research and experimentation,'''<br />
<br />
''' (vi) any property which—'''<br />
<br />
''' (I) is described in subparagraph (A) of section 48(a)(3) (or would be so described if “solar or wind energy” were substituted for “solar energy” in clause (i) thereof and the last sentence of such section did not apply to such subparagraph),'''<br />
<br />
''' (II) is described in paragraph (15) of section 48(l) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) and is a qualifying small power production facility within the meaning of section 3(17)(C) of the Federal Power Act (16 U.S.C. 796(17)(C)), as in effect on September 1, 1986, or'''<br />
<br />
''' (III) is described in section 48(l)(3)(A)(ix) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990), and'''<br />
<br />
''' (vii) any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) which is used in a farming business (as defined in section 263A(e)(4)), the original use of which commences with the taxpayer after December 31, 2017.'''<br />
<br />
'''Nothing in any provision of law shall be construed to treat property as not being described in clause (vi)(I) (or the corresponding provisions of prior law) by reason of being public utility property (within the meaning of section 48(a)(3)).'''<br />
<br />
''' (C) 7-year property. The term “7-year property” includes—'''<br />
<br />
''' (i) any railroad track, and '''<br />
<br />
''' (ii) any motorsports entertainment complex,'''<br />
<br />
''' (iii) any Alaska natural gas pipeline,'''<br />
<br />
''' (iv) any natural gas gathering line the original use of which commences with the taxpayer after April 11, 2005, and'''<br />
<br />
''' '''<br />
<br />
''' (v) any property which—'''<br />
<br />
''' (I) does not have a class life, and'''<br />
<br />
''' (II) is not otherwise classified under paragraph (2) or this paragraph.'''<br />
<br />
''' (D) 10-year property. The term “10-year property” includes—'''<br />
<br />
''' (i) any single purpose agricultural or horticultural structure (within the meaning of subsection (i)(13)),'''<br />
<br />
''' (ii) any tree or vine bearing fruit or nuts,'''<br />
<br />
''' (iii) any qualified smart electric meter, and'''<br />
<br />
''' (iv) any qualified smart electric grid system.'''<br />
<br />
''' (E) 15-year property. The term “15-year property” includes—'''<br />
<br />
''' (i) any municipal wastewater treatment plant,'''<br />
<br />
''' (ii) any telephone distribution plant and comparable equipment used for 2-way exchange of voice and data communications,'''<br />
<br />
''' (iii) any section 1250 property which is a retail motor fuels outlet (whether or not food or other convenience items are sold at the outlet),'''<br />
<br />
''' (iv) initial clearing and grading land improvements with respect to gas utility property,'''<br />
<br />
''' (v) any section 1245 property (as defined in section 1245(a)(3)) used in the transmission at 69 or more kilovolts of electricity for sale and the original use of which commences with the taxpayer after April 11, 2005, and'''<br />
<br />
''' (vi) any natural gas distribution line the original use of which commences with the taxpayer after April 11, 2005, and which is placed in service before January 1, 2011.'''<br />
<br />
''' (F) 20-year property. The term “20-year property” means initial clearing and grading land improvements with respect to any electric utility transmission and distribution plant.'''<br />
<br />
''' (4) Railroad grading or tunnel bore. The term “railroad grading or tunnel bore” means all improvements resulting from excavations (including tunneling), construction of embankments, clearings, diversions of roads and streams, sodding of slopes, and from similar work necessary to provide, construct, reconstruct, alter, protect, improve, replace, or restore a roadbed or right-of-way for railroad track.'''<br />
<br />
''' (5) Water utility property. The term “water utility property” means property—'''<br />
<br />
''' (A) which is an integral part of the gathering, treatment, or commercial distribution of water, and which, without regard to this paragraph, would be 20-year property, and'''<br />
<br />
''' (B) any municipal sewer.'''<br />
<br />
''' (6) Qualified improvement property'''<br />
<br />
''' (A) In general. The term “qualified improvement property” means any improvement to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date such building was first placed in service.'''<br />
<br />
''' '''<br />
<br />
''' (B) Certain improvements not included. Such term shall not include any improvement for which the expenditure is attributable to—'''<br />
<br />
''' (i) the enlargement of the building,'''<br />
<br />
''' (ii) any elevator or escalator, or'''<br />
<br />
''' (iii) the internal structural framework of the building.''' <br />
<br />
'''(f) Property to which section does not apply [EXCLUDED]'''<br />
<br />
'''(g) Alternative depreciation system for certain property'''<br />
<br />
''' (1) In general. In the case of—'''<br />
<br />
''' (A) any tangible property which during the taxable year is used predominantly outside the United States,'''<br />
<br />
''' (B) any tax-exempt use property,'''<br />
<br />
''' (C) any tax-exempt bond financed property,'''<br />
<br />
''' (D) any imported property covered by an Executive order under paragraph (6),'''<br />
<br />
''' (E) any property to which an election under paragraph (7) applies,'''<br />
<br />
''' (F) any property described in paragraph (8), and'''<br />
<br />
''' (G) any property with a recovery period of 10 years or more which is held by an electing farming business (as defined in section 163(j)(7)(C)), the depreciation deduction provided by section 167(a) shall be determined under the alternative depreciation system.'''<br />
<br />
''' (2) Alternative depreciation system. For purposes of paragraph (1), the alternative depreciation system is depreciation determined by using—'''<br />
<br />
''' (A) the straight line method (without regard to salvage value),'''<br />
<br />
''' (B) the applicable convention determined under subsection (d), and'''<br />
<br />
''' (C) a recovery period determined under the following table: In the case of __________ the recovery period shall be ______'''<br />
<br />
''' (i) Property not described in clause (ii) or (iii) -- The class life.'''<br />
<br />
''' (ii) Personal property with no class life -- 12 years.'''<br />
<br />
''' (iii) Residential rental property -- 30 years'''<br />
<br />
''' (iv) Nonresidential real property -- 40 years'''<br />
<br />
''' (v) Any railroad grading or tunnel bore or water utility property -- 50 years'''<br />
<br />
''' (3) Special rules for determining class life'''<br />
<br />
''' (A) Tax-exempt use property subject to lease. In the case of any tax-exempt use property subject to a lease, the recovery period used for purposes of paragraph (2) shall (notwithstanding any other subparagraph of this paragraph) in no event be less than 125 percent of the lease term.'''<br />
<br />
''' (B) Special rule for certain property assigned to classes. For purposes of paragraph (2), in the case of property described in any of the following subparagraphs of subsection (e)(3), the class life shall be determined as follows:If property is described in subparagraph _____, the class life is ____'''<br />
<br />
'''(A)(iii), 4 '''<br />
<br />
'''(B)(ii), 5 '''<br />
<br />
'''(B)(iii), 9.5'''<br />
<br />
'''(B)(vii), 10 '''<br />
<br />
'''(C)(i), 10 '''<br />
<br />
'''(C)(iii), 22 '''<br />
<br />
'''(C)(iv), 14 '''<br />
<br />
'''(D)(i), 15 '''<br />
<br />
'''(D)(ii), 20 '''<br />
<br />
'''(D)(v), 20 '''<br />
<br />
'''(E)(i), 24 '''<br />
<br />
'''(E)(ii), 24 '''<br />
<br />
'''(E)(iii), 20 '''<br />
<br />
'''(E)(iv), 20 '''<br />
<br />
'''(E)(v), 30 '''<br />
<br />
'''(E)(vi), 35 '''<br />
<br />
'''(F), 25 '''<br />
<br />
''' (C) Qualified technological equipment. In the case of any qualified technological equipment, the recovery period used for purposes of paragraph (2) shall be 5 years.'''<br />
<br />
''' (D) Automobiles, etc. In the case of any automobile or light general purpose truck, the recovery period used for purposes of paragraph (2) shall be 5 years.'''<br />
<br />
''' (E) Certain real property. In the case of any section 1245 property which is real property with no class life, the recovery period used for purposes of paragraph (2) shall be 40 years.'''<br />
<br />
''' (4) Exception for certain property used outside United States. Subparagraph (A) of paragraph (1) shall not apply to—'''<br />
<br />
''' (A) any aircraft which is registered by the Administrator of the Federal Aviation Agency and which is operated to and from the United States or is operated under contract with the United States;'''<br />
<br />
''' (B) rolling stock which is used within and without the United States and which is—'''<br />
<br />
''' (i) of a rail carrier subject to part A of subtitle IV of title 49, or'''<br />
<br />
''' (ii) of a United States person (other than a corporation described in clause (i)) but only if the rolling stock is not leased to one or more foreign persons for periods aggregating more than 12 months in any 24-month period;'''<br />
<br />
''' (C) any vessel documented under the laws of the United States which is operated in the foreign or domestic commerce of the United States;'''<br />
<br />
''' (D) any motor vehicle of a United States person (as defined in section 7701(a)(30)) which is operated to and from the United States;'''<br />
<br />
''' (E) any container of a United States person which is used in the transportation of property to and from the United States;'''<br />
<br />
''' (F) any property (other than a vessel or an aircraft) of a United States person which is used for the purpose of exploring for, developing, removing, or transporting resources from the outer Continental Shelf (within the meaning of section 2 of the Outer Continental Shelf Lands Act, as amended and supplemented; (43 U.S.C. 1331));'''<br />
<br />
''' (G) any property which is owned by a domestic corporation (other than a corporation which has an election in effect under section 936) or by a United States citizen (other than a citizen entitled to the benefits of section 931 or 933) and which is used predominantly in a possession of the United States by such a corporation or such a citizen, or by a corporation created or organized in, or under the law of, a possession of the United States;'''<br />
<br />
''' (H) any communications satellite (as defined in section 103(3) of the Communications Satellite Act of 1962, 47 U.S.C. 702(3)), or any interest therein, of a United States person;'''<br />
<br />
''' (I) any cable, or any interest therein, of a domestic corporation engaged in furnishing telephone service to which section 168(i)(10)(C) applies (or of a wholly owned domestic subsidiary of such a corporation), if such cable is part of a submarine cable system which constitutes part of a communication link exclusively between the United States and one or more foreign countries;'''<br />
<br />
''' (J) any property (other than a vessel or an aircraft) of a United States person which is used in international or territorial waters within the northern portion of the Western Hemisphere for the purpose of exploring for, developing, removing, or transporting resources from ocean waters or deposits under such waters;'''<br />
<br />
''' (K) any property described in section 48(l)(3)(A)(ix) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) which is owned by a United States person and which is used in international or territorial waters to generate energy for use in the United States; and'''<br />
<br />
''' (L) any satellite (not described in subparagraph (H)) or other spacecraft (or any interest therein) held by a United States person if such satellite or other spacecraft was launched from within the United States.'''<br />
<br />
'''For purposes of subparagraph (J), the term “northern portion of the Western Hemisphere” means the area lying west of the 30th meridian west of Greenwich, east of the international dateline, and north of the Equator, but not including any foreign country which is a country of South America.'''<br />
<br />
''' (5) Tax-exempt bond financed property. For purposes of this subsection—'''<br />
<br />
''' (A) In general. Except as otherwise provided in this paragraph, the term “tax-exempt bond financed property” means any property to the extent such property is financed (directly or indirectly) by an obligation the interest on which is exempt from tax under section 103(a).'''<br />
<br />
''' (B) Allocation of bond proceeds. For purposes of subparagraph (A), the proceeds of any obligation shall be treated as used to finance property acquired in connection with the issuance of such obligation in the order in which such property is placed in service.'''<br />
<br />
''' (C) Qualified residential rental projects. The term “tax-exempt bond financed property” shall not include any qualified residential rental project (within the meaning of section 142(a)(7)).'''<br />
<br />
''' (6) Imported property'''<br />
<br />
''' (A) Countries maintaining trade restrictions or engaging in discriminatory acts. If the President determines that a foreign country—'''<br />
<br />
''' (i) maintains nontariff trade restrictions, including variable import fees, which substantially burden United States commerce in a manner inconsistent with provisions of trade agreements, or'''<br />
<br />
''' (ii) engages in discriminatory or other acts (including tolerance of international cartels) or policies unjustifiably restricting United States commerce, the President may by Executive order provide for the application of paragraph (1)(D) to any article or class of articles manufactured or produced in such foreign country for such period as may be provided by such Executive order. Any period specified in the preceding sentence shall not apply to any property ordered before (or the construction, reconstruction, or erection of which began before) the date of the Executive order unless the President determines an earlier date to be in the public interest and specifies such date in the Executive order.'''<br />
<br />
''' (B) Imported property. For purposes of this subsection, the term “imported property” means any property if—'''<br />
<br />
''' (i) such property was completed outside the United States, or'''<br />
<br />
''' (ii) less than 50 percent of the basis of such property is attributable to value added within the United States. For purposes of this subparagraph, the term “United States” includes the Commonwealth of Puerto Rico and the possessions of the United States.'''<br />
<br />
''' (7) Election to use alternative depreciation system'''<br />
<br />
''' (A) In general. If the taxpayer makes an election under this paragraph with respect to any class of property for any taxable year, the alternative depreciation system under this subsection shall apply to all property in such class placed in service during such taxable year. Notwithstanding the preceding sentence, in the case of nonresidential real property or residential rental property, such election may be made separately with respect to each property.'''<br />
<br />
''' (B) Election irrevocable. An election under subparagraph (A), once made, shall be irrevocable.'''<br />
<br />
''' (8) Electing real property trade or business. The property described in this paragraph shall consist of any nonresidential real property, residential rental property, and qualified improvement property held by an electing real property trade or business (as defined in 163(j)(7)(B)).'''<br />
<br />
'''(h) Tax-exempt use property [EXCLUDED]'''<br />
<br />
'''(i) Definitions and special rules [EXCLUDED]'''<br />
<br />
'''(j) Property on Indian reservations [EXCLUDED]'''<br />
<br />
'''(k) Special allowance for certain property [EXCLUDED]'''<br />
<br />
'''(l) Special allowance for second generation biofuel plant property [EXCLUDED]'''<br />
<br />
'''(m) Special allowance for certain reuse and recycling property [EXCLUDED]''' <br />
<br />
'''(n) Special allowance for qualified disaster assistance property [EXCLUDED]'''<br />
|} <br />
<br />
{| class="wikitable"<br />
|Treas. Reg. § 1.167(a)-2 Tangible property.<br />
<br />
The depreciation allowance in the case of tangible property applies only to that part of the property which is subject to wear and tear, to decay or decline from natural causes, to exhaustion, and to obsolescence. The allowance '''does not apply to inventories or stock in trade, or to land apart from the improvements or physical development added to it'''. The allowance does not apply to natural resources which are subject to the allowance for depletion provided in section 611. No deduction for depreciation shall be allowed on automobiles or other vehicles used solely for pleasure, on a building used by the taxpayer solely as his residence, or on furniture or furnishings therein, personal effects, or clothing; but properties and costumes used exclusively in a business, such as a theatrical business, may be depreciated.<br />
|} <br />
'''Property Eligible for Deduction'''<br />
§167(a) → permits a deduction for the “exhaustion, wear and tear” and for the “obsolescence” of property used in a trade or business or held for the production of income; two required features:<br />
<br />
(1) It has a useful life beyond the taxable year (the reason it was capitalized in the first place); and<br />
<br />
(2) It wears out, decays, declines in value due to natural causes, or is subject to exhaustion or obsolescence <br />
<br />
<u>Simon v. Commissioner (1994)</u> - Tax Court [violin bows depreciated for wear and tear]<br />
<br />
RULE: A federal taxpayer may take depreciation deductions for recovery property under the accelerated cost recovery system. <br />
<br />
Case Notes:<br />
<br />
● Taxpayers may take depreciation deductions for recovery property under the ACRS. <br />
<br />
● Recovery property must be: <br />
<br />
○ (1) tangible, <br />
<br />
○ (2) placed in service after 1980, <br />
<br />
○ (3) used in a trade or business, and <br />
<br />
○ (4) of a character subject to the allowance for depreciation.<br />
<br />
● A comparison between current and previous tax law indicates that Congress used the term “depreciation” to mean '''exhaustion, wear and tear, or obsolescence'''. <br />
<br />
<u>Simon v. Commissioner (1995)</u> - 2nd Cir. Ct. of Appeals [PART II]<br />
<br />
RULE: Demonstration of a business asset’s useful life is not required to take depreciation deductions under the Accelerated Recovery Tax Act (ARTA). <br />
<br />
Case Notes: <br />
<br />
● The ACRS, under § 168, allows taxpayers to take depreciation deductions for recovery property. <br />
<br />
● Recovery property is “tangible property of a character subject to the allowance for depreciation,” used in the course of carrying on a trade or business. <br />
<br />
● The requirement that the business asset also have a determinable useful life, was a determination required for depreciation deductions prior to the implementation of ACRS. <br />
<br />
● Not all business assets are subject to wear and tear. For instance, paintings hung on the wall of a business office or violin bows kept as collector’s items in a for-profit museum are technically business assets that do not undergo wear and tear. <br />
<br />
● Previously, a determination of a business asset’s determinable useful life was required in order to take a depreciation deduction. <br />
<br />
● Depreciation deductions allow taxpayers to offset their taxable income by deducting the cost of a business asset over its useful life. <br />
<br />
● The allowable depreciation allowance for each year could not be calculated without first establishing the asset’s useful life. <br />
<br />
● The introduction of the ACRS, however, eliminated the need to determine the useful life of an asset. <br />
<br />
● In an effort to stimulate economic growth, the ACRS provides for accelerated depreciation periods that are unrelated to the useful life of an asset. <br />
<br />
● The determination of an asset’s useful life is no longer essential to calculate depreciation allowances. <br />
<br />
● In fact, depreciation periods under the ACRS are usually shorter than the asset’s true useful life. <br />
<br />
● Congress also sought to simplify depreciation deductions by de-emphasizing concepts such as useful life and salvage value.<br />
<br />
● §168 only requires that a business asset be subject to wear and tear to be eligible for depreciation deductions. <br />
<br />
Some tangible assets, like works of art, are not depreciable even though they are used in a trade or business (i.e. painting on the wall of a law office to attract clients). <br />
<br />
'''Legislative History''' <br />
<br />
'''ADR → Asset depreciation range''' -- Asset depreciation range was an accounting method established by the Internal Revenue Service in 1971 to determine the useful life of specific classes of depreciable assets. It was replaced with the accelerated cost recovery system ('''ACRS''') in 1981, which in turn was replaced by the modified accelerated cost recovery system ('''MACRS''') in 1986. <br />
<br />
'''ERTA''' → The Economic Recovery Tax Act of 1981 (Pub.L. 97–34), also known as the ERTA or "Kemp–Roth Tax Cut", was a federal law enacted in the United States in 1981. [August 31, 2018]<br />
<br />
● It was an act "to amend the Internal Revenue Code of 1954 to encourage economic growth through reductions in individual income tax rates, the expensing of depreciable property, incentives for small businesses, and incentives for savings, and for other purposes".<br />
<br />
● Included in the act was an across-the-board decrease in the marginal income tax rates in the United States by 25% over three years, with the top rate falling from 70% to 50% and the bottom rate dropping from 14% to 11%. <br />
<br />
● This act slashed estate taxes and trimmed taxes paid by business corporations by $150 billion over a five-year period. <br />
<br />
● Additionally the tax rates were indexed for inflation, though the indexing was delayed until 1985.<br />
<br />
● In the year after enactment of ERTA, the deficit ballooned, which in turn, drove interest rates from around 12% to over 20%, which, in turn, drove the economy into the second dip of the 1978-82 "double dip recession". <br />
<br />
'''ACRS''' → The Accelerated Cost Recovery System (ACRS) was a major component of the ERTA and was amended in 1986 to become the '''Modified Accelerated cost Recovery System''' ('''MACRS''').<br />
<br />
● The system changed the way that depreciation deductions are allowed for tax purposes. <br />
<br />
● Instead of basing the depreciation deduction on an estimate of the expected useful life of assets, the assets were placed into categories: 3, 5, 10, or 15 years of life. <br />
<br />
● For example, the agriculture industry saw a re-evaluation of their farming assets. Items such as automobiles and swine were given 3 year depreciation values, and things like buildings and land had a 15-year depreciation value.<br />
<br />
● The idea was that there would be a rise in tax cuts due to the optimistic consideration of depreciating values -- this would in turn put more cash into the pockets of business owners to promote investment and economic growth.<br />
<br />
'''Modified Accelerated Cost Recovery System (MACRS)''' → MACRS is a depreciation system which allows the capitalized cost basis of assets to be recovered over a specified life of the asset by annual deductions for value depreciation. MACRS is the depreciation system used in the United States, and was created after the release of the Tax Reform Act of 1986. <br />
<br />
{| class="wikitable"<br />
| colspan="2" |'''Table of Property Types and Class Lives'''<br />
|-<br />
|'''Description of Assets'''<br />
|'''Useful Life (Years)'''<br />
|-<br />
|Tractors, racehorses, rent-to-own property, etc.<br />
|3<br />
|-<br />
|Automobiles, buses, trucks, computers, office machinery, breeding cattle, furniture, etc.<br />
|5<br />
|-<br />
|Office furniture, fixtures, agricultural machinery, railroad track, etc.<br />
|7<br />
|-<br />
|Vessels, tugs, agricultural structure, tree or vine bearing fruits or nuts, etc.<br />
|10<br />
|-<br />
|Municipal wastewater treatment plant, restaurant property, natural gas distribution line, land improvements, such as shrubbery, fences, and sidewalks, etc.<br />
|15<br />
|-<br />
|Farm buildings, certain municipal sewers, etc.<br />
|20<br />
|-<br />
|Water utility property, certain municipal sewers, etc.<br />
|25<br />
|-<br />
|Any building or structure where 80% or more of its gross rental income is from dwelling units<br />
|27.5<br />
|-<br />
|An office building, store, or warehouse that is not residential property or has a class life of less than 27.5 years<br />
|39<br />
|} <br />
<br />
'''The Mechanics of Depreciation''' <br />
<br />
Variables affecting depreciation deductions under §168(a): <br />
<br />
(1) '''Depreciation base''' → the depreciation base for all assets is its cost basis; because the statute assumes that all depreciable assets have no salvage value under §168(b)(4), a taxpayer may recover his or her entire basis in the asset. <br />
<br />
(2) '''Class life''' → the estimated life expectancy of the asset; established in Revenue Procedure 87-56. <br />
<br />
{| class="wikitable"<br />
|'''Rev. Proc. 87-56''' <br />
<br />
'''SECTION 1. PURPOSE''' <br />
<br />
'''The purpose of this revenue procedure is to set forth the class lives of property that are necessary to compute the depreciation allowances available under section 168 of the Internal Revenue Code, as amended by section 201(a) of the Tax Reform Act of 1986 (Act), 1986-3 (Vol. 1) C.B. 38. Rev. Proc. 87-57, page 17, this Bulletin, describes the applicable depreciation methods, applicable recovery periods, and applicable conventions that must be used in computing depreciation allowances under section 168.''' <br />
<br />
'''SEC. 2. GENERAL RULES OF APPLICATION'''<br />
<br />
'''01 IN GENERAL. This revenue procedure specifies class lives and recovery periods for property subject to depreciation under the general depreciation system provided in section 168(a) of the Code or the alternative depreciation system provided in section 168(g).''' <br />
<br />
'''SEC. 5. TABLES OF CLASS LIVES AND RECOVERY PERIODS''' <br />
<br />
'''.01 Except for property described in section 5.02, below, the class lives (if any) and recovery periods for property subject to depreciation under section 168 of the Code appear in the tables below. These tables are based on the definition of class life in section 2.02 of this revenue procedure and the assigned items described in section 3 of this revenue procedure.''' <br />
<br />
'''.02 For purposes of depreciation under the general depreciation system, residential rental property has a recovery period of 27.5 years and nonresidential real property has a recovery period of 31.5 years. For purposes of the alternative depreciation system, residential rental and nonresidential real property each has a recovery period of 40 years.''' <br />
<br />
'''[TABLE EXCLUDED]'''<br />
|} <br />
<br />
(3) '''Applicable Recovery Period''' → under §168(a)(2)<br />
<br />
(a) The table in §168(e)(1) uses the asset’s class life to classify it as one of six different types of property<br />
<br />
(b) Then, the table in §168(c) lists the recovery period for each type of property (subject to the four exceptions noted at the end of the table)<br />
<br />
(c) The recovery period represents the number of taxable years over which the taxpayer may claim depreciation deductions<br />
<br />
(d) Taxpayers typically prefer shorter recovery periods, because that means bigger deductions and quicker recovery of the asset’s basis <br />
<br />
(4) '''Applicable depreciation method''' → <br />
<br />
(a) “Straight-line method” -- where the cost is recovered ratably, one divides the depreciation base by the applicable recovery period '''[FRAY WILL ONLY ASK US TO DO THIS]'''<br />
<br />
(b) Accelerated methods -- “Declining balance methods” -- §168(b) lists them; used more frequently than any other method.<br />
<br />
(i) “Double declining balance method” -- a taxpayer may claim double the percentage of the declining balance in the depreciation base; taxpayer would never fully recover the cost of the asset, statute says to switch to the straight-line method in the first year when that method yields a larger result<br />
<br />
(ii) “150 percent declining balance method” <br />
<br />
EXAMPLE: <br />
<br />
{| class="wikitable"<br />
|Year<br />
|Declining Balance<br />
|40% DDB<br />
|Straight-Line<br />
|Deduction<br />
|Adjusted Basis<br />
|-<br />
|1<br />
|$5,000<br />
|$2,000<br />
|$1,000<br />
| <br />
| <br />
|-<br />
|2<br />
|$3,000<br />
|$1,200<br />
|$750*<br />
| <br />
| <br />
|-<br />
|3<br />
|$1,800<br />
|$720<br />
| <br />
| <br />
| <br />
|-<br />
|4<br />
|$1,080<br />
|$432<br />
| <br />
| <br />
| <br />
|-<br />
|5<br />
|$540<br />
|$216<br />
| <br />
| <br />
| <br />
|} <br />
<br />
'''Losses''' <br />
<br />
'''Business and Investment Losses''' <br />
<br />
{| class="wikitable"<br />
|62(a)(3), 165(a)-(d)<br />
|} <br />
<br />
§1001(a) → defines a loss from the sale or exchange of property as the excess of TP’s adjusted basis over the amount realized<br />
<br />
§1001(c) → all realized losses are recognized (deductible) except as provided elsewhere in the Code<br />
<br />
● FOR INDIVIDUALS, §165(c) is the major limitation; only permits the deduction of three types of uncompensated losses:<br />
<br />
(1) Losses incurred in a trade or business;<br />
<br />
(2) Losses incurred in profit-motivated transactions; and<br />
<br />
(3) Casualty and theft losses with respect to personal-use property <br />
<br />
If a realized loss is not described in §165(c), an individual taxpayer cannot deduct the loss. <br />
<br />
§165(a) → two additional limitations<br />
<br />
(1) The loss must be “sustained” -- for example, a decline in the FMV of an asset cannot be claimed as a loss until the asset is sold or otherwise disposed of in a completed transaction<br />
<br />
(2) The taxpayer must not have been “compensated” for the loss -- if a TP receives insurance proceeds or other compensation for a loss (e.g. homeowners insurance), it would be a windfall to permit a loss deduction on top of recovery <br />
<br />
<u>Miller v. Commissioner (1984)</u> - 6th Cir. [boat damaged, did not file insurance claim, claimed loss]<br />
<br />
RULE: Taxpayers are allowed to claim deductions for economic detriments which are a loss and not compensated for by insurance or otherwise regardless whether the property was insured or not. <br />
<br />
''Facts:''<br />
<br />
● ''Plaintiff taxpayer had an undamaged boat and a friend who is a bad captain.'' <br />
<br />
● ''Unfortunately he lent his boat to this friend who then ran taxpayer's boat into the ground.'' <br />
<br />
● ''Taxpayer was able to collect $200.00 from his friend, reducing taxpayer's actual loss to $642.55.'' <br />
<br />
● ''After taking into account the $100.00 limitation under 26 U.S.C. § 165(c)(3), taxpayer claimed a $542.22 casualty loss deduction on his 1976 return.'' <br />
<br />
● ''While the taxpayer's boat was insured, he did not file an insurance claim for fear of having his insurance policy revoked.'' <br />
<br />
● ''26 U.S.C. § 165(c)allows a deduction for private parties for losses resulting from a shipwreck.''<br />
<br />
● ''The court considered whether a taxpayer's voluntary election not to file an insurance claim for a loss precludes the taxpayer from taking a casualty loss deduction according to 26 U.S.C. § 165.'' <br />
<br />
Case Notes: <br />
<br />
● If you damage something that is insured or under warranty but don't make a claim and don't receive compensation, can you still deduct the loss according to 26 U.S.C. § 165.<br />
<br />
● Plain language example: Someone backs into your car while you are away and breaks a taillight. While you have insurance for the taillight, you don't make a claim because you might lose your insurance or don't want to deal with the paperwork. The loss in excess of the limit in 26 U.S.C. § 165(c)3 (currently $100) may be deducted.<br />
<br />
● Previously, <u>Kentucky Utilities</u> rule → In order to claim a deduction, the court required the taxpayer to a) exhaust all reasonable prospects for insurance indemnification before claiming a sustained loss or (b) that 26 U.S.C. § 165 equated "not compensated by" with "not covered by."<br />
<br />
● Avoiding the <u>Kentucky Utilities</u> rule<br />
<br />
○ First, it allows insured taxpayers to decline insurance indemnification without the penalty of not being able to deduct the loss as if they did not have insurance. <br />
<br />
○ There are many valid reasons for not involving insurance companies and the tax law should not work against them. <br />
<br />
○ Second, taxpayers who carry no insurance or are under-insured are not rewarded with an additional deduction not available to their colleagues who carry the proper amount of insurance coverage.<br />
<br />
● Kentucky Utilities was overruled by Hills, which recognized that "compensated" is distinct from "covered." <br />
<br />
Individual Losses <br />
<br />
● §165(b) → If a TP receives no consideration for a realized loss (whether as payment or compensation), the loss deduction is limited to the TP’s basis in the loss property<br />
<br />
● Thus if a TP is unable to collect on an account receivable (in which a TP has a zero basis except in very limited cases), there is no deduction under §165(a)<br />
<br />
● §165(d) → limits the deduction for gambling losses to the amount of the TP’s gambling winnings; it does not matter whether gambling is a business, investment, or personal activity of the TP <br />
<br />
'''Net Operating Losses''' <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 172 - Net operating loss deduction'''<br />
<br />
'''(a) Deduction allowed. There shall be allowed as a deduction for the taxable year an amount equal to the lesser of—'''<br />
<br />
''' (1) the aggregate of the net operating loss carryovers to such year, plus the net operating loss carrybacks to such year, or'''<br />
<br />
''' (2) 80 percent of taxable income computed without regard to the deduction allowable under this section. For purposes of this subtitle, the term “net operating loss deduction” means the deduction allowed by this subsection.''' <br />
<br />
'''(b) Net operating loss carrybacks and carryovers'''<br />
<br />
''' (1) Years to which loss may be carried'''<br />
<br />
''' (A) General rule. Except as otherwise provided in this paragraph, a net operating loss for any taxable year—'''<br />
<br />
''' (i) except as otherwise provided in this paragraph, shall not be a net operating loss carryback to any taxable year preceding the taxable year of such loss, and'''<br />
<br />
''' (ii) shall be a net operating loss carryover to each taxable year following the taxable year of the loss.'''<br />
<br />
''' (B) Farming losses'''<br />
<br />
''' (i) In general. In the case of any portion of a net operating loss for the taxable year which is a farming loss with respect to the taxpayer, such loss shall be a net operating loss carryback to each of the 2 taxable years preceding the taxable year of such loss.'''<br />
<br />
''' (ii) Farming loss. For purposes of this section, the term “farming loss” means the lesser of—'''<br />
<br />
''' (I) the amount which would be the net operating loss for the taxable year if only income and deductions attributable to farming businesses (as defined in section 263A(e)(4)) are taken into account, or'''<br />
<br />
''' (II) the amount of the net operating loss for such taxable year.'''<br />
<br />
''' (iii) Coordination with paragraph (2). For purposes of applying paragraph (2), a farming loss for any taxable year shall be treated as a separate net operating loss for such taxable year to be taken into account after the remaining portion of the net operating loss for such taxable year.'''<br />
<br />
''' (iv) Election. Any taxpayer entitled to a 2-year carryback under clause (i) from any loss year may elect not to have such clause apply to such loss year. Such election shall be made in such manner as prescribed by the Secretary and shall be made by the due date (including extensions of time) for filing the taxpayer’s return for the taxable year of the net operating loss. Such election, once made for any taxable year, shall be irrevocable for such taxable year.'''<br />
<br />
''' (C) Insurance companies. In the case of an insurance company (as defined in section 816(a)) other than a life insurance company, the net operating loss for any taxable year—'''<br />
<br />
''' (i) shall be a net operating loss carryback to each of the 2 taxable years preceding the taxable year of such loss, and'''<br />
<br />
''' (ii) shall be a net operating loss carryover to each of the 20 taxable years following the taxable year of the loss.'''<br />
<br />
''' (2) Amount of carrybacks and carryovers. The entire amount of the net operating loss for any taxable year (hereinafter in this section referred to as the “loss year”) shall be carried to the earliest of the taxable years to which (by reason of paragraph (1)) such loss may be carried. The portion of such loss which shall be carried to each of the other taxable years shall be the excess, if any, of the amount of such loss over the sum of the taxable income for each of the prior taxable years to which such loss may be carried. For purposes of the preceding sentence, the taxable income for any such prior taxable year shall—'''<br />
<br />
''' (A) be computed with the modifications specified in subsection (d) other than paragraphs (1), (4), and (5) thereof, and by determining the amount of the net operating loss deduction without regard to the net operating loss for the loss year or for any taxable year thereafter,'''<br />
<br />
''' (B) not be considered to be less than zero, and'''<br />
<br />
''' (C) not exceed the amount determined under subsection (a)(2) for such prior taxable year.'''<br />
<br />
''' (3) Election to waive carryback. Any taxpayer entitled to a carryback period under paragraph (1) may elect to relinquish the entire carryback period with respect to a net operating loss for any taxable year. Such election shall be made in such manner as may be prescribed by the Secretary, and shall be made by the due date (including extensions of time) for filing the taxpayer’s return for the taxable year of the net operating loss for which the election is to be in effect. Such election, once made for any taxable year, shall be irrevocable for such taxable year.'''<br />
<br />
'''(c) Net operating loss defined. For purposes of this section, the term “net operating loss” means the excess of the deductions allowed by this chapter over the gross income. Such excess shall be computed with the modifications specified in subsection (d).'''<br />
<br />
'''(d) Modifications. The modifications referred to in this section are as follows:'''<br />
<br />
''' (1) Net operating loss deduction. No net operating loss deduction shall be allowed.'''<br />
<br />
''' (2) Capital gains and losses of taxpayers other than corporations. In the case of a taxpayer other than a corporation—'''<br />
<br />
''' (A) the amount deductible on account of losses from sales or exchanges of capital assets shall not exceed the amount includable on account of gains from sales or exchanges of capital assets; and'''<br />
<br />
''' (B) the exclusion provided by section 1202 shall not be allowed.'''<br />
<br />
''' (3) Deduction for personal exemptions. No deduction shall be allowed under section 151 (relating to personal exemptions). No deduction in lieu of any such deduction shall be allowed.'''<br />
<br />
''' (4) Nonbusiness deductions of taxpayers other than corporations. In the case of a taxpayer other than a corporation, the deductions allowable by this chapter which are not attributable to a taxpayer’s trade or business shall be allowed only to the extent of the amount of the gross income not derived from such trade or business. For purposes of the preceding sentence—'''<br />
<br />
''' (A) any gain or loss from the sale or other disposition of—'''<br />
<br />
''' (i) property, used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 167, or'''<br />
<br />
''' (ii) real property used in the trade or business, shall be treated as attributable to the trade or business;'''<br />
<br />
''' (B) the modifications specified in paragraphs (1), (2)(B), and (3) shall be taken into account;'''<br />
<br />
''' (C) any deduction for casualty or theft losses allowable under paragraph (2) or (3) of section 165(c) shall be treated as attributable to the trade or business; and'''<br />
<br />
''' (D) any deduction allowed under section 404 to the extent attributable to contributions which are made on behalf of an individual who is an employee within the meaning of section 401(c)(1) shall not be treated as attributable to the trade or business of such individual.'''<br />
<br />
''' (5) Computation of deduction for dividends received. The deductions allowed by section [1] 243 (relating to dividends received by corporations) and 245 (relating to dividends received from certain foreign corporations) shall be computed without regard to section 246(b) (relating to limitation on aggregate amount of deductions).'''<br />
<br />
''' (6) Modifications related to real estate investment trusts. In the case of any taxable year for which part II of subchapter M (relating to real estate investment trusts) applies to the taxpayer—'''<br />
<br />
''' (A) the net operating loss for such taxable year shall be computed by taking into account the adjustments described in section 857(b)(2) (other than the deduction for dividends paid described in section 857(b)(2)(B));'''<br />
<br />
''' (B) where such taxable year is a “prior taxable year” referred to in paragraph (2) of subsection (b), the term “taxable income” in such paragraph shall mean “real estate investment trust taxable income” (as defined in section 857(b)(2)); and'''<br />
<br />
''' (C) subsection (a)(2) shall be applied by substituting “real estate investment trust taxable income (as defined in section 857(b)(2) but without regard to the deduction for dividends paid (as defined in section 561))” for “taxable income”.'''<br />
<br />
''' [(7) Repealed. Pub. L. 115–97, title I, § 13305(b)(3), Dec. 22, 2017, 131 Stat. 2126.]'''<br />
<br />
''' (8) Qualified business income deduction. The deduction under section 199A shall not be allowed.'''<br />
<br />
''' (9) Deduction for foreign-derived intangible income. The deduction under section 250 shall not be allowed.'''<br />
<br />
'''(e) Law applicable to computations. In determining the amount of any net operating loss carryback or carryover to any taxable year, the necessary computations involving any other taxable year shall be made under the law applicable to such other taxable year.'''<br />
<br />
'''(f) Special rule for insurance companies. In the case of an insurance company (as defined in section 816(a)) other than a life insurance company—'''<br />
<br />
''' (1) the amount of the deduction allowed under subsection (a) shall be the aggregate of the net operating loss carryovers to such year, plus the net operating loss carrybacks to such year, and'''<br />
<br />
''' (2) subparagraph (C) of subsection (b)(2) shall not apply.''' <br />
<br />
'''(g) Cross references'''<br />
<br />
''' (1) For treatment of net operating loss carryovers in certain corporate acquisitions, see section 381.'''<br />
<br />
''' (2) For special limitation on net operating loss carryovers in case of a corporate change of ownership, see section 382.'''<br />
|} <br />
<br />
EXAMPLE → A and B operate similar businesses<br />
<br />
● A’s business income is very steady; in year 1 and year 2, A has a net business income of $10k<br />
<br />
● B’s business income is more volatile; in year 1, B had a new business LOSS of $10K and in year 2, B had a net business income of $30K<br />
<br />
● During the combined two-year operating period, both A and B had a net income of $20K, but they will not be treated the same. <br />
<br />
{| class="wikitable"<br />
| <br />
|A<br />
|B<br />
|-<br />
|Year 1<br />
|$10,000<br />
|($10,000)<br />
|-<br />
|Year 2<br />
|$10,000<br />
|$30,000<br />
|-<br />
|'''Total'''<br />
|'''$20,000'''<br />
|'''$20,000'''<br />
|} <br />
<br />
Section 172 → designed to ameliorate the different tax treatments<br />
<br />
● A will pay tax on $10K in each of years 1 and 2<br />
<br />
● B will pay no tax in year 1 but will also not be entitled to a return<br />
<br />
● In year 2, B will pay tax on $30K<br />
<br />
● UNDER §172 → B could '''carry''' his $10K “net operating loss” from year 1 over to year 2; by doing so, B’s year 2 taxable income would be reduced by $10K; by allowing a deduction on B’s year 2 income, equitable treatment is closer to achievable <br />
<br />
§172(b) → carryover<br />
<br />
● Taxpayers can carry forward net operating losses<br />
<br />
● Under §172(a), any net operating loss deduction cannot exceed 80% of a TP’s taxable income<br />
<br />
● TCJA removed carryback provisions <br />
<br />
'''Loss Limitations''' <br />
<br />
Other limitations on the deductibility of losses<br />
<br />
● §465 → a TP’s losses from business and investment activities are limited to the amount the TP is “at risk” in such activities<br />
<br />
○ If a TP invests $10K in an investment activity (like an ILP in a real estate LP), the TP can only claim up to $10K in losses from the activity<br />
<br />
● §469 → Losses from “passive” activities can only be deducted to the extent of income from passive activities<br />
<br />
● §1091 → with respect to sales of marketable securities, 1091 disallows losses from so called “wash sales”, where a TP sells shares of stock at a loss and then, within a short period following the sale, purchases shares in the same corporation in anticipation of an upturn in the stock price <br />
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'''Transactions with Related Persons''' <br />
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{| class="wikitable"<br />
|'''26 U.S. Code § 267 - Losses, expenses, and interest with respect to transactions between related taxpayers'''<br />
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'''(a) In general'''<br />
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''' (1) Deduction for losses disallowed. No deduction shall be allowed in respect of any loss from the sale or exchange of property, directly or indirectly, between persons specified in any of the paragraphs of subsection (b). The preceding sentence shall not apply to any loss of the distributing corporation (or the distributee) in the case of a distribution in complete liquidation.'''<br />
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''' (2) Matching of deduction and payee income item in the case of expenses and interest. If—'''<br />
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''' (A) by reason of the method of accounting of the person to whom the payment is to be made, the amount thereof is not (unless paid) includible in the gross income of such person, and'''<br />
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''' (B) at the close of the taxable year of the taxpayer for which (but for this paragraph) the amount would be deductible under this chapter, both the taxpayer and the person to whom the payment is to be made are persons specified in any of the paragraphs of subsection (b), then any deduction allowable under this chapter in respect of such amount shall be allowable as of the day as of which such amount is includible in the gross income of the person to whom the payment is made (or, if later, as of the day on which it would be so allowable but for this paragraph). For purposes of this paragraph, in the case of a personal service corporation (within the meaning of section 441(i)(2)), such corporation and any employee-owner (within the meaning of section 269A(b)(2), as modified by section 441(i)(2)) shall be treated as persons specified in subsection (b).'''<br />
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''' (3) Payments to foreign persons'''<br />
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''' (A) In general. The Secretary shall by regulations apply the matching principle of paragraph (2) in cases in which the person to whom the payment is to be made is not a United States person.'''<br />
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''' (B) Special rule for certain foreign entities'''<br />
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''' (i) In general. Notwithstanding subparagraph (A), in the case of any item payable to a controlled foreign corporation (as defined in section 957) or a passive foreign investment company (as defined in section 1297), a deduction shall be allowable to the payor with respect to such amount for any taxable year before the taxable year in which paid only to the extent that an amount attributable to such item is includible (determined without regard to properly allocable deductions and qualified deficits under section 952(c)(1)(B)) during such prior taxable year in the gross income of a United States person who owns (within the meaning of section 958(a)) stock in such corporation.'''<br />
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''' (ii) Secretarial authority. The Secretary may by regulation exempt transactions from the application of clause (i), including any transaction which is entered into by a payor in the ordinary course of a trade or business in which the payor is predominantly engaged and in which the payment of the accrued amounts occurs within 8½ months after accrual or within such other period as the Secretary may prescribe.'''<br />
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'''(b) Relationships. The persons referred to in subsection (a) are:'''<br />
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''' (1) Members of a family, as defined in subsection (c)(4);'''<br />
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''' (2) An individual and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual;'''<br />
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''' (3) Two corporations which are members of the same controlled group (as defined in subsection (f));'''<br />
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''' (4) A grantor and a fiduciary of any trust;'''<br />
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''' (5) A fiduciary of a trust and a fiduciary of another trust, if the same person is a grantor of both trusts;'''<br />
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''' (6) A fiduciary of a trust and a beneficiary of such trust;'''<br />
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''' (7) A fiduciary of a trust and a beneficiary of another trust, if the same person is a grantor of both trusts;'''<br />
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''' (8) A fiduciary of a trust and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for the trust or by or for a person who is a grantor of the trust;'''<br />
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''' (9) A person and an organization to which section 501 (relating to certain educational and charitable organizations which are exempt from tax) applies and which is controlled directly or indirectly by such person or (if such person is an individual) by members of the family of such individual;'''<br />
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''' (10) A corporation and a partnership if the same persons own—'''<br />
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''' (A) more than 50 percent in value of the outstanding stock of the corporation, and'''<br />
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''' (B) more than 50 percent of the capital interest, or the profits interest, in the partnership;'''<br />
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''' (11) An S corporation and another S corporation if the same persons own more than 50 percent in value of the outstanding stock of each corporation;'''<br />
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''' (12) An S corporation and a C corporation, if the same persons own more than 50 percent in value of the outstanding stock of each corporation; or'''<br />
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''' (13) Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of such estate.''' <br />
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'''(c) Constructive ownership of stock. For purposes of determining, in applying subsection (b), the ownership of stock—'''<br />
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''' (1) Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries;'''<br />
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''' (2) An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family;'''<br />
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''' (3) An individual owning (otherwise than by the application of paragraph (2)) any stock in a corporation shall be considered as owning the stock owned, directly or indirectly, by or for his partner;'''<br />
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''' (4) The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; and'''<br />
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''' (5) Stock constructively owned by a person by reason of the application of paragraph (1) shall, for the purpose of applying paragraph (1), (2), or (3), be treated as actually owned by such person, but stock constructively owned by an individual by reason of the application of paragraph (2) or (3) shall not be treated as owned by him for the purpose of again applying either of such paragraphs in order to make another the constructive owner of such stock.''' <br />
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'''(d) Amount of gain where loss previously disallowed'''<br />
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''' (1) In general. If—'''<br />
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''' (A) in the case of a sale or exchange of property to the taxpayer a loss sustained by the transferor is not allowable to the transferor as a deduction by reason of subsection (a)(1), and'''<br />
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''' (B) the taxpayer sells or otherwise disposes of such property (or of other property the basis of which in the taxpayer’s hands is determined directly or indirectly by reference to such property) at a gain,'''<br />
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'''then such gain shall be recognized only to the extent that it exceeds so much of such loss as is properly allocable to the property sold or otherwise disposed of by the taxpayer.'''<br />
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''' (2) Exception for wash sales. Paragraph (1) shall not apply if the loss sustained by the transferor is not allowable to the transferor as a deduction by reason of section 1091 (relating to wash sales).'''<br />
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''' (3) Exception for transfers from tax indifferent parties. Paragraph (1) shall not apply to the extent any loss sustained by the transferor (if allowed) would not be taken into account in determining a tax imposed under section 1 or 11 or a tax computed as provided by either of such sections.'''<br />
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'''(e) Special rules for pass-thru entities'''<br />
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''' (1) In general. In the case of any amount paid or incurred by, to, or on behalf of, a pass-thru entity, for purposes of applying subsection (a)(2)—'''<br />
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''' (A) such entity,'''<br />
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''' (B) in the case of—'''<br />
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''' (i) a partnership, any person who owns (directly or indirectly) any capital interest or profits interest of such partnership, or'''<br />
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''' (ii) an S corporation, any person who owns (directly or indirectly) any of the stock of such corporation,'''<br />
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''' (C) any person who owns (directly or indirectly) any capital interest or profits interest of a partnership in which such entity owns (directly or indirectly) any capital interest or profits interest, and'''<br />
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''' (D) any person related (within the meaning of subsection (b) of this section or section 707(b)(1)) to a person described in subparagraph (B) or (C), shall be treated as persons specified in a paragraph of subsection (b). Subparagraph (C) shall apply to a transaction only if such transaction is related either to the operations of the partnership described in such subparagraph or to an interest in such partnership.'''<br />
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''' (2) Pass-thru entity. For purposes of this section, the term “pass-thru entity” means—'''<br />
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''' (A) a partnership, and'''<br />
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''' (B) an S corporation.'''<br />
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''' (3) Constructive ownership in the case of partnerships. For purposes of determining ownership of a capital interest or profits interest of a partnership, the principles of subsection (c) shall apply, except that—'''<br />
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''' (A) paragraph (3) of subsection (c) shall not apply, and'''<br />
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''' (B) interests owned (directly or indirectly) by or for a C corporation shall be considered as owned by or for any shareholder only if such shareholder owns (directly or indirectly) 5 percent or more in value of the stock of such corporation.'''<br />
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''' (4) Subsection (a)(2) not to apply to certain guaranteed payments of partnerships. In the case of any amount paid or incurred by a partnership, subsection (a)(2) shall not apply to the extent that section 707(c) applies to such amount.'''<br />
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''' (5) Exception for certain expenses and interest of partnerships owning low-income housing'''<br />
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''' (A) In general. This subsection shall not apply with respect to qualified expenses and interest paid or incurred by a partnership owning low-income housing to—'''<br />
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''' (i) any qualified 5-percent or less partner of such partnership, or'''<br />
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''' (ii) any person related (within the meaning of subsection (b) of this section or section 707(b)(1)) to any qualified 5-percent or less partner of such partnership.'''<br />
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''' (B) Qualified 5-percent or less partner. For purposes of this paragraph, the term “qualified 5-percent or less partner” means any partner who has (directly or indirectly) an interest of 5 percent or less in the aggregate capital and profits interests of the partnership but only if—'''<br />
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''' (i) such partner owned the low-income housing at all times during the 2-year period ending on the date such housing was transferred to the partnership, or'''<br />
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''' (ii) such partnership acquired the low-income housing pursuant to a purchase, assignment, or other transfer from the Department of Housing and Urban Development or any State or local housing authority. For purposes of the preceding sentence, a partner shall be treated as holding any interest in the partnership which is held (directly or indirectly) by any person related (within the meaning of subsection (b) of this section or section 707(b)(1)) to such partner.'''<br />
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''' (C) Qualified expenses and interest. For purpose of this paragraph, the term “qualified expenses and interest” means any expense or interest incurred by the partnership with respect to low-income housing held by the partnership but—'''<br />
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''' (i) only if the amount of such expense or interest (as the case may be) is unconditionally required to be paid by the partnership not later than 10 years after the date such amount was incurred, and'''<br />
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''' (ii) in the case of such interest, only if such interest is incurred at an annual rate not in excess of 12 percent.'''<br />
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''' (D) Low-income housing. For purposes of this paragraph, the term “low-income housing” means—'''<br />
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''' (i) any interest in property described in clause (i), (ii), (iii), or (iv) of section 1250(a)(1)(B), and'''<br />
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''' (ii) any interest in a partnership owning such property.'''<br />
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''' (6) Cross reference. For additional rules relating to partnerships, see section 707(b).'''<br />
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'''(f) Controlled group defined; special rules applicable to controlled groups'''<br />
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''' (1) Controlled group defined. For purposes of this section, the term “controlled group” has the meaning given to such term by section 1563(a), except that—'''<br />
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''' (A) “more than 50 percent” shall be substituted for “at least 80 percent” each place it appears in section 1563(a), and'''<br />
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''' (B) the determination shall be made without regard to subsections (a)(4) and (e)(3)(C) of section 1563.'''<br />
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''' (2) Deferral (rather than denial) of loss from sale or exchange between membersIn the case of any loss from the sale or exchange of property which is between members of the same controlled group and to which subsection (a)(1) applies (determined without regard to this paragraph but with regard to paragraph (3))—'''<br />
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''' (A) subsections (a)(1) and (d) shall not apply to such loss, but'''<br />
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''' (B) such loss shall be deferred until the property is transferred outside such controlled group and there would be recognition of loss under consolidated return principles or until such other time as may be prescribed in regulations.'''<br />
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''' (3) Loss deferral rules not to apply in certain cases'''<br />
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''' (A) Transfer to DISC. For purposes of applying subsection (a)(1), the term “controlled group” shall not include a DISC.'''<br />
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''' (B) Certain sales of inventory, Except to the extent provided in regulations prescribed by the Secretary, subsection (a)(1) shall not apply to the sale or exchange of property between members of the same controlled group (or persons described in subsection (b)(10)) if—'''<br />
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''' (i) such property in the hands of the transferor is property described in section 1221(a)(1),'''<br />
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''' (ii) such sale or exchange is in the ordinary course of the transferor’s trade or business,'''<br />
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''' (iii) such property in the hands of the transferee is property described in section 1221(a)(1), and'''<br />
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''' (iv) the transferee or the transferor is a foreigncorporation.'''<br />
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''' (C) Certain foreign currency losses. To the extent provided in regulations, subsection (a)(1) shall not apply to any loss sustained by a member of a controlled group on the repayment of a loan made to another member of such group if such loan is payable in a foreign currency or is denominated in such a currency and such loss is attributable to a reduction in value of such foreign currency.'''<br />
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''' (D) Redemptions by fund-of-funds regulated investment companies. Except to the extent provided in regulations prescribed by the Secretary, subsection (a)(1) shall not apply to any distribution in redemption of stock of a regulated investment company if—'''<br />
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''' (i) such company issues only stock which is redeemable upon the demand of the stockholder, and'''<br />
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''' (ii) such redemption is upon the demand of another regulated investment company.'''<br />
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''' (4) Determination of relationship resulting in disallowance of loss, for purposes of other provisions. For purposes of any other section of this title which refers to a relationship which would result in a disallowance of losses under this section, deferral under paragraph (2) shall be treated as disallowance.'''<br />
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'''(g) Coordination with section 1041. Subsection (a)(1) shall not apply to any transfer described in section 1041(a) (relating to transfers of property between spouses or incident to divorce).'''<br />
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Related party sales <br />
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● 267(a) prevents manipulation by disallowing any otherwise deductible loss if the loss results from the sale or exchange of property to a related person<br />
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● 267(b) spells out specific relationships that will trigger disallowance (in-laws are not related) <br />
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'''Limitation on the Deductibility of Capital Losses''' <br />
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{| class="wikitable"<br />
|'''26 U.S. Code § 1211 - Limitation on capital losses'''<br />
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'''(a) Corporations. In the case of a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of gains from such sales or exchanges.'''<br />
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'''(b) Other taxpayers. In the case of a taxpayer other than a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges, plus (if such losses exceed such gains) the lower of—'''<br />
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''' (1) $3,000 ($1,500 in the case of a married individual filing a separate return), or'''<br />
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''' (2) the excess of such losses over such gains.'''<br />
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Deducting Capital Losses: The $3,000 Bonus<br />
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● Capital loss → a loss arising from the sale or exchange of a capital asset<br />
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● If the capital asset was held by the TP for more than one year prior to the sale or exchange, the TP has a '''long-term capital loss'''.<br />
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● If the TP held the asset for one year or less, the TP has a '''short-term capital loss'''. <br />
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1211(b) → generally limits the deductibility of capital losses to the extent of capital gains; also contains a TP-friendly bonus, if capital losses '''exceed''' capital gains (statute: “net capital loss”), up to $3,000 of the excess can be deducted (i.e., up to $3,000 of net capital loss can be used to offset a TP’s ordinary income). <br />
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'''Carryover of Excess Capital Losses''' <br />
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{| class="wikitable"<br />
|'''26 U.S. Code § 1212 - Capital loss carrybacks and carryovers'''<br />
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'''(a) Corporations'''<br />
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''' (1) In general. If a corporation has a net capital loss for any taxable year (hereinafter in this paragraph referred to as the “loss year”), the amount thereof shall be—'''<br />
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''' (A) a capital loss carryback to each of the 3 taxable years preceding the loss year, but only to the extent—'''<br />
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''' (i) such loss is not attributable to a foreign expropriation capital loss, and'''<br />
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''' (ii) the carryback of such loss does not increase or produce a net operating loss (as defined in section 172(c)) for the taxable year to which it is being carried back;'''<br />
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''' (B) except as provided in subparagraph (C), a capital loss carryover to each of the 5 taxable years succeeding the loss year; and'''<br />
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''' (C) a capital loss carryover to each of the 10 taxable years succeeding the loss year, but only to the extent such loss is attributable to a foreign expropriation loss, and shall be treated as a short-term capital loss in each such taxable year. The entire amount of the net capital loss for any taxable year shall be carried to the earliest of the taxable years to which such loss may be carried, and the portion of such loss which shall be carried to each of the other taxable years to which such loss may be carried shall be the excess, if any, of such loss over the total of the capital gain net income for each of the prior taxable years to which such loss may be carried. For purposes of the preceding sentence, the capital gain net income for any such prior taxable year shall be computed without regard to the net capital loss for the loss year or for any taxable year thereafter. In the case of any net capital loss which cannot be carried back in full to a preceding taxable year by reason of clause (ii) of subparagraph (A), the capital gain net income for such prior taxable year shall in no case be treated as greater than the amount of such loss which can be carried back to such preceding taxable year upon the application of such clause (ii).'''<br />
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''' '''<br />
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''' (2) Definitions and special rules'''<br />
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''' (A) Foreign expropriation capital loss defined. For purposes of this subsection, the term “foreign expropriation capital loss” means, for any taxable year, the sum of the losses taken into account in computing the net capital loss for such year which are—'''<br />
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''' (i) losses sustained directly by reason of the expropriation, intervention, seizure, or similar taking of property by the government of any foreign country, any political subdivision thereof, or any agency or instrumentality of the foregoing, or'''<br />
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''' (ii) losses (treated under section 165(g)(1) as losses from the sale or exchange of capital assets) from securities which become worthless by reason of the expropriation, intervention, seizure, or similar taking of property by the government of any foreign country, any political subdivision thereof, or any agency or instrumentality of the foregoing.'''<br />
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''' (B) Portion of loss attributable to foreign expropriation capital loss. For purposes of paragraph (1), the portion of any net capital loss for any taxable year attributable to a foreign expropriation capital loss is the amount of the foreign expropriation capital loss for such year (but not in excess of the net capital loss for such year).'''<br />
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''' (C) Priority of application. For purposes of paragraph (1), if a portion of a net capital loss for any taxable year is attributable to a foreign expropriation capital loss, such portion shall be considered to be a separate net capital loss for such year to be applied after the other portion of such net capital loss.'''<br />
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''' (3) Regulated investment companies'''<br />
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''' (A) In general. If a regulated investment company has a net capital loss for any taxable year—'''<br />
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''' (i) paragraph (1) shall not apply to such loss,'''<br />
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''' (ii) the excess of the net short-term capital loss over the net long-term capital gain for such year shall be a short-term capital loss arising on the first day of the next taxable year, and'''<br />
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''' (iii) the excess of the net long-term capital loss over the net short-term capital gain for such year shall be a long-term capital loss arising on the first day of the next taxable year.'''<br />
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''' (B) Coordination with general rule. If a net capital loss to which paragraph (1) applies is carried over to a taxable year of a regulated investment company—'''<br />
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''' (i) Losses to which this paragraph applies. Clauses (ii) and (iii) of subparagraph (A) shall be applied without regard to any amount treated as a short-term capital loss under paragraph (1).'''<br />
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''' '''<br />
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''' (ii) Losses to which general rule applies. Paragraph (1) shall be applied by substituting “net capital loss for the loss year or any taxable year thereafter (other than a net capital loss to which paragraph (3)(A) applies)” for “net capital loss for the loss year or any taxable year thereafter”.'''<br />
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''' (4) Special rules on carrybacks. A net capital loss of a corporation shall not be carried back under paragraph (1)(A) to a taxable year—'''<br />
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''' (A) for which it is a regulated investment company (as defined in section 851), or'''<br />
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''' (B) for which it is a real estate investment trust (as defined in section 856).''' <br />
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'''(b) Other taxpayers'''<br />
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''' (1) In general. If a taxpayer other than a corporation has a net capital loss for any taxable year—'''<br />
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''' (A) the excess of the net short-term capital loss over the net long-term capital gain for such year shall be a short-term capital loss in the succeeding taxable year, and'''<br />
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''' (B) the excess of the net long-term capital loss over the net short-term capital gain for such year shall be a long-term capital loss in the succeeding taxable year.'''<br />
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''' (2) Treatment of amounts allowed under section 1211(b)(1) or (2)'''<br />
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''' (A) In general. For purposes of determining the excess referred to in subparagraph (A) or (B) of paragraph (1), there shall be treated as a short-term capital gain in the taxable year an amount equal to the lesser of—'''<br />
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''' (i) the amount allowed for the taxable year under paragraph (1) or (2) of section 1211(b), or'''<br />
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''' (ii) the adjusted taxable income for such taxable year.'''<br />
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''' (B) Adjusted taxable income. For purposes of subparagraph (A), the term “adjusted taxable income” means taxable income increased by the sum of—'''<br />
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''' (i) the amount allowed for the taxable year under paragraph (1) or (2) of section 1211(b), and'''<br />
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''' (ii) the deduction allowed for such year under section 151 or any deduction in lieu thereof.'''<br />
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'''For purposes of the preceding sentence, any excess of the deductions allowed for the taxable year over the gross income for such year shall be taken into account as negative taxable income.''' <br />
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'''(c) Carryback of losses from section 1256 contracts to offset prior gains from such contracts'''<br />
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''' (1) In general. If a taxpayer (other than a corporation) has a net section 1256 contracts loss for the taxable year and elects to have this subsection apply to such taxable year, the amount of such net section 1256 contracts loss—'''<br />
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''' (A) shall be a carryback to each of the 3 taxable years preceding the loss year, and'''<br />
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''' (B) to the extent that, after the application of paragraphs (2) and (3), such loss is allowed as a carryback to any such preceding taxable year—'''<br />
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''' (i) 40 percent of the amount so allowed shall be treated as a short-term capital loss from section 1256 contracts, and'''<br />
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''' (ii) 60 percent of the amount so allowed shall be treated as a long-term capital loss from section 1256 contracts.'''<br />
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''' (2) Amount carried to each taxable year. The entire amount of the net section 1256 contracts loss for any taxable year shall be carried to the earliest of the taxable years to which such loss may be carried back under paragraph (1). The portion of such loss which shall be carried to each of the 2 other taxable years to which such loss may be carried back shall be the excess (if any) of such loss over the portion of such loss which, after the application of paragraph (3), was allowed as a carryback for any prior taxable year.'''<br />
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''' (3) Amount which may be used in any prior taxable year. An amount shall be allowed as a carryback under paragraph (1) to any prior taxable year only to the extent—'''<br />
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''' (A) such amount does not exceed the net section 1256 contract gain for such year, and'''<br />
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''' (B) the allowance of such carryback does not increase or produce a net operating loss (as defined in section 172(c)) for such year.'''<br />
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''' (4) Net section 1256 contracts loss. For purposes of paragraph (1), the term “net section 1256 contracts loss” means the lesser of—'''<br />
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''' (A) the net capital loss for the taxable year determined by taking into account only gains and losses from section 1256 contracts, or'''<br />
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''' (B) the sum of the amounts which, but for paragraph (6)(A), would be treated as capital losses in the succeeding taxable year under subparagraphs (A) and (B) of subsection (b)(1).'''<br />
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''' (5) Net section 1256 contract gain. For purposes of paragraph (1)—'''<br />
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''' (A) In general. The term “net section 1256 contract gain” means the lesser of—'''<br />
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''' (i) the capital gain net income for the taxable year determined by taking into account only gains and losses from section 1256 contracts, or'''<br />
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''' (ii) the capital gain net income for the taxable year.'''<br />
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''' (B) Special rule. The net section 1256 contract gain for any taxable year before the loss year shall be computed without regard to the net section 1256 contracts loss for the loss year or for any taxable year thereafter.'''<br />
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''' (6) Coordination with carryforward provisions of subsection (b)(1)'''<br />
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''' (A) Carryforward amount reduced by amount used as carryback. For purposes of applying subsection (b)(1), if any portion of the net section 1256 contracts loss for any taxable year is allowed as a carryback under paragraph (1) to any preceding taxable year—'''<br />
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''' (i) 40 percent of the amount allowed as a carryback shall be treated as a short-term capital gain for the loss year, and'''<br />
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''' (ii) 60 percent of the amount allowed as a carryback shall be treated as a long-term capital gain for the loss year.'''<br />
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''' (B) Carryover loss retains character as attributable to section 1256 contract. Any amount carried forward as a short-term or long-term capital loss to any taxable year under subsection (b)(1) (after the application of subparagraph (A)) shall, to the extent attributable to losses from section 1256 contracts, be treated as loss from section 1256 contracts for such taxable year.'''<br />
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''' (7) Other definitions and special rules. For purposes of this subsection—'''<br />
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''' (A)Section 1256 contract. The term “section 1256 contract” means any section 1256 contract (as defined in section 1256(b)) to which section 1256 applies.'''<br />
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''' (B) Exclusion for estates and trusts. This subsection shall not apply to any estate or trust.'''<br />
|} <br />
<br />
Carryover of Excess Capital Losses → under 1212(b)(1), if the TP’s net capital loss exceeds the $3,000 bonus amount, then the non-deductible portion carries over to the next taxable year. <br />
<br />
EXAMPLE → For Year One, TP, an individual, recognized $5,000 in long-term capital gains and $3,000 in long-term capital losses; TP has no other capital gains or losses; the long-term capital losses are fully deductible and offset the long-term capital gains; TP has a “net capital gain” of $2,000 (which will be taxed at a preferential rate under 1(h). <br />
<br />
TP also recognized $4,000 in short-term capital gains and $9,000 in short-term capital losses in Year One; the total capital losses in Year One ($12,000) exceed the total capital gains ($9,000) by $3,000. Under 1211(b), however, TP may deduct all of the capital losses in Year One because this excess does not exceed $3,000; the $12,000 deduction will offset all of TP’s capital gains ($9,000) and even $3,000 of ordinary income from Year One. <br />
<br />
{| class="wikitable"<br />
| <br />
|Long-Term<br />
|Short-Term<br />
|TOTALS<br />
|-<br />
|Gains<br />
|$5,000<br />
|$4,000<br />
|$9,000<br />
|-<br />
|Losses<br />
|($3,000)<br />
|($9,000)<br />
|$12,000<br />
|-<br />
|Net<br />
|$2,000<br />
|($5,000)<br />
|($3,000)<br />
|} <br />
<br />
If total capital losses exceeds total capital gains by more than $3,000, under 1211(b), TP can deduct $3,000 of this excess in Year One; the remaining $$ comproses TP’s “net capital loss” → under 1212(b), that net capital loss will carry over to Year Two; to determine the flavor of the carryover amount 1212(b)(2)(A) tells us to treat the $3,000 bonus as a short-term capital gain.<br />
<br />
● In Year Two, the entire $$ carryover will be flavored as a short-term capital loss and TP can use that carryover amount to offset capital gains (and maybe up to $3,000 of ordinary income) recognized in Year Two.<br />
<br />
'''Transactions in Property''' <br />
<br />
{| class="wikitable"<br />
|Amount Realized (AR)<br />
<br />
- Adjusted Basis (AB)<br />
<br />
------------------------------<br />
<br />
Realized Gain (RG)<br />
|} <br />
{| class="wikitable"<br />
| Adjusted Basis (AB)<br />
<br />
- Amount Realized (AR)<br />
<br />
------------------------------<br />
<br />
Realized Loss (RL)<br />
|}<br />
<br />
<br />
'''The Impact of Debt Relief on Amount Realized'''<br />
<br />
''1001; 1012; 1014(a); 1016(a)''<br />
<br />
Recourse debt → one in which the lender has recourse against more than just property securing the loan; the borrower is personally on the hook for the money <br />
<br />
Nonrecourse debt → debt where the lender can go after the collateral on the loan (usually property) but not the borrower individually. <br />
<br />
'''''Debt incurred is included in basis and any relief from that debt is included in amount realized.''''' <br />
<br />
'''For recourse debt…''' <br />
<br />
EXAMPLE → A borrows $200 from the bank and uses $300 of her own funds to purchase a capital asset for $500 (agreed to recourse debt)<br />
<br />
# Borrowing $200 from the bank does not give rise to gross income for A, because A’s repayment obligation offsets any “accession to wealth” from receipt of the loan proceeds<br />
# Because A’s repayment obligation to Bank is part of her “cost” in acquiring the purchased asset, A’s basis in the asset is now $500.<br />
# IF A sells the purchased asset 13 months later to an unrelated buyer and the FMV is $900 →<br />
# STEP<br />
ONE: GROSS INCOME<br />
## '''''How much will the buyer pay for the asset?''''' Since the asset still secures A’s repayment obligation, the buyer will not pay the full $900 to A; if A defaults, the Bank would foreclose on the asset and the buyer could lose $200 of the asset’s value to the bank; buyer will either '''assume the debt''' and pay the seller an amount of cash equal to the excess of the asset’s value over the amount of the debt, or the buyer will take the property '''subject to the seller’s liability''' and pay the seller an amount of cash equal to the seller’s equity<br />
### Buyer here would pay $700 to A and either assume the liability to the Bank or take the property subject to the risk of A’s default<br />
## '''''What is the amount realized by A?''''' The amount of a recourse liability secured by transferred property is included in the seller’s amount realized; the liability has shifted to the buyer and is no longer the seller’s problem.<br />
### A’s amount realized is $900 ($700 cash and $200 debt relief) no matter whether the buyer assumes the debt or takes the asset subject to the debt<br />
## '''''What is the flavor of A’s gain?''''' By disposing of the debt in the same transaction as the underlying capital asset, the gain allocable to the debt relief piggybacks onto the flavor of the transferred asset.<br />
### With an amount realized of $900, A realizes a gain of $400 on the sale (amount realized of $900 less adjusted basis of $500); treated as a long-term capital gain since it was held for 13 months and will get preferential tax treatment under 1(h)<br />
### The entire gain is eligible for the preferential tax treatment even though a portion is allocable to A’s debt relief, this is different than if the Bank forgave or cancelled the debt (treated as COD income and ordinary income under 1). <br />
<br />
IF the amount of the debt is higher than the value of the asset → if the lender agrees not to pursue a claim against the seller for the difference, the lender effectively relieves the seller of the excess debt which would then be treated as COD income. <br />
<br />
'''BUT for nonrecourse debt...''' <br />
<br />
<u>Crane v. Commissioner (1947)</u> - SCOTUS<br />
<br />
RULE: The amount realized in the disposition of property subject to an unassumed mortgage includes the amount of the mortgage.<br />
<br />
Case Notes: <br />
<br />
● A taxpayer’s gain from the disposition of property is calculated by subtracting the adjusted basis from the amount realized. <br />
<br />
● The adjusted basis is found by adjusting the original basis for certain factors, such as depreciation; the amount realized is calculated by adding any money and property received. <br />
<br />
● Where the taxpayer receives the property from a decedent’s estate, the original basis is the fair market value at the time of receipt. <br />
<br />
● In order to ascertain the adjusted basis and amount realized for the property, it is first necessary to determine what the term “property” refers to. <br />
<br />
○ First, the plain meaning of the term suggests that “property” refers to the physical thing that is owned. <br />
<br />
○ Second, administrative regulations have used the term to refer to physical property. <br />
<br />
○ Third, in other provisions of the Revenue Code, Congress clearly distinguishes between property and equity and there is no indication that Congress interchanges the two terms. <br />
<br />
○ Finally, if property referred to equity, depreciation deductions based on equity would be miniscule; or, if depreciation deductions were based on the actual value of the property and deducted from an equity basis, negative deductions would result. <br />
<br />
● Interpreting the term to mean equity would negate the purpose of allowing depreciation deductions in the first place. <br />
<br />
● If property is based on equity, the taxpayer’s basis would change every time a mortgage payment is made, causing a great administrative burden on both the Commissioner and taxpayers. <br />
<br />
● It makes no difference whether the taxpayer is personally liable for the mortgage or not. A taxpayer who sells property subject to a mortgage receives a benefit equal to the value of the mortgage. <br />
<br />
● It is not unconstitutional to adjust TP’s cost basis by the amount of the depreciation deductions TP took on the property, in order to determine how much TP has gained from the sale. <br />
<br />
<u>Commissioner v. Tufts (1983)</u> - SCOTUS<br />
<br />
RULE: The amount realized in the disposition of property subject to a nonrecourse mortgage includes the entire amount of the mortgage regardless of whether the mortgage exceeds the fair market value of the property. <br />
<br />
Case Notes:<br />
<br />
● In <u>Crane</u>, this Court held that a taxpayer who sells property subject to a nonrecourse mortgage must include the unpaid balance of the mortgage in the amount realized. <br />
<br />
● Generally, with a nonrecourse mortgage, the mortgager is not personally liable for the loan. The mortgage is secured by property, so that the mortgager is only liable up to the fair market value of the property. <br />
<br />
● Upon sale of the property subject to a nonrecourse loan, the mortgager must calculate the amount realized. <br />
<br />
● The amount realized includes the sum of money and property received, as well as any debts the mortgager is relieved of through the transaction. <br />
<br />
● Though a taxpayer could technically only be relieved of liability equal in value to the fair market value of the property, the mortgager must include the entire amount of the unpaid mortgage in the amount realized. This is because the taxpayer receives certain benefits based on the assumption that the taxpayer is obligated to repay the entire nonrecourse mortgage. <br />
<br />
● For instance, the taxpayer receives a nonrecourse mortgage tax-free, since it is money the taxpayer must eventually pay back. If, after receiving the mortgage tax-free, the taxpayer does not include the entire unpaid loan in the amount realized upon disposition of the property, he receives the amount in excess of the fair market value of the property tax-free. <br />
<br />
● A taxpayer is allowed to include the entire amount of a nonrecourse loan in his cost basis of the property because he is expected to repay the entire loan. If he is not correspondingly required to include the entire unpaid loan in the amount realized, the taxpayer would receive an untaxed increase in basis. <br />
<br />
● To prevent such incongruities, a taxpayer must include the entire unpaid amount of a nonrecourse mortgage in his amount realized, regardless of whether the mortgage exceeds the fair market value of the property. <br />
<br />
'''Flavor''' <br />
<br />
'''Capital Assets''' <br />
<br />
''1221(a); 1222; 1223'' <br />
<br />
Capital Assets --<br />
<br />
● Defined in 1221(a); “negative definition” - if not included in list, it '''<u>IS</u>''' a capital asset<br />
<br />
● Overarching themes:<br />
<br />
○ Assets that are held to '''produce ordinary income''' are generally not capital assets (this includes inventory and other property held for sale to customers, buildings and equipment used in a business activity, certain IP rights that generate royalties, and supplies consumed in the ordinary course of business)<br />
<br />
○ Assets where '''gain results from the efforts of the TP''' and not from the mere passage of time are likely not capital assets (such as works of art, etc.) <br />
<br />
Section 1221(a)(1) lists three assets that do not qualify as capital assets:<br />
<br />
(1) Stock in trade; ''(raw materials used to manufacture or produce inventory property)''<br />
<br />
(2) Inventory property; and<br />
<br />
(3) Property held primarily for sale to customers in the ordinary course of business <br />
<br />
<u>Byram v. United States (1983)</u> - 5th Cir.<br />
<br />
RULE: For federal tax purposes, property held primarily for sale to customers in the ordinary course of business is ordinary income rather than a capital asset.<br />
<br />
Case Notes: <br />
<br />
● Property held primarily for sale to customers in the ordinary course of a taxpayer’s business is not a capital asset, thus subjecting it to a higher rate of taxation as ordinary income. <br />
<br />
● The issue of whether a taxpayer is holding property for sale to customers in the ordinary course of business is a factual issue of intent. <br />
<br />
● Seven-factor test to determine that TP’s purpose for holding the realty was not primarily for sale to customers in the ordinary course of his business; “seven pillars of capital gains treatment”<br />
<br />
(1) The nature and purpose of the acquisition of the property and the duration of the ownership;<br />
<br />
(2) The extent and nature of the TP’s efforts to sell the property;<br />
<br />
(3) The number, extent, continuity and substantiality of the sales; (IMPORTANT)<br />
<br />
(4) The extent of subdividing, developing, and advertising to increase sales;<br />
<br />
(5) The use of a business office for the sale of the property;<br />
<br />
(6) The character and degree of supervision or control exercised by the TP over any representative selling the property; and<br />
<br />
(7) The time and effort the TP habitually devoted to the sales. <br />
<br />
● These factors are known as the <u>Winthrop</u> factors and are not all weighed the same<br />
<br />
● <br />
<br />
{| class="wikitable"<br />
|'''<u>Winthrop</u> Factors'''<br />
<br />
(1) The nature and purpose of the acquisition of the property and the duration of the ownership;<br />
<br />
(2) The extent and nature of the TP’s efforts to sell the property;<br />
<br />
(3) The number, extent, continuity and substantiality of the sales; (IMPORTANT)<br />
<br />
(4) The extent of subdividing, developing, and advertising to increase sales;<br />
<br />
(5) The use of a business office for the sale of the property;<br />
<br />
(6) The character and degree of supervision or control exercised by the TP over any representative selling the property; and<br />
<br />
(7) The time and effort the TP habitually devoted to the sales. <br />
|} <br />
'''Futures contract→ a contract to buy a fixed amount of a commodity at a set price at some specific date in the future (e.g. a buyer promises to buy a seller’s corn at $10 per bushel in three months); the seller benefits because the seller knows the prices at which the product can be sold, and the buyer benefits because there is a fixed price for the manufacturing inputs and the buyer can plan accordingly.'''<br />
Many investors buy futures, not for the product, but for the bet on whether the price of the underlying commodity will rise or fall<br />
<br />
● if the price of a commodity goes up, the long future is worth more because a person could purchase the product for less than the sales price agreed to in the contract<br />
<br />
● if the price goes down, below the future price, the future is worthless because you can buy the product on the open market <br />
<br />
<u>Corn Products Refining Co. v. Commissioner (1955)</u> - SCOTUS<br />
<br />
RULE: For federal tax purposes, assets held by a business to hedge operating risks are not capital assets. <br />
<br />
Case Notes:<br />
<br />
● Assets bought and sold to hedge risks associated with an operating business are not capital assets under 26 U.S.C. § 1221. <br />
<br />
● If a taxpayer’s ordinary business activities involve hedging what might otherwise be considered capital assets, such as real estate or securities, the taxpayer’s gains or losses from the sale of those assets constitute ordinary income or losses, not capital gains or losses. <br />
<br />
● Investments, including investments in futures-commodity contracts, are capital assets.<br />
<br />
● <u>Corn Products</u> does not create a common-law exception to the definition of capital asset but instead found that the futures were surrogates for inventory<br />
<br />
● Definition of “capital asset” must be construed narrowly and its exceptions defined broadly <br />
<br />
<u>Arkansas Best</u> → motivation of the customer is irrelevant; if it falls within the definition, the gain or sale will be capital <br />
<br />
'''Section 1221(a)(7)''' → now specifically excludes from the definition of capital asset “hedging transactions” identified by the TP <br />
<br />
'''Section 1221(a)(8)''' → excludes supplies regularly used by the TP in a trade or business. <br />
<br />
'''Section 1237''' → Safe harbor for those who own real property to retain investment status rather than being treated like a broker. <br />
<br />
'''Holding Periods''' <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 1222 - Other terms relating to capital gains and losses'''<br />
<br />
'''For purposes of this subtitle—''' <br />
<br />
'''(1) Short-term capital gain. The term “short-term capital gain” means gain from the sale or exchange of a capital asset held for not more than 1 year, if and to the extent such gain is taken into account in computing gross income.'''<br />
<br />
'''(2) Short-term capital loss. The term “short-term capital loss” means loss from the sale or exchange of a capital asset held for not more than 1 year, if and to the extent that such loss is taken into account in computing taxable income.'''<br />
<br />
'''(3) Long-term capital gain. The term “long-term capital gain” means gain from the sale or exchange of a capital asset held for more than 1 year, if and to the extent such gain is taken into account in computing gross income.'''<br />
<br />
'''(4) Long-term capital loss. The term “long-term capital loss” means loss from the sale or exchange of a capital asset held for more than 1 year, if and to the extent that such loss is taken into account in computing taxable income.'''<br />
<br />
'''(5) Net short-term capital gain. The term “net short-term capital gain” means the excess of short-term capital gains for the taxable year over the short-term capital losses for such year.'''<br />
<br />
'''(6) Net short-term capital loss. The term “net short-term capital loss” means the excess of short-term capital losses for the taxable year over the short-term capital gains for such year.'''<br />
<br />
'''(7) Net long-term capital gain. The term “net long-term capital gain” means the excess of long-term capital gains for the taxable year over the long-term capital losses for such year.'''<br />
<br />
'''(8) Net long-term capital loss. The term “net long-term capital loss” means the excess of long-term capital losses for the taxable year over the long-term capital gains for such year.'''<br />
<br />
'''(9) Capital gain net income. The term “capital gain net income” means the excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges.'''<br />
<br />
'''(10) Net capital loss. The term “net capital loss” means the excess of the losses from sales or exchanges of capital assets over the sum allowed under section 1211. In the case of a corporation, for the purpose of determining losses under this paragraph, amounts which are short-term capital losses under section 1212(a)(1) shall be excluded.'''<br />
<br />
'''(11) Net capital gain. The term “net capital gain” means the excess of the net long-term capital gain for the taxable year over the net short-term capital loss for such year.'''<br />
|} <br />
<br />
Section 1222 → requires netting of “long-term” and “short-term” capital gains and losses; in certain situations, a TP may add the holding period of another owner or add the holding period from another asset. (TACKING RELEVANT FOR DETERMINING WHETHER THE 13 MONTH MINIMUM FOR LONG TERM HAS BEEN MET) <br />
<br />
Section 1223 → lists various situations where “tacking” of holding periods is allowed; unless one of these situations is present, a TP’s holding period begins upon acquisition.<br />
<br />
● For example, if a TP exchanges one capital asset for another in a transaction in which the taxpayer does not recognize gain or loss (a so-called “nonrecognition transaction” → NRT), the TP usually takes the new asset with a basis equal to the TP’s basis in the property surrendered (i.e. the gain or loss from the surrendered asset is preserved in the acquired asset”<br />
<br />
● 1223(1) → the TP’s holding period in the surrendered asset also carries over to the acquired asset; if a TP exchanges an asset held for five years for another capital asset in a NRT, the newly acquired asset is deemed to have been held for five years (and immediate sale would produce long-term cap gain or loss). <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 1223 - Holding period of property'''<br />
<br />
'''For purposes of this subtitle—''' <br />
<br />
'''(1) In determining the period for which the taxpayer has held property received in an exchange, there shall be included the period for which he held the property exchanged if, under this chapter, the property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as the property exchanged, and, in the case of such exchanges the property exchanged at the time of such exchange was a capital asset as defined in section 1221 or property described in section 1231. For purposes of this paragraph—'''<br />
<br />
''' (A) an involuntary conversion described in section 1033 shall be considered an exchange of the property converted for the property acquired, and'''<br />
<br />
''' (B) a distribution to which section 355 (or so much of section 356 as relates to section 355) applies shall be treated as an exchange.''' <br />
<br />
'''(2) In determining the period for which the taxpayer has held property however acquired there shall be included the period for which such property was held by any other person, if under this chapter such property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as it would have in the hands of such other person.''' <br />
<br />
'''(3) In determining the period for which the taxpayer has held stock or securities the acquisition of which (or the contract or option to acquire which) resulted in the nondeductibility (under section 1091 relating to wash sales) of the loss from the sale or other disposition of substantially identical stock or securities, there shall be included the period for which he held the stock or securities the loss from the sale or other disposition of which was not deductible.''' <br />
<br />
'''(4) In determining the period for which the taxpayer has held stock or rights to acquire stock received on a distribution, if the basis of such stock or rights is determined under section 307, there shall (under regulations prescribed by the Secretary) be included the period for which he held the stock in the distributing corporation before the receipt of such stock or rights upon such distribution.''' <br />
<br />
'''(5) In determining the period for which the taxpayer has held stock or securities acquired from a corporation by the exercise of rights to acquire such stock or securities, there shall be included only the period beginning with the date on which the right to acquire was exercised.''' <br />
<br />
'''[(6) Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(80)(C), Dec. 19, 2014, 128 Stat. 4049.]''' <br />
<br />
'''(7) In determining the period for which the taxpayer has held a commodity acquired in satisfaction of a commodity futures contract (other than a commodity futures contract to which section 1256 applies) there shall be included the period for which he held the commodity futures contract if such commodity futures contract was a capital asset in his hands.''' <br />
<br />
'''[(8) Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(80)(C), Dec. 19, 2014, 128 Stat. 4049.]''' <br />
<br />
'''(9) In the case of a person acquiring property from a decedent or to whom property passed from a decedent (within the meaning of section 1014(b)), if—'''<br />
<br />
''' (A) the basis of such property in the hands of such person is determined under section 1014, and'''<br />
<br />
''' (B) such property is sold or otherwise disposed of by such person within 1 year after the decedent’s death,'''<br />
<br />
'''then such person shall be considered to have held such property for more than 1 year.''' <br />
<br />
'''(10) If—'''<br />
<br />
''' (A) property is acquired by any person in a transfer to which section 1040 applies,'''<br />
<br />
''' (B) such property is sold or otherwise disposed of by such person within 1 year after the decedent’s death, and'''<br />
<br />
''' (C) such sale or disposition is to a person who is a qualified heir (as defined in section 2032A(e)(1)) with respect to the decedent,'''<br />
<br />
'''then the person making such sale or other disposition shall be considered to have held such property for more than 1 year.''' <br />
<br />
'''(11) In determining the period for which the taxpayer has held qualified replacement property (within the meaning of section 1042(b)) the acquisition of which resulted under section 1042 in the nonrecognition of any part of the gain realized on the sale of qualified securities (within the meaning of section 1042(b)), there shall be included the period for which such qualified securities had been held by the taxpayer.''' <br />
<br />
'''(12) In determining the period for which the taxpayer has held property the acquisition of which resulted under section 1043 in the nonrecognition of any part of the gain realized on the sale of other property, there shall be included the period for which such other property had been held as of the date of such sale.''' <br />
<br />
'''(13) Except for purposes of sections 1202(a)(2), 1202(c)(2)(A), 1400B(b), and 1400F(b), in determining the period for which the taxpayer has held property the acquisition of which resulted under section 1045 or 1397B in the nonrecognition of any part of the gain realized on the sale of other property, there shall be included the period for which such other property has been held as of the date of such sale.''' <br />
<br />
'''(14) If the security to which a securities futures contract (as defined in section 1234B) relates (other than a contract to which section 1256 applies) is acquired in satisfaction of such contract, in determining the period for which the taxpayer has held such security, there shall be included the period for which the taxpayer held such contract if such contract was a capital asset in the hands of the taxpayer.''' <br />
<br />
'''(15) Cross reference.— For special holding period provision relating to certain partnership distributions, see section 735(b).'''<br />
|} <br />
<br />
'''The Sale or Exchange Requirement'''<br />
<br />
''1222'' <br />
<br />
Section 1222 → states that a capital gain or capital loss arises only upon the “sale or exchange” of a capital asset<br />
<br />
● If a TP disposes of a capital asset in a transaction not properly characterized as a sale or exchange, any resulting fain would be ordinary income (BAD) any any realized loss would be ordinary loss (OK, GOOD).<br />
<br />
● The requirement '''must be narrower''' than the requirement of a “sale or disposition of property” under 1001(a) (the provision providing the basic formula for computing realized gains and losses)<br />
<br />
● There are ways to dispose of property other than by sale or exchange (abandonment, forfeiture, etc.)<br />
<br />
● There are no overt rationale for limiting capital gain or loss characterization only to property dispositions that constitute a sale or exchange. <br />
<br />
'''Depreciation Recapture''' <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 1245 - Gain from dispositions of certain depreciable property'''<br />
<br />
'''(a) General rule'''<br />
<br />
''' (1) Ordinary income. Except as otherwise provided in this section, if section 1245 property is disposed of the amount by which the lower of—'''<br />
<br />
''' (A) the recomputed basis of the property, or'''<br />
<br />
''' (B)'''<br />
<br />
''' (i) in the case of a sale, exchange, or involuntary conversion, the amount realized, or'''<br />
<br />
''' (ii) in the case of any other disposition, the fair market value of such property,'''<br />
<br />
'''exceeds the adjusted basis of such property shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.'''<br />
<br />
''' (2) Recomputed basis. For purposes of this section—'''<br />
<br />
''' (A) In general. The term “recomputed basis” means, with respect to any property, its adjusted basis recomputed by adding thereto all adjustments reflected in such adjusted basis on account of deductions (whether in respect of the same or other property) allowed or allowable to the taxpayer or to any other person for depreciation or amortization.'''<br />
<br />
''' (B) Taxpayer may establish amount allowed. For purposes of subparagraph (A), if the taxpayer can establish by adequate records or other sufficient evidence that the amount allowed for depreciation or amortization for any period was less than the amount allowable, the amount added for such period shall be the amount allowed.'''<br />
<br />
''' (C) Certain deductions treated as amortization. Any deduction allowable under section 179, 179B, 179C, 179D, 179E, 181, 190, 193, or 194 shall be treated as if it were a deduction allowable for amortization.'''<br />
<br />
''' (3) Section 1245 property. For purposes of this section, the term “section 1245 property” means any property which is or has been property of a character subject to the allowance for depreciation provided in section 167 and is either—'''<br />
<br />
''' (A) personal property,'''<br />
<br />
''' (B) other property (not including a building or its structural components) but only if such other property is tangible and has an adjusted basis in which there are reflected adjustments described in paragraph (2) for a period in which such property (or other property)—'''<br />
<br />
''' (i) was used as an integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electrical energy, gas, water, or sewage disposal services,'''<br />
<br />
''' (ii) constituted a research facility used in connection with any of the activities referred to in clause (i), or'''<br />
<br />
''' (iii) constituted a facility used in connection with any of the activities referred to in clause (i) for the bulk storage of fungible commodities (including commodities in a liquid or gaseous state),'''<br />
<br />
''' (C) so much of any real property (other than any property described in subparagraph (B)) which has an adjusted basis in which there are reflected adjustments for amortization under section 169, 179, 179B, 179C, 179D, 179E, 185,[1] 188 (as in effect before its repeal by the Revenue Reconciliation Act of 1990), 190, 193, or 194,[2]'''<br />
<br />
''' (D) a single purpose agricultural or horticultural structure (as defined in section 168(i)(13)),'''<br />
<br />
''' (E) a storage facility (not including a building or its structural components) used in connection with the distribution of petroleum or any primary product of petroleum, or'''<br />
<br />
''' (F) any railroad grading or tunnel bore (as defined in section 168(e)(4)).''' <br />
<br />
'''(b) Exceptions and limitations'''<br />
<br />
''' (1) Gifts. Subsection (a) shall not apply to a disposition by gift.'''<br />
<br />
''' (2) Transfers at death. Except as provided in section 691 (relating to income in respect of a decedent), subsection (a) shall not apply to a transfer at death.'''<br />
<br />
''' (3) Certain tax-free transactions. If the basis of property in the hands of a transferee is determined by reference to its basis in the hands of the transferor by reason of the application of section 332, 351, 361, 721, or 731, then the amount of gain taken into account by the transferor under subsection (a)(1) shall not exceed the amount of gain recognized to the transferor on the transfer of such property (determined without regard to this section). Except as provided in paragraph (6), this paragraph shall not apply to a disposition to an organization (other than a cooperative described in section 521) which is exempt from the tax imposed by this chapter.'''<br />
<br />
''' (4) Like kind exchanges; involuntary conversions, etc.If property is disposed of and gain (determined without regard to this section) is not recognized in whole or in part under section 1031 or 1033, then the amount of gain taken into account by the transferor under subsection (a)(1) shall not exceed the sum of—'''<br />
<br />
''' (A) the amount of gain recognized on such disposition (determined without regard to this section), plus'''<br />
<br />
''' (B) the fair market value of property acquired which is not section 1245 property and which is not taken into account under subparagraph (A).'''<br />
<br />
''' (5) Property distributed by a partnership to a partner'''<br />
<br />
''' (A) In general. For purposes of this section, the basis of section 1245 property distributed by a partnership to a partner shall be deemed to be determined by reference to the adjusted basis of such property to the partnership.'''<br />
<br />
''' (B) Adjustments added back. In the case of any property described in subparagraph (A), for purposes of computing the recomputed basis of such property the amount of the adjustments added back for periods before the distribution by the partnership shall be—'''<br />
<br />
''' (i) the amount of the gain to which subsection (a) would have applied if such property had been sold by the partnership immediately before the distribution at its fair market value at such time, reduced by'''<br />
<br />
''' (ii) the amount of such gain to which section 751(b) applied.'''<br />
<br />
''' (6) Transfers to tax-exempt organization where property will be used in unrelated business'''<br />
<br />
''' (A) In general. The second sentence of paragraph (3) shall not apply to a disposition of section 1245 property to an organization described in section 511(a)(2) or 511(b)(2) if, immediately after such disposition, such organization uses such property in an unrelated trade or business (as defined in section 513).'''<br />
<br />
''' (B) Later change in use. If any property with respect to the disposition of which gain is not recognized by reason of subparagraph (A) ceases to be used in an unrelated trade or business of the organization acquiring such property, such organization shall be treated for purposes of this section as having disposed of such property on the date of such cessation.'''<br />
<br />
''' (7) Timber property. In determining, under subsection (a)(2), the recomputed basis of property with respect to which a deduction under section 194 was allowed for any taxable year, the taxpayer shall not take into account adjustments under section 194 to the extent such adjustments are attributable to the amortizable basis of the taxpayer acquired before the 10th taxable year preceding the taxable year in which gain with respect to the property is recognized.'''<br />
<br />
''' (8) Disposition of amortizable section 197 intangibles'''<br />
<br />
''' (A) In general. If a taxpayer disposes of more than 1 amortizable section 197 intangible (as defined in section 197(c)) in a transaction or a series of related transactions, all such amortizable 197 intangibles shall be treated as 1 section 1245 property for purposes of this section.'''<br />
<br />
''' (B) Exception. Subparagraph (A) shall not apply to any amortizable section 197 intangible (as so defined) with respect to which the adjusted basis exceeds the fair market value.'''<br />
<br />
'''(c) Adjustments to basis. The Secretary shall prescribe such regulations as he may deem necessary to provide for adjustments to the basis of property to reflect gain recognized under subsection (a).'''<br />
<br />
'''(d) Application of section. This section shall apply notwithstanding any other provision of this subtitle.'''<br />
|} <br />
<br />
Section 1245 → error-correcting device<br />
<br />
● When a TP takes a depreciation on property, the TP’s basis is reduced by the amount of the depreciation<br />
<br />
● If the TP later sells that asset for more than the basis, at least some of that gain is, by definition, due to the previously taken depreciation<br />
<br />
● The TP took more depreciation than economic depreciation would have allowed so now they must pay tax on the difference<br />
<br />
● Applies to machines, equipment, and vehicles <br />
<br />
FIRST calculate your realized gain<br />
<br />
THEN calculate your recapture amount (amount realized - recomputed basis)<br />
<br />
RESULTING NUMBER tells you how much is allowed to be treated as capital gain (rather than ordinary income) <br />
<br />
Recomputed basis amount → take current actual basis and add it to any depreciation deductions you have received. <br />
<br />
If RESULTING NUMBER is a negative/loss (below zero) → all of your gain will be ordinary income <br />
<br />
Recapture only comes into play when you have a gain, it does not apply where there is a loss (if the realized gain/first calculation comes up as a loss, don’t even move on to recapture amount) <br />
<br />
EXAMPLE → A acquires depreciable equipment for use in their business at a cost of $100,000, makes no 179 election, and properly plans to claim straight-line depreciation deductions of $10,000 each year for 10 years; after 3 years of depreciation deductions, and ignoring the half-year convention, the TP’s basis in the equipment is $70,000. <br />
<br />
If TP sells the equipment to an unrelated buyer for $80,000 cash, TP realizes and recognizes $10,000 of gain (but what is the flavor?) <br />
<br />
● Under 1221(a)(2) → not a capital asset <br />
<br />
● BUT because TP held the equipment for more than a year, the gain is properly treated as a 1231 gain<br />
<br />
● That means '''there is a chance''' the gain could be treated as long-term capital gain under 1231(a)(1) <br />
<br />
BUT the $10,000 gain is entirely due to the fact that TP received a $10,000 deduction that offset '''ordinary income'''; to the extent the depreciation deduction was used to offset ordinary income, fairness dictates that gain attributable solely to depreciation should be treated as ordinary income and not long-term capital gain. <br />
<br />
In this example, 1245 would recharacterize the flavor of the gain as ordinary income<br />
<br />
● Under 1245(a)(1) → gain attributable to depreciation deductions (and not economic appreciation) '''must be''' taxed as ordinary income<br />
<br />
● This recharacterization of the gain is known as “'''depreciation recapture'''” → it is triggered by the need to account for the fact that prior depreciation deductions offset ordinary income <br />
<br />
Depreciation recapture and 1245<br />
<br />
● Under 1245 is limited to “section 1245” property (defined in 1245(a)(3)).<br />
<br />
● 1245(a)(3)(A) encompasses all depreciable personal property<br />
<br />
● In order to determine the portion of a realized gain that is attributable to prior depreciation deductions, the statute creates a device called '''recomputed basis'''. <br />
<br />
'''Recomputed Basis''' → calculated by adding to the adjusted basis all deductions allowed or allowable to the taxpayer or to any other person for depreciation or amortization<br />
<br />
→ the recomputed basis is then compared to the '''amount realized''' (in the event of a sale, exchange, or involuntary conversion of the property) or the '''fair market value''' of the property (in the case of any other disposition) <br />
<br />
'''''The smaller number is then applied against the taxpayer’s adjusted basis to determine the recapture amount, the portion of the gain that must be treated as ordinary income'''''. <br />
<br />
More 1245 rules →<br />
<br />
● 1245 does not apply where the taxpayer has a realized loss<br />
<br />
● 1245 requires the recognition of ordinary income even where the transaction would not otherwise be taxable <br />
<br />
'''Depreciation Recapture for Real Property: Section 1250''' <br />
<br />
Review:<br />
<br />
● TPs can depreciate the cost of real property used in a trade or business activity or held for investment<br />
<br />
● While the underlying land is not depreciable, structures on the land are subject to “exhaustion” or “wear and tear” and thus qualify for depreciation deductions<br />
<br />
● The depreciation deductions offset ordinary income and reduce the taxpayer’s basis in the subject property<br />
<br />
● When the taxpayer sells the real property, at least some portion of any resulting gain will be attributable to the prior depreciation deductions<br />
<br />
● FAIRNESS dictates that the portion of the realized gain attributable to prior depreciation deductions should be treated as ordinary income<br />
<br />
● Although real property used in a trade or business activity is not a capital asset under 1221(a)(2), gain from the sale of such property qualifies as 1231 gain if the taxpayer has held the property for more than one year under 1231(b)<br />
<br />
● If the taxpayer’s section 1231 gains exceed the taxpayer’s 1231 losses for the taxable year, the gains and losses are treated as long-term capital gains and losses, meaning any net gain will qualify for preferential tax treatment pursuant to 1231(a)(1). <br />
<br />
If the subject real property is held as '''investment property''', it is a capital asset to begin with and the resulting gain is automatically eligible for preferential tax rates if the subject property was held for more than a year, even though the property was depreciable in the hands of the taxpayer. <br />
<br />
To permit preferential tax treatment to a gain caused only by the taxpayer’s taking depreciation deductions to offset ordinary income is an unjustified double benefit → 1245 recapture does not apply to most depreciable real property like buildings and their permanent fixtures, SO… <br />
<br />
1250 <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 1250 - Gain from dispositions of certain depreciable realty'''<br />
<br />
'''(a) General rule. Except as otherwise provided in this section—'''<br />
<br />
''' (1) Additional depreciation after December 31, 1975'''<br />
<br />
''' (A) In general. If section 1250 property is disposed of after December 31, 1975, then the applicable percentage of the lower of—'''<br />
<br />
''' (i) that portion of the additional depreciation (as defined in subsection (b)(1) or (4)) attributable to periods after December 31, 1975, in respect of the property, or'''<br />
<br />
''' (ii) the excess of the amount realized (in the case of a sale, exchange, or involuntary conversion), or the fair market value of such property (in the case of any other disposition), over the adjusted basis of such property,'''<br />
<br />
'''shall be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.'''<br />
<br />
''' (B) Applicable percentage. For purposes of subparagraph (A), the term “applicable percentage” means—'''<br />
<br />
''' (i) in the case of section 1250 property with respect to which a mortgage is insured under section 221(d)(3) or 236 of the National Housing Act, or housing financed or assisted by direct loan or tax abatement under similar provisions of State or local laws and with respect to which the owner is subject to the restrictions described in section 1039(b)(1)(B) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990), 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full months;'''<br />
<br />
''' (ii) in the case of dwelling units which, on the average, were held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under the provisions of State or local law authorizing similar levels of subsidy for lower-income families, 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full months;'''<br />
<br />
''' (iii) in the case of section 1250 property with respect to which a depreciation deduction for rehabilitation expenditures was allowed under section 167(k), 100 percent minus 1 percentage point for each full month in excess of 100 full months after the date on which such property was placed in service;'''<br />
<br />
''' (iv) in the case of section 1250 property with respect to which a loan is made or insured under title V of the Housing Act of 1949, 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full months; and'''<br />
<br />
''' (v) in the case of all other section 1250 property, 100 percent. In the case of a building (or a portion of a building devoted to dwelling units), if, on the average, 85 percent or more of the dwelling units contained in such building (or portion thereof) are units described in clause (ii), such building (or portion thereof) shall be treated as property described in clause (ii). Clauses (i), (ii), and (iv) shall not apply with respect to the additional depreciation described in subsection (b)(4) which was allowed under section 167(k).'''<br />
<br />
''' (2) Additional depreciation after December 31, 1969, and before January 1, 1976'''<br />
<br />
''' (A) In general. If section 1250 property is disposed of after December 31, 1969, and the amount determined under paragraph (1)(A)(ii) exceeds the amount determined under paragraph (1)(A)(i), then the applicable percentage of the lower of—'''<br />
<br />
''' (i) that portion of the additional depreciation attributable to periods after December 31, 1969, and before January 1, 1976, in respect of the property, or'''<br />
<br />
''' (ii) the excess of the amount determined under paragraph (1)(A)(ii) over the amount determined under paragraph (1)(A)(i), shall also be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.''' <br />
<br />
''' (B) Applicable percentage. For purposes of subparagraph (A), the term “applicable percentage” means—'''<br />
<br />
''' (i) in the case of section 1250 property disposed of pursuant to a written contract which was, on July 24, 1969, and at all times thereafter, binding on the owner of the property, 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 20 full months;'''<br />
<br />
''' (ii) in the case of section 1250 property with respect to which a mortgage is insured under section 221(d)(3) or 236 of the National Housing Act, or housing financed or assisted by direct loan or tax abatement under similar provisions of State or local laws, and with respect to which the owner is subject to the restrictions described in section 1039(b)(1)(B) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990), 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 20 full months;'''<br />
<br />
''' (iii) in the case of residential rental property (as defined in section 167(j)(2)(B)) other than that covered by clauses (i) and (ii), 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full months;'''<br />
<br />
''' (iv) in the case of section 1250 property with respect to which a depreciation deduction for rehabilitation expenditures was allowed under section 167(k), 100 percent minus 1 percentage point for each full month in excess of 100 full months after the date on which such property was placed in service; and'''<br />
<br />
''' (v) in the case of all other section 1250 property, 100 percent. Clauses (i), (ii), and (iii) shall not apply with respect to the additional depreciation described in subsection (b)(4).'''<br />
<br />
''' (3) Additional depreciation before January 1, 1970'''<br />
<br />
''' (A) In general. If section 1250 property is disposed of after December 31, 1963, and the amount determined under paragraph (1)(A)(ii) exceeds the sum of the amounts determined under paragraphs (1)(A)(i) and (2)(A)(i), then the applicable percentage of the lower of—'''<br />
<br />
''' (i) that portion of the additional depreciation attributable to periods before January 1, 1970, in respect of the property, or'''<br />
<br />
''' (ii) the excess of the amount determined under paragraph (1)(A)(ii) over the sum of the amounts determined under paragraphs (1)(A)(i) and (2)(A)(i), shall also be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.'''<br />
<br />
''' (B) Applicable percentage. For purposes of subparagraph (A), the term “applicable percentage” means 100 percent minus 1 percentage point for each full month the property was held after the date on which the property was held for 20 full months.'''<br />
<br />
''' (4) Special rule. For purposes of this subsection, any reference to section 167(k) or 167(j)(2)(B) shall be treated as a reference to such section as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990.'''<br />
<br />
''' (5) Cross reference. For reduction in the case of corporations on capital gain treatment under this section, see section 291(a)(1).'''<br />
<br />
'''(b) Additional depreciation defined. For purposes of this section—'''<br />
<br />
''' (1) In general. The term “additional depreciation” means, in the case of any property, the depreciation adjustments in respect of such property; except that, in the case of property held more than one year, it means such adjustments only to the extent that they exceed the amount of the depreciation adjustments which would have resulted if such adjustments had been determined for each taxable year under the straight line method of adjustment.'''<br />
<br />
''' (2) Property held by lessee. In the case of a lessee, in determining the depreciation adjustments which would have resulted in respect of any building erected (or other improvement made) on the leased property, or in respect of any cost of acquiring the lease, the lease period shall be treated as including all renewal periods. For purposes of the preceding sentence—'''<br />
<br />
''' (A) the term “renewal period” means any period for which the lease may be renewed, extended, or continued pursuant to an option exercisable by the lessee, but'''<br />
<br />
''' (B) the inclusion of renewal periods shall not extend the period taken into account by more than ⅔ of the period on the basis of which the depreciation adjustments were allowed.'''<br />
<br />
''' (3) Depreciation adjustments. The term “depreciation adjustments” means, in respect of any property, all adjustments attributable to periods after December 31, 1963, reflected in the adjusted basis of such property on account of deductions (whether in respect of the same or other property) allowed or allowable to the taxpayer or to any other person for exhaustion, wear and tear, obsolescence, or amortization (other than amortization under section 168 (as in effect before its repeal by the Tax Reform Act of 1976), 169, 185 (as in effect before its repeal by the Tax Reform Act of 1986), 188 (as in effect before its repeal by the Revenue Reconciliation Act of 1990), 190, or 193). For purposes of the preceding sentence, if the taxpayer can establish by adequate records or other sufficient evidence that the amount allowed as a deduction for any period was less than the amount allowable, the amount taken into account for such period shall be the amount allowed.'''<br />
<br />
''' (4) Additional depreciation attributable to rehabilitation expenditures. The term “additional depreciation” also means, in the case of section 1250 property with respect to which a depreciation or amortization deduction for rehabilitation expenditures was allowed under section 167(k) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) or 191 (as in effect before its repeal by the Economic Recovery Tax Act of 1981), the depreciation or amortization adjustments allowed under such section to the extent attributable to such property, except that, in the case of such property held for more than one year after the rehabilitation expenditures so allowed were incurred, it means such adjustments only to the extent that they exceed the amount of the depreciation adjustments which would have resulted if such adjustments had been determined under the straight line method of adjustment without regard to the useful life permitted under section 167(k) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) or 191 (as in effect before its repeal by the Economic Recovery Tax Act of 1981).'''<br />
<br />
''' (5) Method of computing straight line adjustments. For purposes of paragraph (1), the depreciation adjustments which would have resulted for any taxable year under the straight line method shall be determined—'''<br />
<br />
''' (A) in the case of property to which section 168 applies, by determining the adjustments which would have resulted for such year if the taxpayer had elected the straight line method for such year using the recovery period applicable to such property, and'''<br />
<br />
''' (B) in the case any property to which section 168 does not apply, if a useful life (or salvage value) was used in determining the amount allowable as a deduction for any taxable year, by using such life (or value).''' <br />
<br />
'''(c) Section 1250 property. For purposes of this section, the term “section 1250 property” means any real property (other than section 1245 property, as defined in section 1245(a)(3)) which is or has been property of a character subject to the allowance for depreciation provided in section 167.'''<br />
<br />
'''(d) Exceptions and limitations'''<br />
<br />
''' '''<br />
<br />
''' (1) Gifts. Subsection (a) shall not apply to a disposition by gift.'''<br />
<br />
''' (2) Transfers at death. Except as provided in section 691 (relating to income in respect of a decedent), subsection (a) shall not apply to a transfer at death.'''<br />
<br />
''' (3) Certain tax-free transactions. If the basis of property in the hands of a transferee is determined by reference to its basis in the hands of the transferor by reason of the application of section 332, 351, 361, 721, or 731, then the amount of gain taken into account by the transferor under subsection (a) shall not exceed the amount of gain recognized to the transferor on the transfer of such property (determined without regard to this section). Except as provided in paragraph (9), this paragraph shall not apply to a disposition to an organization (other than a cooperative described in section 521) which is exempt from the tax imposed by this chapter.'''<br />
<br />
''' (4) Like kind exchanges; involuntary conversions, etc.'''<br />
<br />
''' (A) Recognition limit. If property is disposed of and gain (determined without regard to this section) is not recognized in whole or in part under section 1031 or 1033, then the amount of gain taken into account by the transferor under subsection (a) shall not exceed the greater of the following:'''<br />
<br />
''' (i) the amount of gain recognized on the disposition (determined without regard to this section), increased as provided in subparagraph (B), or'''<br />
<br />
''' (ii) the amount determined under subparagraph (C).'''<br />
<br />
''' (B) Increase for certain stock. With respect to any transaction, the increase provided by this subparagraph is the amount equal to the fair market value of any stock purchased in a corporation which (but for this paragraph) would result in nonrecognition of gain under section 1033(a)(2)(A).'''<br />
<br />
''' (C) Adjustment where insufficient section 1250 property is acquired. With respect to any transaction, the amount determined under this subparagraph shall be the excess of—'''<br />
<br />
''' (i) the amount of gain which would (but for this paragraph) be taken into account under subsection (a), over'''<br />
<br />
''' (ii) the fair market value (or cost in the case of a transaction described in section 1033(a)(2)) of the section 1250 property acquired in the transaction.'''<br />
<br />
''' (D) Basis of property acquired. In the case of property purchased by the taxpayer in a transaction described in section 1033(a)(2), in applying section 1033(b)(2), such sentence [1] shall be applied—'''<br />
<br />
''' (i) first solely to section 1250 properties and to the amount of gain not taken into account under subsection (a) by reason of this paragraph, and'''<br />
<br />
''' (ii) then to all purchased properties to which such sentence applies and to the remaining gain not recognized on the transaction as if the cost of the section 1250 properties were the basis of such properties computed under clause (i). In the case of property acquired in any other transaction to which this paragraph applies, rules consistent with the preceding sentence shall be applied under regulations prescribed by the Secretary.'''<br />
<br />
''' (E) Additional depreciation with respect to property disposed of. In the case of any transaction described in section 1031 or 1033, the additional depreciation in respect of the section 1250 property acquired which is attributable to the section 1250 property disposed of shall be an amount equal to the amount of the gain which was not taken into account under subsection (a) by reason of the application of this paragraph.'''<br />
<br />
''' (5) Property distributed by a partnership to a partner'''<br />
<br />
''' (A) In general. For purposes of this section, the basis of section 1250 property distributed by a partnership to a partner shall be deemed to be determined by reference to the adjusted basis of such property to the partnership.'''<br />
<br />
''' (B) Additional depreciation. In respect of any property described in subparagraph (A), the additional depreciation attributable to periods before the distribution by the partnership shall be—'''<br />
<br />
''' (i) the amount of the gain to which subsection (a) would have applied if such property had been sold by the partnership immediately before the distribution at its fair market value at such time and the applicable percentage for the property had been 100 percent, reduced by'''<br />
<br />
''' (ii) if section 751(b) applied to any part of such gain, the amount of such gain to which section 751(b) would have applied if the applicable percentage for the property had been 100 percent.'''<br />
<br />
''' (6) Transfers to tax-exempt organization where property will be used in unrelated business'''<br />
<br />
''' (A) In general. The second sentence of paragraph (3) shall not apply to a disposition of section 1250 property to an organization described in section 511(a)(2) or 511(b)(2) if, immediately after such disposition, such organization uses such property in an unrelated trade or business (as defined in section 513).'''<br />
<br />
''' (B) Later change in use. If any property with respect to the disposition of which gain is not recognized by reason of subparagraph (A) ceases to be used in an unrelated trade or business of the organization acquiring such property, such organization shall be treated for purposes of this section as having disposed of such property on the date of such cessation.'''<br />
<br />
''' (7) Foreclosure dispositions. If any section 1250 property is disposed of by the taxpayer pursuant to a bid for such property at foreclosure or by operation of an agreement or of process of law after there was a default on indebtedness which such property secured, the applicable percentage referred to in paragraph (1)(B), (2)(B), or (3)(B) of subsection (a), as the case may be, shall be determined as if the taxpayer ceased to hold such property on the date of the beginning of the proceedings pursuant to which the disposition occurred, or, in the event there are no proceedings, such percentage shall be determined as if the taxpayer ceased to hold such property on the date, determined under regulations prescribed by the Secretary, on which such operation of an agreement or process of law, pursuant to which the disposition occurred, began.'''<br />
<br />
'''(e) Holding period. For purposes of determining the applicable percentage under this section, the provisions of section 1223 shall not apply, and the holding period of section 1250 property shall be determined under the following rules:'''<br />
<br />
''' (1) Beginning of holding period. The holding period of section 1250 property shall be deemed to begin—'''<br />
<br />
''' (A) in the case of property acquired by the taxpayer, on the day after the date of acquisition, or'''<br />
<br />
''' (B) in the case of property constructed, reconstructed, or erected by the taxpayer, on the first day of the month during which the property is placed in service.'''<br />
<br />
''' (2) Property with transferred basis. If the basis of property acquired in a transaction described in paragraph (1), (2), or (3) of subsection (d) is determined by reference to its basis in the hands of the transferor, then the holding period of the property in the hands of the transferee shall include the holding period of the property in the hands of the transferor.'''<br />
<br />
'''(f) Special rules for property which is substantially improved'''<br />
<br />
''' (1) Amount treated as ordinary income. If, in the case of a disposition of section 1250 property, the property is treated as consisting of more than one element by reason of paragraph (3), then the amount taken into account under subsection (a) in respect of such section 1250 property as ordinary income shall be the sum of the amounts determined under paragraph (2).'''<br />
<br />
''' (2) Ordinary income attributable to an element. For purposes of paragraph (1), the amount taken into account for any element shall be the sum of a series of amounts determined for the periods set forth in subsection (a), with the amount for any such period being determined by multiplying—'''<br />
<br />
''' (A) the amount which bears the same ratio to the lower of the amounts specified in clause (i) or (ii) of subsection (a)(1)(A), in clause (i) or (ii) of subsection (a)(2)(A), or in clause (i) or (ii) of subsection (a)(3)(A), as the case may be, for the section 1250 property as the additional depreciation for such element attributable to such period bears to the sum of the additional depreciation for all elements attributable to such period, by'''<br />
<br />
''' (B) the applicable percentage for such element for such period.'''<br />
<br />
'''For purposes of this paragraph, determinations with respect to any element shall be made as if it were a separate property.'''<br />
<br />
''' (3) Property consisting of more than one element. In applying this subsection in the case of any section 1250 property, there shall be treated as a separate element—'''<br />
<br />
''' (A) each separate improvement,'''<br />
<br />
''' (B) if, before completion of section 1250 property, units thereof (as distinguished from improvements) were placed in service, each such unit of section 1250 property, and'''<br />
<br />
''' (C) the remaining property which is not taken into account under subparagraphs (A) and (B).'''<br />
<br />
''' (4) Property which is substantially improved. For purposes of this subsection—'''<br />
<br />
''' (A) In general. The term “separate improvement” means each improvement added during the 36–month period ending on the last day of any taxable year to the capital account for the property, but only if the sum of the amounts added to such account during such period exceeds the greatest of—'''<br />
<br />
''' (i) 25 percent of the adjusted basis of the property,'''<br />
<br />
''' (ii) 10 percent of the adjusted basis of the property, determined without regard to the adjustments provided in paragraphs (2) and (3) of section 1016(a), or'''<br />
<br />
''' (iii) $5,000. For purposes of clauses (i) and (ii), the adjusted basis of the property shall be determined as of the beginning of the first day of such 36–month period, or of the holding period of the property (within the meaning of subsection (e)), whichever is the later.'''<br />
<br />
''' (B) Exception. Improvements in any taxable year shall be taken into account for purposes of subparagraph (A) only if the sum of the amounts added to the capital account for the property for such taxable year exceeds the greater of—'''<br />
<br />
''' (i) $2,000, or'''<br />
<br />
''' (ii) one percent of the adjusted basis referred to in subparagraph (A)(ii), determined, however, as of the beginning of such taxable year. For purposes of this section, if the amount added to the capital account for any separate improvement does not exceed the greater of clause (i) or (ii), such improvement shall be treated as placed in service on the first day, of a calendar month, which is closest to the middle of the taxable year.'''<br />
<br />
''' (C) Improvement. The term “improvement” means, in the case of any section 1250 property, any addition to capital account for such property after the initial acquisition or after completion of the property.'''<br />
<br />
'''(g) Adjustments to basis. The Secretary shall prescribe such regulations as he may deem necessary to provide for adjustments to the basis of property to reflect gain recognized under subsection (a).'''<br />
<br />
'''(h) Application of section. This section shall apply notwithstanding any other provision of this subtitle.'''<br />
|} <br />
<br />
Section 1250 → appears to provide a recapture mechanism (but it does not)<br />
<br />
● '''1250(a)(1)(A)''' → In order to trigger a 1250 recapture, TP must have taken “additional depreciation” on depreciable real property<br />
<br />
● '''1250(b)(1) → Additional depreciation''' → generally defined as the excess of the amount of accelerated depreciation deductions allowed to the taxpayer over the amount that would have been allowed had the property been depreciated using the straight-line method<br />
<br />
● BUT pursuant to 168(b)(3), TPs with depreciable real property are required to use the straight-line method <br />
<br />
1250 is no longer effective to provide recapture for depreciable real property sold at a gain, but an indirect form of recapture sits in 1(h)(1)(D): <br />
<br />
{| class="wikitable"<br />
|'''26 U.S. Code § 1 - Tax imposed''' <br />
<br />
'''(h) Maximum capital gains rate'''<br />
<br />
''' (1) In general. If a taxpayer has a net capital gain for any taxable year, the tax imposed by this section for such taxable year shall not exceed the sum of—'''<br />
<br />
''' (A) a tax computed at the rates and in the same manner as if this subsection had not been enacted on the greater of—'''<br />
<br />
''' (i) taxable income reduced by the net capital gain; or'''<br />
<br />
''' (ii) the lesser of—'''<br />
<br />
''' (I) the amount of taxable income taxed at a rate below 25 percent; or'''<br />
<br />
''' (II) taxable income reduced by the adjusted net capital gain;'''<br />
<br />
''' (B) 0 percent of so much of the adjusted net capital gain (or, if less, taxable income) as does not exceed the excess (if any) of—'''<br />
<br />
''' (i) the amount of taxable income which would (without regard to this paragraph) be taxed at a rate below 25 percent, over'''<br />
<br />
''' (ii) the taxable income reduced by the adjusted net capital gain;'''<br />
<br />
''' (C) 15 percent of the lesser of—'''<br />
<br />
''' (i) so much of the adjusted net capital gain (or, if less, taxable income) as exceeds the amount on which a tax is determined under subparagraph (B), or'''<br />
<br />
''' (ii) the excess of—'''<br />
<br />
''' (I) the amount of taxable income which would (without regard to this paragraph) be taxed at a rate below 39.6 percent, over'''<br />
<br />
''' (II) the sum of the amounts on which a tax is determined under subparagraphs (A) and (B),'''<br />
<br />
''' (D) 20 percent of the adjusted net capital gain (or, if less, taxable income) in excess of the sum of the amounts on which tax is determined under subparagraphs (B) and (C),'''<br />
<br />
''' (E) 25 percent of the excess (if any) of—'''<br />
<br />
''' (i) the unrecaptured section 1250 gain (or, if less, the net capital gain (determined without regard to paragraph (11))), over'''<br />
<br />
''' (ii) the excess (if any) of—'''<br />
<br />
''' (I) the sum of the amount on which tax is determined under subparagraph (A) plus the net capital gain, over'''<br />
<br />
''' (II) taxable income; and'''<br />
<br />
''' (F) 28 percent of the amount of taxable income in excess of the sum of the amounts on which tax is determined under the preceding subparagraphs of this paragraph.'''<br />
<br />
''' (2) Net capital gain taken into account as investment income'''<br />
<br />
'''For purposes of this subsection, the net capital gain for any taxable year shall be reduced (but not below zero) by the amount which the taxpayer takes into account as investment income under section 163(d)(4)(B)(iii).'''<br />
<br />
''' (3) Adjusted net capital gain. For purposes of this subsection, the term “adjusted net capital gain” means the sum of—'''<br />
<br />
''' (A) net capital gain (determined without regard to paragraph (11)) reduced (but not below zero) by the sum of—'''<br />
<br />
''' (i) unrecaptured section 1250 gain, and'''<br />
<br />
''' (ii) 28-percent rate gain, plus'''<br />
<br />
''' (B) qualified dividend income (as defined in paragraph (11)).'''<br />
<br />
''' (4) 28-percent rate gain. For purposes of this subsection, the term “28-percent rate gain” means the excess (if any) of—'''<br />
<br />
''' (A) the sum of—'''<br />
<br />
''' (i) collectibles gain; and'''<br />
<br />
''' (ii) section 1202 gain, over'''<br />
<br />
''' (B) the sum of—'''<br />
<br />
''' (i) collectibles loss;'''<br />
<br />
''' (ii) the net short-term capital loss; and'''<br />
<br />
''' (iii) the amount of long-term capital loss carried under section 1212(b)(1)(B) to the taxable year.'''<br />
<br />
''' (5) Collectibles gain and loss. For purposes of this subsection—'''<br />
<br />
''' (A) In general. The terms “collectibles gain” and “collectibles loss” mean gain or loss (respectively) from the sale or exchange of a collectible (as defined in section 408(m) without regard to paragraph (3) thereof) which is a capital asset held for more than 1 year but only to the extent such gain is taken into account in computing gross income and such loss is taken into account in computing taxable income.'''<br />
<br />
''' (B) Partnerships, etc. For purposes of subparagraph (A), any gain from the sale of an interest in a partnership, S corporation, or trust which is attributable to unrealized appreciation in the value of collectibles shall be treated as gain from the sale or exchange of a collectible. Rules similar to the rules of section 751 shall apply for purposes of the preceding sentence.'''<br />
<br />
''' (6) Unrecaptured section 1250 gain. For purposes of this subsection—'''<br />
<br />
''' (A) In general. The term “unrecaptured section 1250 gain” means the excess (if any) of—'''<br />
<br />
''' (i) the amount of long-term capital gain (not otherwise treated as ordinary income) which would be treated as ordinary income if section 1250(b)(1) included all depreciation and the applicable percentage under section 1250(a) were 100 percent, over'''<br />
<br />
''' (ii) the excess (if any) of—'''<br />
<br />
''' (I) the amount described in paragraph (4)(B); over'''<br />
<br />
''' (II) the amount described in paragraph (4)(A).'''<br />
<br />
''' (B) Limitation with respect to section 1231 property. The amount described in subparagraph (A)(i) from sales, exchanges, and conversions described in section 1231(a)(3)(A) for any taxable year shall not exceed the net section 1231 gain (as defined in section 1231(c)(3)) for such year.'''<br />
<br />
''' (7)Section 1202 gain. For purposes of this subsection, the term “section 1202 gain” means the excess of—'''<br />
<br />
''' (A) the gain which would be excluded from gross income under section 1202 but for the percentage limitation in section 1202(a), over'''<br />
<br />
''' (B) the gain excluded from gross income under section 1202.'''<br />
<br />
''' (8) Coordination with recapture of net ordinary losses under section 1231. If any amount is treated as ordinary income under section 1231(c), such amount shall be allocated among the separate categories of net section 1231 gain (as defined in section 1231(c)(3)) in such manner as the Secretary may by forms or regulations prescribe.'''<br />
<br />
''' (9) Regulations. The Secretary may prescribe such regulations as are appropriate (including regulations requiring reporting) to apply this subsection in the case of sales and exchanges by pass-thru entities and of interests in such entities.'''<br />
<br />
''' (10) Pass-thru entity defined. For purposes of this subsection, the term “pass-thru entity” means—'''<br />
<br />
''' (A) a regulated investment company;'''<br />
<br />
''' (B) a real estate investment trust;'''<br />
<br />
''' (C) an S corporation;'''<br />
<br />
''' (D) a partnership;'''<br />
<br />
''' (E) an estate or trust;'''<br />
<br />
''' (F) a common trust fund; and'''<br />
<br />
''' (G) a qualified electing fund (as defined in section 1295).'''<br />
<br />
''' (11) Dividends taxed as net capital gain'''<br />
<br />
''' (A) In general. For purposes of this subsection, the term “net capital gain” means net capital gain (determined without regard to this paragraph) increased by qualified dividend income.'''<br />
<br />
''' (B) Qualified dividend income. For purposes of this paragraph—'''<br />
<br />
''' (i) In general. The term “qualified dividend income” means dividends received during the taxable year from—'''<br />
<br />
''' (I) domestic corporations, and'''<br />
<br />
''' (II) qualified foreign corporations.'''<br />
<br />
''' (ii) Certain dividends excluded. Such term shall not include—'''<br />
<br />
''' (I) any dividend from a corporation which for the taxable year of the corporation in which the distribution is made, or the preceding taxable year, is a corporation exempt from tax under section 501 or 521,'''<br />
<br />
''' (II) any amount allowed as a deduction under section 591 (relating to deduction for dividends paid by mutual savings banks, etc.), and'''<br />
<br />
''' (III) any dividend described in section 404(k).'''<br />
<br />
''' (iii) Coordination with section 246(c)Such term shall not include any dividend on any share of stock—'''<br />
<br />
''' (I) with respect to which the holding period requirements of section 246(c) are not met (determined by substituting in section 246(c) “60 days” for “45 days” each place it appears and by substituting “121-day period” for “91-day period”), or'''<br />
<br />
''' (II) to the extent that the taxpayer is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property.'''<br />
<br />
''' (C) Qualified foreign corporations'''<br />
<br />
''' (i) In general. Except as otherwise provided in this paragraph, the term “qualified foreign corporation” means any foreign corporation if—'''<br />
<br />
''' (I) such corporation is incorporated in a possession of the United States, or'''<br />
<br />
''' (II) such corporation is eligible for benefits of a comprehensive income tax treaty with the United States which the Secretary determines is satisfactory for purposes of this paragraph and which includes an exchange of information program.'''<br />
<br />
''' (ii) Dividends on stock readily tradable on United States securities market. A foreign corporation not otherwise treated as a qualified foreign corporation under clause (i) shall be so treated with respect to any dividend paid by such corporation if the stock with respect to which such dividend is paid is readily tradable on an established securities market in the United States.'''<br />
<br />
''' (iii) Exclusion of dividends of certain foreign corporations. Such term shall not include—'''<br />
<br />
''' (I) any foreign corporation which for the taxable year of the corporation in which the dividend was paid, or the preceding taxable year, is a passive foreign investment company (as defined in section 1297), and'''<br />
<br />
''' (II) any corporation which first becomes a surrogate foreign corporation (as defined in section 7874(a)(2)(B)) after the date of the enactment of this subclause, other than a foreign corporation which is treated as a domestic corporation under section 7874(b).'''<br />
<br />
''' (iv) Coordination with foreign tax credit limitation. Rules similar to the rules of section 904(b)(2)(B) shall apply with respect to the dividend rate differential under this paragraph.'''<br />
<br />
''' (D) Special rules'''<br />
<br />
''' (i) Amounts taken into account as investment income. Qualified dividend income shall not include any amount which the taxpayer takes into account as investment income under section 163(d)(4)(B).'''<br />
<br />
''' (ii) Extraordinary dividends. If a taxpayer to whom this section applies receives, with respect to any share of stock, qualified dividend income from 1 or more dividends which are extraordinary dividends (within the meaning of section 1059(c)), any loss on the sale or exchange of such share shall, to the extent of such dividends, be treated as long-term capital loss.'''<br />
<br />
''' (iii) Treatment of dividends from regulated investment companies and real estate investment trusts. A dividend received from a regulated investment company or a real estate investment trust shall be subject to the limitations prescribed in sections 854 and 857'''<br />
|} <br />
<br />
199A → Qualified Business Income<br />
<br />
● Reduction offered in 11 for C Corporations<br />
<br />
● No reduction for businesses operated as sole proprietorships, noncorporate entities like partnerships and LLCs, or S Corporations<br />
<br />
● Deduction will terminate at the end of 2025 and unavailable on 2026 tax returns unless Congress extends it -- 199A(i)</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=Income_Tax_Freeland/Outline&diff=42465Income Tax Freeland/Outline2022-05-31T22:52:15Z<p>Rezsue: Created page with "{{Infobox Text-Specific Outline |subject=Income Tax |text=Fundamentals of Federal Income Taxation: Cases and Materials |authors=James Freeland*Daniel Lathrope*Stephen Lind*Ric..."</p>
<hr />
<div>{{Infobox Text-Specific Outline<br />
|subject=Income Tax<br />
|text=Fundamentals of Federal Income Taxation: Cases and Materials<br />
|authors=James Freeland*Daniel Lathrope*Stephen Lind*Richard Stephens*<br />
|professor=Julian M. Fray<br />
}}<br />
'''Applicable Tax Rates'''<br />
<br />
<br />
Origination Clause → all tax bills must come out of the House. <br />
<br />
● Shell bill: the Senate receives a tax bill from the House, completely guts it (leaves it a shell of a bill), fills in its own provisions, passes it, and sends it back to the House.<br />
<br />
<br />
'''Court System'''<br />
<br />
<br />
Tax Court → same level as district court, subject to Circuit Court of Appeals in relevant district for binding authority; bench trials only (no jury); taxpayer does not need to pay first and seek a refund before bringing an action.<br />
<br />
<br />
District Court & US Court of Claims → taxpayer must pay the tax bill first, then seek a refund (bring action).<br />
<br />
<br />
The FIRST Tax Bill → February 28, 1913<br />
<br />
<br />
'''Federal Income Tax - Applicable Tax Rates'''<br />
<br />
<br />
Tax Cuts and Jobs Act (2017)<br />
<br />
● Tax breaks for individuals are temporary (easier to pass extensions)<br />
<br />
● Tax breaks for corporations are permanent<br />
<br />
● Result of lobbying efforts<br />
<br />
<br />
Authorities: lower tiers <u>do not</u> have authority outweighing higher tiers<br />
<br />
{| class="wikitable"<br />
|'''Tier 1'''<br />
|'''Tier 2'''<br />
|'''Tier 3'''<br />
|-<br />
|IRS Code<br />
<br />
Regulations<br />
<br />
Cases<br />
<br />
Treaties<br />
|Public Administrative Rulings<br />
<br />
Legislative History<br />
|Private Administrative Rulings<br />
<br />
IRS Publications<br />
|-<br />
|Get court deference; Chevron Deference for '''FINAL REGULATIONS''', otherwise, '''LAST IN TIME RULE'''<br />
|No deference, court looks to weight of arguments<br />
|No deference, court looks to weight of arguments<br />
|}<br />
<nowiki>*</nowiki>IRS letter rulings can be persuasive (agency interpretation if own law)<br />
<br />
'''<span lang="EN">Chevron Deference</span>''': 2 part test ONLY ON '''FINAL REGULATIONS'''<br />
<br />
#If Congress has clearly addressed the issue, “that is the end of the matter” and the Court gives effect to the intent of Congress<br />
#If the statute is silent or ambiguous with respect to the specific question, the agency interpretation is given “controlling weight” unless it is arbitrary or capricious<br />
<br />
'''<span lang="EN">LAST IN TIME RULE</span>''' → most recent authority wins <br />
<br />
'''<span lang="EN">Effective tax rate</span>''' → tax liability as a percentage of taxable income; the total percentage of tax paid (overall rate, average after all brackets considered, total tax paid); Effective tax rates will show how '''progressive''' a tax is (the more brackets in the tax ladder, the more '''progressive''').<br />
<br />
<span lang="EN">● Will '''always''' be lower than the marginal tax rate.</span> <br />
<br />
'''<span lang="EN">Marginal tax rate</span>''' <span lang="EN">→ rate of tax applicable to the taxpayer’s '''last dollar''' of taxable income (the tax bracket at the end, highest bracket applicable to taxpayer).</span> <br />
<br />
'''<span lang="EN">2018 Marginal Tax Rates</span>''' <span lang="EN">- Unmarried Persons</span> <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">10%</span>'''<br />
|'''<span lang="EN">$0-$9,525</span>'''<br />
|-<br />
|'''<span lang="EN">12%</span>'''<br />
|'''<span lang="EN">$9,526-$38,700</span>'''<br />
|-<br />
|'''<span lang="EN">22%</span>'''<br />
|'''<span lang="EN">$38,701-$82,500</span>'''<br />
|-<br />
|'''<span lang="EN">24%</span>'''<br />
|'''<span lang="EN">$82,501-$157,500</span>'''<br />
|-<br />
|'''<span lang="EN">32%</span>'''<br />
|'''<span lang="EN">$157,501-$200,000</span>'''<br />
|-<br />
|'''<span lang="EN">35%</span>'''<br />
|'''<span lang="EN">$200,001-$500,000</span>'''<br />
|-<br />
|'''<span lang="EN">37%</span>'''<br />
|'''<span lang="EN">Over $500,000</span>'''<br />
|} <br />
<br />
'''<span lang="EN">Progressive tax</span>''' <span lang="EN">→ progresses higher as income increases (i.e. federal income tax)</span><br />
<br />
'''<span lang="EN">Regressive tax</span>''' <span lang="EN">→ all pay the same, regardless of income (i.e. sales tax, flat tax in MA)</span><br />
<br />
'''<span lang="EN">Dead-weight loss</span>''' <span lang="EN">→ cost to implement law or provision outweighs the minimal amount of revenue it would raise.</span> <br />
<br />
<span lang="EN">Four Pillars of Tax Law Analysis (steps to answer tax law questions):</span><br />
<br />
<span lang="EN">1) Sufficiency → does the provision raise enough revenue?</span><br />
<br />
<span lang="EN">2) Equity → does the provision treat everyone equally?</span><br />
<br />
<span lang="EN">3) Efficiency → don’t want to create too many market disturbances (don’t stifle a section of the market unless that’s a goal)</span><br />
<br />
<span lang="EN">4) Administrability → is the rule imposable, policable, practical to regulate and enforce? Is it administratively feasible? (the higher the cost, the less practical it is)</span> <br />
<br />
<span lang="EN">Horizontal equity → same situation, same treatment</span><br />
<br />
<span lang="EN">Vertical equity → different situation, different treatment</span> <br />
<br />
<span lang="EN">Types of Tax:</span><br />
<br />
<span lang="EN">● Capitation Tax: everyone pays the same dollar amount</span><br />
<br />
<span lang="EN">○ Problems: regressive, if different incomes, drastically different impacts (i.e. tax of $5,000 on income of $10,000 v. income of $100,000)</span><br />
<br />
<span lang="EN">○ Unlikely that much revenue could be generated under this method</span><br />
<br />
<span lang="EN">● Sales Tax → percentage cost of goods, levied against consumer</span><br />
<br />
<span lang="EN">○ States without income tax (TX, FL) use higher sales tax to create revenue</span><br />
<br />
<span lang="EN">● Value Added Tax (VAT) → percentage cost of goods, levied against the business, not the consumer</span><br />
<br />
<span lang="EN">○ By the time the consumer buys, tax has been paid, BUT cost of good generally higher</span><br />
<br />
<span lang="EN">● Real Estate Tax → tax imposed on real property (annually)</span><br />
<br />
<span lang="EN">● Estate Tax → currently imposed on the largest estates, only paid by a tiny portion of estates, exclusion amount doubled</span><br />
<br />
<span lang="EN">● Flat Tax → everyone pays the same percentage of their income</span> <br />
<br />
'''<span lang="EN">tax = base x rate</span>''' <br />
<br />
BASE → taxable income RATE → progressive tax bracket, calculated as income increases <br />
<br />
<span lang="EN">Tax Brackets</span><br />
<br />
<span lang="EN">● Even though marginal rates are going up, you don’t lose money</span><br />
<br />
<span lang="EN">● Each increment taxed at rate of bracket: First $9,000 taxed at 10%, of the next $10,000, $525 will be taxed at 10% and the remaining will be taxed at the next bracket of 12%</span><br />
<br />
<span lang="EN">● Taxpayer still benefit from lower rates regardless of income (fewer than 4% of the population makes it to the final tax bracket)</span><br />
<br />
● Tax brackets are updated annually → previously, they were linked to the consumer price index, now brackets are linked to chained CPI (effectively raising taxes) <br />
<br />
Filing Status → §1(a)-(c)<br />
<br />
1) Married filing jointly<br />
<br />
<span lang="EN">2) Surviving spouse</span><br />
<br />
<span lang="EN">3) Head of household</span><br />
<br />
<span lang="EN">4) Unmarried</span><br />
<br />
5) Married filing separately <br />
<br />
'''<span lang="EN">Taxable Income</span>''' <br />
<br />
Taxable Income Defined → §63<br />
<br />
<span lang="EN">STEP ONE: GROSS INCOME</span> <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code § 61 - Gross income defined</span>''' <br />
<br />
'''<span lang="EN">(a) General definition. Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:</span>'''<br />
<br />
'''<span lang="EN"> (1) Compensation for services, including fees, commissions, fringe benefits, and similar items;</span>'''<br />
<br />
'''<span lang="EN"> (2) Gross income derived from business;</span>'''<br />
<br />
'''<span lang="EN"> (3) Gains derived from dealings in property;</span>'''<br />
<br />
'''<span lang="EN"> (4) Interest;</span>'''<br />
<br />
'''<span lang="EN"> (5) Rents;</span>'''<br />
<br />
'''<span lang="EN"> (6) Royalties;</span>'''<br />
<br />
'''<span lang="EN"> (7) Dividends;</span>'''<br />
<br />
'''<span lang="EN"> (8) [1] Alimony and separate maintenance payments;</span>'''<br />
<br />
'''<span lang="EN"> (9) Annuities;</span>'''<br />
<br />
'''<span lang="EN"> (10) Income from life insurance and endowment contracts;</span>'''<br />
<br />
'''<span lang="EN"> (11) Pensions;</span>'''<br />
<br />
'''<span lang="EN"> (12) Income from discharge of indebtedness;</span>'''<br />
<br />
'''<span lang="EN"> (13) Distributive share of partnership gross income;</span>'''<br />
<br />
'''<span lang="EN"> (14) Income in respect of a decedent; and</span>'''<br />
<br />
'''<span lang="EN"> (15) Income from an interest in an estate or trust.</span>''' <br />
<br />
'''<span lang="EN">(b) Cross references. For items specifically included in gross income, see part II (sec. 71 and following). For items specifically excluded from gross income, see part III (sec. 101 and following).</span>'''<br />
|} <br />
<br />
<span lang="EN">STEP TWO: DEDUCTIONS UNDER §62(a)</span> <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code § 62 - Adjusted gross income defined</span>''' <br />
<br />
'''<span lang="EN">(a) General rule. For purposes of this subtitle, the term “adjusted gross income” means, in the case of an individual, gross income minus the following deductions:</span>'''<br />
<br />
'''<span lang="EN"> (1) Trade and business deductions. The deductions allowed by this chapter (other than by part VII of this subchapter) which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee.</span>'''<br />
<br />
'''<span lang="EN"> (2) Certain trade and business deductions of employees</span>'''<br />
<br />
'''<span lang="EN"> (A) Reimbursed expenses of employees. The deductions allowed by part VI (section 161 and following) which consist of expenses paid or incurred by the taxpayer, in connection with the performance by him of services as an employee, under a reimbursement or other expense allowance arrangement with his employer. The fact that the reimbursement may be provided by a third party shall not be determinative of whether or not the preceding sentence applies.</span>'''<br />
<br />
'''<span lang="EN"> (B) Certain expenses of performing artists. The deductions allowed by section 162 which consist of expenses paid or incurred by a qualified performing artist in connection with the performances by him of services in the performing arts as an employee.</span>'''<br />
<br />
'''<span lang="EN"> (C) Certain expenses of officials. The deductions allowed by section 162 which consist of expenses paid or incurred with respect to services performed by an official as an employee of a State or a political subdivision thereof in a position compensated in whole or in part on a fee basis.</span>'''<br />
<br />
'''<span lang="EN"> (D) Certain expenses of elementary and secondary school teachers. The deductions allowed by section 162 which consist of expenses, not in excess of $250, paid or incurred by an eligible educator—</span>'''<br />
<br />
'''<span lang="EN"> (i) by reason of the participation of the educator in professional development courses related to the curriculum in which the educator provides instruction or to the students for which the educator provides instruction, and</span>'''<br />
<br />
'''<span lang="EN"> </span>'''<br />
<br />
'''<span lang="EN"> (ii) in connection with books, supplies (other than non athletic supplies for courses of instruction in health or physical education), computer equipment (including related software and services) and other equipment, and supplementary materials used by the eligible educator in the classroom.</span>'''<br />
<br />
'''<span lang="EN"> (E) Certain expenses of members of reserve components of the Armed Forces of the United States</span>'''<br />
<br />
'''<span lang="EN">The deductions allowed by section 162 which consist of expenses, determined at a rate not in excess of the rates for travel expenses (including per diem in lieu of subsistence) authorized for employees of agencies under subchapter I of chapter 57 of title 5, United States Code, paid or incurred by the taxpayer in connection with the performance of services by such taxpayer as a member of a reserve component of the Armed Forces of the United States for any period during which such individual is more than 100 miles away from home in connection with such services.</span>'''<br />
<br />
'''<span lang="EN"> (3) Losses from sale or exchange of property. The deductions allowed by part VI (sec. 161 and following) as losses from the sale or exchange of property.</span>'''<br />
<br />
'''<span lang="EN"> (4) Deductions attributable to rents and royalties. The deductions allowed by part VI (sec. 161 and following), by section 212 (relating to expenses for production of income), and by section 611 (relating to depletion) which are attributable to property held for the production of rents or royalties.</span>'''<br />
<br />
'''<span lang="EN"> (5) Certain deductions of life tenants and income beneficiaries of property. In the case of a life tenant of property, or an income beneficiary of property held in trust, or an heir, legatee, or devisee of an estate, the deduction for depreciation allowed by section 167 and the deduction allowed by section 611.</span>'''<br />
<br />
'''<span lang="EN"> (6) Pension, profit-sharing, and annuity plans of self-employed individuals. In the case of an individual who is an employee within the meaning of section 401(c)(1), the deduction allowed by section 404.</span>'''<br />
<br />
'''<span lang="EN"> (7) Retirement savings. The deduction allowed by section 219 (relating to deduction of certain retirement savings).</span>'''<br />
<br />
'''<span lang="EN"> [(8) Repealed. Pub. L. 104–188, title I, § 1401(b)(4), Aug. 20, 1996, 110 Stat. 1788]</span>'''<br />
<br />
'''<span lang="EN"> (9) Penalties forfeited because of premature withdrawal of funds from time savings accounts or deposits. The deductions allowed by section 165 for losses incurred in any transaction entered into for profit, though not connected with a trade or business, to the extent that such losses include amounts forfeited to a bank, mutual savings bank, savings and loan association, building and loan association, cooperative bank or homestead association as a penalty for premature withdrawal of funds from a time savings account, certificate of deposit, or similar class of deposit.</span>'''<br />
<br />
'''<span lang="EN"> (10) Alimony. The deduction allowed by section 215.</span>'''<br />
<br />
'''<span lang="EN"> (11) Reforestation expenses. The deduction allowed by section 194.</span>'''<br />
<br />
'''<span lang="EN"> (12) Certain required repayments of supplemental unemployment compensation benefits. The deduction allowed by section 165 for the repayment to a trust described in paragraph (9) or (17) of section 501(c) of supplemental unemployment compensation benefits received from such trust if such repayment is required because of the receipt of trade readjustment allowances under section 231 or 232 of the Trade Act of 1974 (19 U.S.C. 2291 and 2292).</span>'''<br />
<br />
'''<span lang="EN"> (13) Jury duty pay remitted to employer. Any deduction allowable under this chapter by reason of an individual remitting any portion of any jury pay to such individual’s employer in exchange for payment by the employer of compensation for the period such individual was performing jury duty. For purposes of the preceding sentence, the term “jury pay” means any payment received by the individual for the discharge of jury duty.</span>'''<br />
<br />
'''<span lang="EN"> [(14) Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(34)(C), Dec. 19, 2014, 128 Stat. 4042]</span>'''<br />
<br />
'''<span lang="EN"> (15) Moving expenses. The deduction allowed by section 217.</span>'''<br />
<br />
'''<span lang="EN"> (16) Archer MSAs. The deduction allowed by section 220.</span>'''<br />
<br />
'''<span lang="EN"> (17) Interest on education loans. The deduction allowed by section 221.</span>'''<br />
<br />
'''<span lang="EN"> (18) Higher education expenses. The deduction allowed by section 222.</span>'''<br />
<br />
'''<span lang="EN"> (19) Health savings accounts. The deduction allowed by section 223.</span>'''<br />
<br />
'''<span lang="EN"> (20) Costs involving discrimination suits, etc. Any deduction allowable under this chapter for attorney fees and court costs paid by, or on behalf of, the taxpayer in connection with any action involving a claim of unlawful discrimination (as defined in subsection (e)) or a claim of a violation of subchapter III of chapter 37 of title 31, United States Code [2] or a claim made under section 1862(b)(3)(A) of the Social Security Act (42 U.S.C. 1395y(b)(3)(A)). The preceding sentence shall not apply to any deduction in excess of the amount includible in the taxpayer’s gross income for the taxable year on account of a judgment or settlement (whether by suit or agreement and whether as lump sum or periodic payments) resulting from such claim.</span>'''<br />
<br />
'''<span lang="EN"> (21) Attorneys’ fees relating to awards to whistleblowers</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. Any deduction allowable under this chapter for attorney fees and court costs paid by, or on behalf of, the taxpayer in connection with any award under—</span>'''<br />
<br />
'''<span lang="EN"> (i) section 7623(b), or</span>'''<br />
<br />
'''<span lang="EN"> (ii) in the case of taxable years beginning after December 31, 2017, any action brought under—</span>'''<br />
<br />
'''<span lang="EN"> (I) section 21F of the Securities Exchange Act of 1934 (15 U.S.C. 78u–6),</span>'''<br />
<br />
'''<span lang="EN"> (II) a State false claims act, including a State false claims act with qui tam provisions, or</span>'''<br />
<br />
'''<span lang="EN"> (III) section 23 of the Commodity Exchange Act (7 U.S.C. 26).</span>'''<br />
<br />
'''<span lang="EN"> (B) May not exceed award. Subparagraph (A) shall not apply to any deduction in excess of the amount includible in the taxpayer’s gross income for the taxable year on account of such award.</span>''' <br />
<br />
'''<span lang="EN">Nothing in this section shall permit the same item to be deducted more than once. The deduction allowed by section 199A shall not be treated as a deduction described in any of the preceding paragraphs of this subsection.</span>''' <br />
<br />
'''<span lang="EN">(b) Qualified performing artist</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. For purposes of subsection (a)(2)(B), the term “qualified performing artist” means, with respect to any taxable year, any individual if—</span>'''<br />
<br />
'''<span lang="EN"> (A) such individual performed services in the performing arts as an employee during the taxable year for at least 2 employers,</span>'''<br />
<br />
'''<span lang="EN"> (B) the aggregate amount allowable as a deduction under section 162 in connection with the performance of such services exceeds 10 percent of such individual’s gross income attributable to the performance of such services, and</span>'''<br />
<br />
'''<span lang="EN"> (C) the adjusted gross income of such individual for the taxable year (determined without regard to subsection (a)(2)(B)) does not exceed $16,000.</span>'''<br />
<br />
'''<span lang="EN"> (2) Nominal employer not taken into account. An individual shall not be treated as performing services in the performing arts as an employee for any employer during any taxable year unless the amount received by such individual from such employer for the performance of such services during the taxable year equals or exceeds $200.</span>'''<br />
<br />
'''<span lang="EN"> (3) Special rules for married couples</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. Except in the case of a husband and wife who lived apart at all times during the taxable year, if the taxpayer is married at the close of the taxable year, subsection (a)(2)(B) shall apply only if the taxpayer and his spouse file a joint return for the taxable year.</span>'''<br />
<br />
'''<span lang="EN"> (B) Application of paragraph (1)In the case of a joint return—</span>'''<br />
<br />
'''<span lang="EN"> (i) paragraph (1) (other than subparagraph (C) thereof) shall be applied separately with respect to each spouse, but</span>'''<br />
<br />
'''<span lang="EN"> (ii) paragraph (1)(C) shall be applied with respect to their combined adjusted gross income.</span>'''<br />
<br />
'''<span lang="EN"> (C) Determination of marital status. For purposes of this subsection, marital status shall be determined under section 7703(a).</span>'''<br />
<br />
'''<span lang="EN"> (D) Joint return. For purposes of this subsection, the term “joint return” means the joint return of a husband and wife made under section 6013.</span>'''<br />
<br />
'''<span lang="EN">(c) Certain arrangements not treated as reimbursement arrangements. For purposes of subsection (a)(2)(A), an arrangement shall in no event be treated as a reimbursement or other expense allowance arrangement if—</span>'''<br />
<br />
'''<span lang="EN"> (1) such arrangement does not require the employee to substantiate the expenses covered by the arrangement to the person providing the reimbursement, or</span>'''<br />
<br />
'''<span lang="EN"> (2) such arrangement provides the employee the right to retain any amount in excess of the substantiated expenses covered under the arrangement.</span>''' <br />
<br />
'''<span lang="EN">The substantiation requirements of the preceding sentence shall not apply to any expense to the extent that substantiation is not required under section 274(d) for such expense by reason of the regulations prescribed under the 2nd sentence thereof.</span>''' <br />
<br />
'''<span lang="EN">(d) Definition; special rules</span>'''<br />
<br />
'''<span lang="EN"> (1) Eligible educator</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. For purposes of subsection (a)(2)(D), the term “eligible educator” means, with respect to any taxable year, an individual who is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide in a school for at least 900 hours during a school year.</span>'''<br />
<br />
'''<span lang="EN"> (B) School. The term “school” means any school which provides elementary education or secondary education (kindergarten through grade 12), as determined under State law.</span>'''<br />
<br />
'''<span lang="EN"> (2) Coordination with exclusions. A deduction shall be allowed under subsection (a)(2)(D) for expenses only to the extent the amount of such expenses exceeds the amount excludable under section 135, 529(c)(1), or 530(d)(2) for the taxable year.</span>'''<br />
<br />
'''<span lang="EN"> (3) Inflation adjustment. In the case of any taxable year beginning after 2015, the $250 amount in subsection (a)(2)(D) shall be increased by an amount equal to—</span>'''<br />
<br />
'''<span lang="EN"> (A) such dollar amount, multiplied by</span>'''<br />
<br />
'''<span lang="EN"> (B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 2014” for “calendar year 2016” in subparagraph (A)(ii) thereof.</span>''' <br />
<br />
'''<span lang="EN">Any increase determined under the preceding sentence shall be rounded to the nearest multiple of $50.</span>''' <br />
<br />
'''<span lang="EN">(e) Unlawful discrimination defined. For purposes of subsection (a)(20), the term “unlawful discrimination” means an act that is unlawful under any of the following:</span>'''<br />
<br />
'''<span lang="EN"> (1) Section 302 of the Civil Rights Act of 1991 (2 U.S.C. 1202).[3]</span>'''<br />
<br />
'''<span lang="EN"> (2) Section 201, 202, 203, 204, 205, 206, or 207 of the Congressional Accountability Act of 1995 (2 U.S.C. 1311, 1312, 1313, 1314, 1315, 1316, or 1317).</span>'''<br />
<br />
'''<span lang="EN"> (3) The National Labor Relations Act (29 U.S.C. 151 et seq.).</span>'''<br />
<br />
'''<span lang="EN"> (4) The Fair Labor Standards Act of 1938 (29 U.S.C. 201 et seq.).</span>'''<br />
<br />
'''<span lang="EN"> </span>'''<br />
<br />
'''<span lang="EN"> (5) Section 4 or 15 of the Age Discrimination in Employment Act of 1967 (29 U.S.C. 623 or 633a).</span>'''<br />
<br />
'''<span lang="EN"> (6) Section 501 or 504 of the Rehabilitation Act of 1973 (29 U.S.C. 791 or 794).</span>'''<br />
<br />
'''<span lang="EN"> (7) Section 510 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1140).</span>'''<br />
<br />
'''<span lang="EN"> (8) Title IX of the Education Amendments of 1972 (20 U.S.C. 1681 et seq.).</span>'''<br />
<br />
'''<span lang="EN"> (9) The Employee Polygraph Protection Act of 1988 (29 U.S.C. 2001 et seq.).</span>'''<br />
<br />
'''<span lang="EN"> (10) The Worker Adjustment and Retraining Notification Act (29 U.S.C. 2102 et seq.).</span>'''<br />
<br />
'''<span lang="EN"> (11) Section 105 of the Family and Medical Leave Act of 1993 (29 U.S.C. 2615).</span>'''<br />
<br />
'''<span lang="EN"> (12) Chapter 43 of title 38, United States Code (relating to employment and reemployment rights of members of the uniformed services).</span>'''<br />
<br />
'''<span lang="EN"> (13) Section 1977, 1979, or 1980 of the Revised Statutes (42 U.S.C. 1981, 1983, or 1985).</span>'''<br />
<br />
'''<span lang="EN"> (14) Section 703, 704, or 717 of the Civil Rights Act of 1964 (42 U.S.C. 2000e–2, 2000e–3, or 2000e–16).</span>'''<br />
<br />
'''<span lang="EN"> (15) Section 804, 805, 806, 808, or 818 of the Fair Housing Act (42 U.S.C. 3604, 3605, 3606, 3608, or 3617).</span>'''<br />
<br />
'''<span lang="EN"> (16) Section 102, 202, 302, or 503 of the Americans with Disabilities Act of 1990 (42 U.S.C. 12112, 12132, 12182, or 12203).</span>'''<br />
<br />
'''<span lang="EN"> (17) Any provision of Federal law (popularly known as whistleblower protection provisions) prohibiting the discharge of an employee, the discrimination against an employee, or any other form of retaliation or reprisal against an employee for asserting rights or taking other actions permitted under Federal law.</span>'''<br />
<br />
'''<span lang="EN"> (18) Any provision of Federal, State, or local law, or common law claims permitted under Federal, State, or local law—</span>'''<br />
<br />
'''<span lang="EN"> (i) providing for the enforcement of civil rights, or</span>'''<br />
<br />
'''<span lang="EN"> (ii) regulating any aspect of the employment relationship, including claims for wages, compensation, or benefits, or prohibiting the discharge of an employee, the discrimination against an employee, or any other form of retaliation or reprisal against an employee for asserting rights or taking other actions permitted by law.</span>'''<br />
|} <br />
<br />
<span lang="EN">STEP THREE: LESS QUALIFIED BUSINESS INCOME UNDER 199A</span> <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code § 199A - Qualified business income</span>''' <br />
<br />
'''<span lang="EN">(a) In general. In the case of a taxpayer other than a corporation, there shall be allowed as a deduction for any taxable year an amount equal to the sum of—</span>'''<br />
<br />
'''<span lang="EN"> (1) the lesser of—</span>'''<br />
<br />
'''<span lang="EN"> (A) the combined qualified business income amount of the taxpayer, or</span>'''<br />
<br />
'''<span lang="EN"> (B) an amount equal to 20 percent of the excess (if any) of—</span>'''<br />
<br />
'''<span lang="EN"> (i) the taxable income of the taxpayer for the taxable year, over</span>'''<br />
<br />
'''<span lang="EN"> (ii) the sum of any net capital gain (as defined in section 1(h)), plus the aggregate amount of the qualified cooperative dividends, of the taxpayer for the taxable year, plus</span>'''<br />
<br />
'''<span lang="EN"> (2) the lesser of—</span>'''<br />
<br />
'''<span lang="EN"> (A) 20 percent of the aggregate amount of the qualified cooperative dividends of the taxpayer for the taxable year, or</span>'''<br />
<br />
'''<span lang="EN"> (B) taxable income (reduced by the net capital gain (as so defined)) of the taxpayer for the taxable year.</span>''' <br />
<br />
'''<span lang="EN">The amount determined under the preceding sentence shall not exceed the taxable income (reduced by the net capital gain (as so defined)) of the taxpayer for the taxable year.</span>''' <br />
<br />
'''<span lang="EN">(b) Combined qualified business income amount. For purposes of this section—</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. The term “combined qualified business income amount” means, with respect to any taxable year, an amount equal to—</span>'''<br />
<br />
'''<span lang="EN"> (A) the sum of the amounts determined under paragraph (2) for each qualified trade or business carried on by the taxpayer, plus</span>'''<br />
<br />
'''<span lang="EN"> (B) 20 percent of the aggregate amount of the qualified REIT dividends and qualified publicly traded partnership income of the taxpayer for the taxable year.</span>'''<br />
<br />
'''<span lang="EN"> (2) Determination of deductible amount for each trade or business. The amount determined under this paragraph with respect to any qualified trade or business is the lesser of—</span>'''<br />
<br />
'''<span lang="EN"> (A) 20 percent of the taxpayer’s qualified business income with respect to the qualified trade or business, or</span>'''<br />
<br />
'''<span lang="EN"> (B) the greater of—</span>'''<br />
<br />
'''<span lang="EN"> (i) 50 percent of the W–2 wages with respect to the qualified trade or business, or</span>'''<br />
<br />
'''<span lang="EN"> (ii) the sum of 25 percent of the W–2 wages with respect to the qualified trade or business, plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property.</span>'''<br />
<br />
'''<span lang="EN"> (3) Modifications to limit based on taxable income</span>'''<br />
<br />
'''<span lang="EN"> (A) Exception from limit. In the case of any taxpayer whose taxable income for the taxable year does not exceed the threshold amount, paragraph (2) shall be applied without regard to subparagraph (B).</span>'''<br />
<br />
'''<span lang="EN"> (B) Phase-in of limit for certain taxpayers</span>'''<br />
<br />
'''<span lang="EN"> (i) In general. If—</span>'''<br />
<br />
'''<span lang="EN"> (I) the taxable income of a taxpayer for any taxable year exceeds the threshold amount, but does not exceed the sum of the threshold amount plus $50,000 ($100,000 in the case of a joint return), and</span>'''<br />
<br />
'''<span lang="EN"> (II) the amount determined under paragraph (2)(B) (determined without regard to this subparagraph) with respect to any qualified trade or business carried on by the taxpayer is less than the amount determined under paragraph (2)(A) with respect such trade or business, then paragraph (2) shall be applied with respect to such trade or business without regard to subparagraph (B) thereof and by reducing the amount determined under subparagraph (A) thereof by the amount determined under clause (ii).</span>'''<br />
<br />
'''<span lang="EN"> (ii) Amount of reduction. The amount determined under this subparagraph is the amount which bears the same ratio to the excess amount as—</span>'''<br />
<br />
'''<span lang="EN"> (I) the amount by which the taxpayer’s taxable income for the taxable year exceeds the threshold amount, bears to</span>'''<br />
<br />
'''<span lang="EN"> (II) $50,000 ($100,000 in the case of a joint return).</span>'''<br />
<br />
'''<span lang="EN"> (iii) Excess amount. For purposes of clause (ii), the excess amount is the excess of—</span>'''<br />
<br />
'''<span lang="EN"> (I) the amount determined under paragraph (2)(A) (determined without regard to this paragraph), over</span>'''<br />
<br />
'''<span lang="EN"> (II) the amount determined under paragraph (2)(B) (determined without regard to this paragraph).</span>'''<br />
<br />
'''<span lang="EN"> (4) Wages, etc</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. The term “W–2 wages” means, with respect to any person for any taxable year of such person, the amounts described in paragraphs (3) and (8) of section 6051(a) paid by such person with respect to employment of employees by such person during the calendar year ending during such taxable year.</span>'''<br />
<br />
'''<span lang="EN"> (B) Limitation to wages attributable to qualified business income. Such term shall not include any amount which is not properly allocable to qualified business income for purposes of subsection (c)(1).</span>'''<br />
<br />
'''<span lang="EN"> (C) Return requirement. Such term shall not include any amount which is not properly included in a return filed with the Social Security Administration on or before the 60th day after the due date (including extensions) for such return.</span>'''<br />
<br />
'''<span lang="EN"> (5) Acquisitions, dispositions, and short taxable years. The Secretary shall provide for the application of this subsection in cases of a short taxable year or where the taxpayer acquires, or disposes of, the major portion of a trade or business or the major portion of a separate unit of a trade or business during the taxable year.</span>'''<br />
<br />
'''<span lang="EN"> (6) Qualified property. For purposes of this section:</span>'''<br />
<br />
'''<span lang="EN"> </span>''' <br />
<br />
'''<span lang="EN"> (A) In general. The term “qualified property” means, with respect to any qualified trade or business for a taxable year, tangible property of a character subject to the allowance for depreciation under section 167—</span>'''<br />
<br />
'''<span lang="EN"> (i) which is held by, and available for use in, the qualified trade or business at the close of the taxable year,</span>'''<br />
<br />
'''<span lang="EN"> (ii) which is used at any point during the taxable year in the production of qualified business income, and</span>'''<br />
<br />
'''<span lang="EN"> (iii) the depreciable period for which has not ended before the close of the taxable year.</span>'''<br />
<br />
'''<span lang="EN"> (B) Depreciable period. The term “depreciable period” means, with respect to qualified property of a taxpayer, the period beginning on the date the property was first placed in service by the taxpayer and ending on the later of—</span>'''<br />
<br />
'''<span lang="EN"> (i) the date that is 10 years after such date, or</span>'''<br />
<br />
'''<span lang="EN"> (ii) the last day of the last full year in the applicable recovery period that would apply to the property under section 168 (determined without regard to subsection (g) thereof).</span>''' <br />
<br />
'''<span lang="EN">(c) Qualified business income. For purposes of this section—</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. The term “qualified business income” means, for any taxable year, the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer. Such term shall not include any qualified REIT dividends, qualified cooperative dividends, or qualified publicly traded partnership income.</span>'''<br />
<br />
'''<span lang="EN"> (2) Carryover of losses. If the net amount of qualified income, gain, deduction, and loss with respect to qualified trades or businesses of the taxpayer for any taxable year is less than zero, such amount shall be treated as a loss from a qualified trade or business in the succeeding taxable year.</span>'''<br />
<br />
'''<span lang="EN"> (3) Qualified items of income, gain, deduction, and loss. For purposes of this subsection—</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. The term “qualified items of income, gain, deduction, and loss” means items of income, gain, deduction, and loss to the extent such items are—</span>'''<br />
<br />
'''<span lang="EN"> (i) effectively connected with the conduct of a trade or business within the United States (within the meaning of section 864(c), determined by substituting “qualified trade or business (within the meaning of section 199A)” for“nonresident alien individual or a foreign corporation” or for “a foreign corporation” each place it appears), and</span>'''<br />
<br />
'''<span lang="EN"> (ii) included or allowed in determining taxable income for the taxable year.</span>'''<br />
<br />
'''<span lang="EN"> (B) Exceptions. The following investment items shall not be taken into account as a qualified item of income, gain, deduction, or loss:</span>'''<br />
<br />
'''<span lang="EN"> (i) Any item of short-term capital gain, short-term capital loss, long-term capital gain, or long-term capital loss.</span>'''<br />
<br />
'''<span lang="EN"> (ii) Any dividend, income equivalent to a dividend, or payment in lieu of dividends described in section 954(c)(1)(G).</span>'''<br />
<br />
'''<span lang="EN"> (iii) Any interest income other than interest income which is properly allocable to a trade or business.</span>'''<br />
<br />
'''<span lang="EN"> (iv) Any item of gain or loss described in subparagraph (C) or (D) of section 954(c)(1) (applied by substituting “qualified trade or business” for “controlled foreign corporation”).</span>'''<br />
<br />
'''<span lang="EN"> (v) Any item of income, gain, deduction, or loss taken into account under section 954(c)(1)(F) (determined without regard to clause (ii) thereof and other than items attributable to notional principal contracts entered into in transactions qualifying under section 1221(a)(7)).</span>'''<br />
<br />
'''<span lang="EN"> (vi) Any amount received from an annuity which is not received in connection with the trade or business.</span>'''<br />
<br />
'''<span lang="EN"> (vii) Any item of deduction or loss properly allocable to an amount described in any of the preceding clauses.</span>'''<br />
<br />
'''<span lang="EN"> (4) Treatment of reasonable compensation and guaranteed payments. Qualified business income shall not include—</span>'''<br />
<br />
'''<span lang="EN"> (A) reasonable compensation paid to the taxpayer by any qualified trade or business of the taxpayer for services rendered with respect to the trade or business,</span>'''<br />
<br />
'''<span lang="EN"> (B) any guaranteed payment described in section 707(c) paid to a partner for services rendered with respect to the trade or business, and</span>'''<br />
<br />
'''<span lang="EN"> (C) to the extent provided in regulations, any payment described in section 707(a) to a partner for services rendered with respect to the trade or business.</span>''' <br />
<br />
'''<span lang="EN">(d) Qualified trade or business. For purposes of this section—</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. The term “qualified trade or business” means any trade or business other than—</span>'''<br />
<br />
'''<span lang="EN"> (A) a specified service trade or business, or</span>'''<br />
<br />
'''<span lang="EN"> (B) the trade or business of performing services as an employee.</span>'''<br />
<br />
'''<span lang="EN"> (2) Specified service trade or business. The term “specified service trade or business” means any trade or business—</span>'''<br />
<br />
'''<span lang="EN"> (A) which is described in section 1202(e)(3)(A) (applied without regard to the words “engineering, architecture,”) or which would be so described if the term “employees or owners” were substituted for “employees” therein, or</span>'''<br />
<br />
'''<span lang="EN"> (B) which involves the performance of services that consist of investing and investment management, trading, or dealing in securities (as defined in section 475(c)(2)), partnership interests, or commodities (as defined in section 475(e)(2)).</span>'''<br />
<br />
'''<span lang="EN"> (3) Exception for specified service businesses based on taxpayer’s income</span>'''<br />
<br />
'''<span lang="EN"> (A) In generalIf, for any taxable year, the taxable income of any taxpayer is less than the sum of the threshold amount plus $50,000 ($100,000 in the case of a joint return), then—</span>'''<br />
<br />
'''<span lang="EN"> (i) any specified service trade or business of the taxpayer shall not fail to be treated as a qualified trade or business due to paragraph (1)(A), but</span>'''<br />
<br />
'''<span lang="EN"> (ii) only the applicable percentage of qualified items of income, gain, deduction, or loss, and the W–2 wages and the unadjusted basis immediately after acquisition of qualified property, of the taxpayer allocable to such specified service trade or business shall be taken into account in computing the qualified business income, W–2 wages, and the unadjusted basis immediately after acquisition of qualified property of the taxpayer for the taxable year for purposes of applying this section.</span>'''<br />
<br />
'''<span lang="EN"> (B) Applicable percentage. For purposes of subparagraph (A), the term “applicable percentage” means, with respect to any taxable year, 100 percent reduced (not below zero) by the percentage equal to the ratio of—</span>'''<br />
<br />
'''<span lang="EN"> (i) the taxable income of the taxpayer for the taxable year in excess of the threshold amount, bears to</span>'''<br />
<br />
'''<span lang="EN"> (ii) $50,000 ($100,000 in the case of a joint return).</span>''' <br />
<br />
'''<span lang="EN">(e) Other Definitions. For purposes of this section—</span>'''<br />
<br />
'''<span lang="EN"> (1) Taxable income. Taxable income shall be computed without regard to the deduction allowable under this section.</span>'''<br />
<br />
'''<span lang="EN"> (2) Threshold amount</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. The term “threshold amount” means $157,500 (200 percent of such amount in the case of a joint return).</span>'''<br />
<br />
'''<span lang="EN"> (B) Inflation adjustment. In the case of any taxable year beginning after 2018, the dollar amount in subparagraph (A) shall be increased by an amount equal to—</span>'''<br />
<br />
'''<span lang="EN"> (i) such dollar amount, multiplied by</span>'''<br />
<br />
'''<span lang="EN"> (ii) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “calendar year 2017” for “calendar year 2016” in subparagraph (A)(ii) thereof.</span>''' <br />
<br />
'''<span lang="EN">The amount of any increase under the preceding sentence shall be rounded as provided in section 1(f)(7).</span>'''<br />
<br />
'''<span lang="EN"> (3) Qualified REIT dividend. The term “qualified REIT dividend” means any dividend from a real estate investment trust received during the taxable year which—</span>'''<br />
<br />
'''<span lang="EN"> (A) is not a capital gain dividend, as defined in section 857(b)(3), and</span>'''<br />
<br />
'''<span lang="EN"> (B) is not qualified dividend income, as defined in section 1(h)(11).</span>'''<br />
<br />
'''<span lang="EN"> (4) Qualified cooperative dividend. The term “qualified cooperative dividend” means any patronage dividend (as defined in section 1388(a)), any per-unit retain allocation (as defined in section 1388(f)), and any qualified written notice of allocation (as defined in section 1388(c)), or any similar amount received from an organization described in subparagraph (B)(ii), which—</span>'''<br />
<br />
'''<span lang="EN"> (A) is includible in gross income, and</span>'''<br />
<br />
'''<span lang="EN"> (B) is received from—</span>'''<br />
<br />
'''<span lang="EN"> (i) an organization or corporation described in section 501(c)(12) or 1381(a), or</span>'''<br />
<br />
'''<span lang="EN"> (ii) an organization which is governed under this title by the rules applicable to cooperatives under this title before the enactment of subchapter T.</span>'''<br />
<br />
'''<span lang="EN"> (5) Qualified publicly traded partnership income. The term “qualified publicly traded partnership income” means, with respect to any qualified trade or business of a taxpayer, the sum of—</span>'''<br />
<br />
'''<span lang="EN"> (A) the net amount of such taxpayer’s allocable share of each qualified item of income, gain, deduction, and loss (as defined in subsection (c)(3) and determined after the application of subsection (c)(4)) from a publicly traded partnership (as defined in section 7704(a)) [1] which is not treated as a corporation under section 7704(c), plus</span>'''<br />
<br />
'''<span lang="EN"> (B) any gain recognized by such taxpayer upon disposition of its interest in such partnership to the extent such gain is treated as an amount realized from the sale or exchange of property other than a capital asset under section 751(a).</span>''' <br />
<br />
'''<span lang="EN">(f) Special rules</span>'''<br />
<br />
'''<span lang="EN"> (1) Application to partnerships and s corporations</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. In the case of a partnership or S corporation—</span>'''<br />
<br />
'''<span lang="EN"> (i) this section shall be applied at the partner or shareholder level,</span>'''<br />
<br />
'''<span lang="EN"> (ii) each partner or shareholder shall take into account such person’s allocable share of each qualified item of income, gain, deduction, and loss, and</span>'''<br />
<br />
'''<span lang="EN"> (iii) each partner or shareholder shall be treated for purposes of subsection (b) as having W–2 wages and unadjusted basis immediately after acquisition of qualified property for the taxable year in an amount equal to such person’s allocable share of the W–2 wages and the unadjusted basis immediately after acquisition of qualified property of the partnership or S corporation for the taxable year (as determined under regulations prescribed by the Secretary).</span>''' <br />
<br />
'''<span lang="EN">For purposes of clause (iii), a partner’s or shareholder’s allocable share of W–2 wages shall be determined in the same manner as the partner’s or shareholder’s allocable share of wage expenses. For purposes of such clause, partner’s or shareholder’s allocable share of the unadjusted basis immediately after acquisition of qualified property shall be determined in the same manner as the partner’s or shareholder’s allocable share of depreciation. For purposes of this subparagraph, in the case of an S corporation, an allocable share shall be the shareholder’s pro rata share of an item.</span>'''<br />
<br />
'''<span lang="EN"> (B) Application to trusts and estates. Rules similar to the rules under section 199(d)(1)(B)(i) (as in effect on December 1, 2017) for the apportionment of W–2 wages shall apply to the apportionment of W–2 wages and the apportionment of unadjusted basis immediately after acquisition of qualified property under this section.</span>'''<br />
<br />
'''<span lang="EN"> (C) Treatment of trades or business in Puerto Rico</span>'''<br />
<br />
'''<span lang="EN"> (i) In general. In the case of any taxpayer with qualified business income from sources within the commonwealth of Puerto Rico, if all such income is taxable under section 1 for such taxable year, then for purposes of determining the qualified business income of such taxpayer for such taxable year, the term “United States” shall include the Commonwealth of Puerto Rico.</span>'''<br />
<br />
'''<span lang="EN"> (ii) Special rule for applying limit. In the case of any taxpayer described in clause (i), the determination of W–2 wages of such taxpayer with respect to any qualified trade or business conducted in Puerto Rico shall be made without regard to any exclusion under section 3401(a)(8) for remuneration paid for services in Puerto Rico.</span>'''<br />
<br />
'''<span lang="EN"> (2) Coordination with minimum tax. For purposes of determining alternative minimum taxable income under section 55, qualified business income shall be determined without regard to any adjustments under sections 56 through 59.</span>'''<br />
<br />
'''<span lang="EN"> (3) Deduction limited to income taxes. The deduction under subsection (a) shall only be allowed for purposes of this chapter.</span>'''<br />
<br />
'''<span lang="EN"> (4) Regulations. The Secretary shall prescribe such regulations as are necessary to carry out the purposes of this section, including regulations—</span>'''<br />
<br />
'''<span lang="EN"> (A) for requiring or restricting the allocation of items and wages under this section and such reporting requirements as the Secretary determines appropriate, and</span>'''<br />
<br />
'''<span lang="EN"> (B) for the application of this section in the case of tiered entities.</span>''' <br />
<br />
'''<span lang="EN">(g) Deduction allowed to specified agricultural or horticultural cooperatives</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. In the case of any taxable year of a specified agricultural or horticultural cooperative beginning after December 31, 2017, there shall be allowed a deduction in an amount equal to the lesser of—</span>'''<br />
<br />
'''<span lang="EN"> (A) 20 percent of the excess (if any) of—</span>'''<br />
<br />
'''<span lang="EN"> (i) the gross income of a specified agricultural or horticultural cooperative, over</span>'''<br />
<br />
'''<span lang="EN"> (ii) the qualified cooperative dividends (as defined in subsection (e)(4)) paid during the taxable year for the taxable year, or</span>'''<br />
<br />
'''<span lang="EN"> (B) the greater of—</span>'''<br />
<br />
'''<span lang="EN"> (i) 50 percent of the W–2 wages of the cooperative with respect to its trade or business, or</span>'''<br />
<br />
'''<span lang="EN"> (ii) the sum of 25 percent of the W–2 wages of the cooperative with respect to its trade or business, plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property of the cooperative.</span>'''<br />
<br />
'''<span lang="EN"> (2) Limitation. The amount determined under paragraph (1) shall not exceed the taxable income of the specified agricultural or horticultural for the taxable year.</span>'''<br />
<br />
'''<span lang="EN"> (3) Specified agricultural or horticultural cooperative. For purposes of this subsection, the term “specified agricultural or horticultural cooperative” means an organization to which part I of subchapter T applies which is engaged in—</span>'''<br />
<br />
'''<span lang="EN"> (A) the manufacturing, production, growth, or extraction in whole or significant part of any agricultural or horticultural product,</span>'''<br />
<br />
'''<span lang="EN"> (B) the marketing of agricultural or horticultural products which its patrons have so manufactured, produced, grown, or extracted, or</span>'''<br />
<br />
'''<span lang="EN"> (C) the provision of supplies, equipment, or services to farmers or to organizations described in subparagraph (A) or (B).</span>''' <br />
<br />
'''<span lang="EN">(h) Anti-abuse rules. The Secretary shall—</span>'''<br />
<br />
'''<span lang="EN"> (1) apply rules similar to the rules under section 179(d)(2) in order to prevent the manipulation of the depreciable period of qualified property using transactions between related parties, and</span>'''<br />
<br />
'''<span lang="EN"> (2) prescribe rules for determining the unadjusted basis immediately after acquisition of qualified property acquired in like-kind exchanges or involuntary conversions.</span>''' <br />
<br />
'''<span lang="EN">(i) Termination. This section shall not apply to taxable years beginning after December 31, 2025.</span>'''<br />
|} <br />
<br />
<span lang="EN">STEP FOUR A: LESS GENERAL DEDUCTION OR ITEMIZED DEDUCTIONS UNDER 63(c) and 63(d)</span> <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code § 63 - Taxable income defined</span>''' <br />
<br />
'''<span lang="EN">(a) In general. Except as provided in subsection (b), for purposes of this subtitle, the term “taxable income” means gross income minus the deductions allowed by this chapter (other than the standard deduction).</span>'''<br />
<br />
'''<span lang="EN">(b) Individuals who do not itemize their deductions. In the case of an individual who does not elect to itemize his deductions for the taxable year, for purposes of this subtitle, the term “taxable income” means adjusted gross income, minus—</span>'''<br />
<br />
'''<span lang="EN"> (1) the standard deduction,</span>'''<br />
<br />
'''<span lang="EN"> (2) the deduction for personal exemptions provided in section 151, and</span>'''<br />
<br />
'''<span lang="EN"> (3) the deduction provided in section 199A.</span>''' <br />
<br />
'''<span lang="EN">(c) Standard deduction. For purposes of this subtitle—</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. Except as otherwise provided in this subsection, the term “standard deduction” means the sum of—</span>'''<br />
<br />
'''<span lang="EN"> (A) the basic standard deduction, and</span>'''<br />
<br />
'''<span lang="EN"> (B) the additional standard deduction.</span>'''<br />
<br />
'''<span lang="EN"> (2) Basic standard deduction. For purposes of paragraph (1), the basic standard deduction is—</span>'''<br />
<br />
'''<span lang="EN"> (A) 200 percent of the dollar amount in effect under subparagraph (C) for the taxable year in the case of—</span>'''<br />
<br />
'''<span lang="EN"> (i) a joint return, or</span>'''<br />
<br />
'''<span lang="EN"> (ii) a surviving spouse (as defined in section 2(a)),</span>'''<br />
<br />
'''<span lang="EN"> (B) $4,400 in the case of a head of household (as defined in section 2(b)), or</span>'''<br />
<br />
'''<span lang="EN"> (C) $3,000 in any other case.</span>'''<br />
<br />
'''<span lang="EN"> (3) Additional standard deduction for aged and blind. For purposes of paragraph (1), the additional standard deduction is the sum of each additional amount to which the taxpayer is entitled under subsection (f).</span>'''<br />
<br />
'''<span lang="EN"> (4) Adjustments for inflation. In the case of any taxable year beginning in a calendar year after 1988, each dollar amount contained in paragraph (2)(B), (2)(C), or (5) or subsection (f) shall be increased by an amount equal to—</span>'''<br />
<br />
'''<span lang="EN"> (A) such dollar amount, multiplied by</span>'''<br />
<br />
'''<span lang="EN"> (B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting for “calendar year 2016” in subparagraph (A)(ii) thereof—</span>'''<br />
<br />
'''<span lang="EN"> (i) “calendar year 1987” in the case of the dollar amounts contained in paragraph (2)(B), (2)(C), or (5)(A) or subsection (f), and</span>'''<br />
<br />
'''<span lang="EN"> (ii) “calendar year 1997” in the case of the dollar amount contained in paragraph (5)(B).</span>'''<br />
<br />
'''<span lang="EN"> (5) Limitation on basic standard deduction in the case of certain dependents. In the case of an individual with respect to whom a deduction under section 151 is allowable to another taxpayer for a taxable year beginning in the calendar year in which the individual’s taxable year begins, the basic standard deduction applicable to such individual for such individual’s taxable year shall not exceed the greater of—</span>'''<br />
<br />
'''<span lang="EN"> (A) $500, or</span>'''<br />
<br />
'''<span lang="EN"> (B) the sum of $250 and such individual’s earned income.</span>'''<br />
<br />
'''<span lang="EN"> (6) Certain individuals, etc., not eligible for standard deduction. In the case of—</span>'''<br />
<br />
'''<span lang="EN"> (A) a married individual filing a separate return where either spouse itemizes deductions,</span>'''<br />
<br />
'''<span lang="EN"> (B) a nonresident alien individual,</span>'''<br />
<br />
'''<span lang="EN"> (C) an individual making a return under section 443(a)(1) for a period of less than 12 months on account of a change in his annual accounting period, or</span>'''<br />
<br />
'''<span lang="EN"> (D) an estate or trust, common trust fund, or partnership, the standard deduction shall be zero.</span>''' <br />
<br />
<span lang="EN"> '''(7) Special rules for taxable years 2018 through 2025. In the case of a taxable year beginning after December 31, 2017, and before January 1, 2026—'''</span><br />
<br />
'''<span lang="EN"> (A) Increase in standard deduction. Paragraph (2) shall be applied—</span>'''<br />
<br />
'''<span lang="EN"> (i) by substituting “$18,000” for “$4,400” in subparagraph (B), and</span>'''<br />
<br />
'''<span lang="EN"> (ii) by substituting “$12,000” for “$3,000” in subparagraph (C).</span>'''<br />
<br />
'''<span lang="EN"> (B) Adjustment for inflation</span>'''<br />
<br />
'''<span lang="EN"> (i) In general. Paragraph (4) shall not apply to the dollar amounts contained in paragraphs (2)(B) and (2)(C).</span>'''<br />
<br />
'''<span lang="EN"> (ii) Adjustment of increased amounts. In the case of a taxable year beginning after 2018, the $18,000 and $12,000 amounts in subparagraph (A) shall each be increased by an amount equal to—</span>'''<br />
<br />
'''<span lang="EN"> (I) such dollar amount, multiplied by</span>'''<br />
<br />
'''<span lang="EN"> (II) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting “2017” for “2016” in subparagraph (A)(ii) thereof.</span>''' <br />
<br />
'''<span lang="EN">If any increase under this clause is not a multiple of $50, such increase shall be rounded to the next lowest multiple of $50.</span>''' <br />
<br />
'''<span lang="EN">(d) Itemized deductions. For purposes of this subtitle, the term “itemized deductions” means the deductions allowable under this chapter other than—</span>'''<br />
<br />
'''<span lang="EN"> (1) the deductions allowable in arriving at adjusted gross income,</span>'''<br />
<br />
'''<span lang="EN"> (2) the deduction for personal exemptions provided by section 151, and</span>'''<br />
<br />
'''<span lang="EN"> (3) the deduction provided in section 199A.</span>''' <br />
<br />
'''<span lang="EN">(e) Election to itemize</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. Unless an individual makes an election under this subsection for the taxable year, no itemized deduction shall be allowed for the taxable year. For purposes of this subtitle, the determination of whether a deduction is allowable under this chapter shall be made without regard to the preceding sentence.</span>'''<br />
<br />
'''<span lang="EN"> (2) Time and manner of election. Any election under this subsection shall be made on the taxpayer’s return, and the Secretary shall prescribe the manner of signifying such election on the return.</span>'''<br />
<br />
'''<span lang="EN"> (3) Change of election.Under regulations prescribed by the Secretary, a change of election with respect to itemized deductions for any taxable year may be made after the filing of the return for such year. If the spouse of the taxpayer filed a separate return for any taxable year corresponding to the taxable year of the taxpayer, the change shall not be allowed unless, in accordance with such regulations—</span>'''<br />
<br />
'''<span lang="EN"> (A) the spouse makes a change of election with respect to itemized deductions, for the taxable year covered in such separate return, consistent with the change of treatment sought by the taxpayer, and</span>'''<br />
<br />
'''<span lang="EN"> (B) the taxpayer and his spouse consent in writing to the assessment (within such period as may be agreed on with the Secretary) of any deficiency, to the extent attributable to such change of election, even though at the time of the filing of such consent the assessment of such deficiency would otherwise be prevented by the operation of any law or rule of law.</span>''' <br />
<br />
'''<span lang="EN">This paragraph shall not apply if the tax liability of the taxpayer’s spouse for the taxable year corresponding to the taxable year of the taxpayer has been compromised under section 7122.</span>''' <br />
<br />
'''<span lang="EN">(f) Aged or blind additional amounts</span>'''<br />
<br />
'''<span lang="EN"> (1) Additional amounts for the aged. The taxpayer shall be entitled to an additional amount of $600—</span>'''<br />
<br />
'''<span lang="EN"> (A) for himself if he has attained age 65 before the close of his taxable year, and</span>'''<br />
<br />
'''<span lang="EN"> (B) for the spouse of the taxpayer if the spouse has attained age 65 before the close of the taxable year and an additional exemption is allowable to the taxpayer for such spouse under section 151(b).</span>'''<br />
<br />
'''<span lang="EN"> (2) Additional amount for blind. The taxpayer shall be entitled to an additional amount of $600—</span>'''<br />
<br />
'''<span lang="EN"> (A) for himself if he is blind at the close of the taxable year, and</span>'''<br />
<br />
'''<span lang="EN"> (B) for the spouse of the taxpayer if the spouse is blind as of the close of the taxable year and an additional exemption is allowable to the taxpayer for such spouse under section 151(b).</span>''' <br />
<br />
'''<span lang="EN">For purposes of subparagraph (B), if the spouse dies during the taxable year the determination of whether such spouse is blind shall be made as of the time of such death.</span>'''<br />
<br />
'''<span lang="EN"> (3) Higher amount for certain unmarried individuals. In the case of an individual who is not married and is not a surviving spouse, paragraphs (1) and (2) shall be applied by substituting “$750” for “$600”.</span>'''<br />
<br />
'''<span lang="EN"> (4) Blindness defined. For purposes of this subsection, an individual is blind only if his central visual acuity does not exceed 20/200 in the better eye with correcting lenses, or if his visual acuity is greater than 20/200 but is accompanied by a limitation in the fields of vision such that the widest diameter of the visual field subtends an angle no greater than 20 degrees.</span>'''<br />
<br />
'''<span lang="EN">(g) Marital status. For purposes of this section, marital status shall be determined under section 7703.</span>'''<br />
|} <br />
<br />
<span lang="EN">STEP FOUR B: ITEMIZED DEDUCTIONS §67</span> <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code § 67 - 2-percent floor on miscellaneous itemized deductions</span>''' <br />
<br />
'''<span lang="EN">(a) General rule. In the case of an individual, the miscellaneous itemized deductions for any taxable year shall be allowed only to the extent that the aggregate of such deductions exceeds 2 percent of adjusted gross income.</span>'''<br />
<br />
'''<span lang="EN">(b) Miscellaneous itemized deductions. For purposes of this section, the term “miscellaneous itemized deductions” means the itemized deductions other than—</span>'''<br />
<br />
'''<span lang="EN"> (1) the deduction under section 163 (relating to interest),</span>'''<br />
<br />
'''<span lang="EN"> (2) the deduction under section 164 (relating to taxes),</span>'''<br />
<br />
'''<span lang="EN"> (3) the deduction under section 165(a) for casualty or theft losses described in paragraph (2) or (3) of section 165(c) or for losses described in section 165(d),</span>'''<br />
<br />
'''<span lang="EN"> (4) the deductions under section 170 (relating to charitable, etc., contributions and gifts) and section 642(c) (relating to deduction for amounts paid or permanently set aside for a charitable purpose),</span>'''<br />
<br />
'''<span lang="EN"> (5) the deduction under section 213 (relating to medical, dental, etc., expenses),</span>'''<br />
<br />
'''<span lang="EN"> (6) any deduction allowable for impairment-related work expenses,</span>'''<br />
<br />
'''<span lang="EN"> (7) the deduction under section 691(c) (relating to deduction for estate tax in case of income in respect of the decedent),</span>'''<br />
<br />
'''<span lang="EN"> (8) any deduction allowable in connection with personal property used in a short sale,</span>'''<br />
<br />
'''<span lang="EN"> (9) the deduction under section 1341 (relating to computation of tax where taxpayer restores substantial amount held under claim of right),</span>'''<br />
<br />
'''<span lang="EN"> (10) the deduction under section 72(b)(3) (relating to deduction where annuity payments cease before investment recovered),</span>'''<br />
<br />
'''<span lang="EN"> (11) the deduction under section 171 (relating to deduction for amortizable bond premium), and</span>'''<br />
<br />
'''<span lang="EN"> (12) the deduction under section 216 (relating to deductions in connection with cooperative housing corporations).</span>''' <br />
<br />
'''<span lang="EN">(c) Disallowance of indirect deduction through pass-thru entity</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. The Secretary shall prescribe regulations which prohibit the indirect deduction through pass-thru entities of amounts which are not allowable as a deduction if paid or incurred directly by an individual and which contain such reporting requirements as may be necessary to carry out the purposes of this subsection.</span>'''<br />
<br />
'''<span lang="EN"> (2) Treatment of publicly offered regulated investment companies</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. Paragraph (1) shall not apply with respect to any publicly offered regulated investment company.</span>'''<br />
<br />
'''<span lang="EN"> (B) Publicly offered regulated investment companies. For purposes of this subsection—</span>'''<br />
<br />
'''<span lang="EN"> (i) In general. The term “publicly offered regulated investment company” means a regulated investment company the shares of which are—</span>'''<br />
<br />
'''<span lang="EN"> (I) continuously offered pursuant to a public offering (within the meaning of section 4 of the Securities Act of 1933, as amended (15 U.S.C. 77a to 77aa)),</span>'''<br />
<br />
'''<span lang="EN"> (II) regularly traded on an established securities market, or</span>'''<br />
<br />
'''<span lang="EN"> (III) held by or for no fewer than 500 persons at all times during the taxable year.</span>'''<br />
<br />
'''<span lang="EN"> (ii) Secretary may reduce 500 person requirement. The Secretary may by regulation decrease the minimum shareholder requirement of clause (i)(III) in the case of regulated investment companies which experience a loss of shareholders through net redemptions of their shares.</span>'''<br />
<br />
'''<span lang="EN"> (3) Treatment of certain other entities. Paragraph (1) shall not apply—</span>'''<br />
<br />
'''<span lang="EN"> (A) with respect to cooperatives and real estate investment trusts, and</span>'''<br />
<br />
'''<span lang="EN"> (B) except as provided in regulations, with respect to estates and trusts.</span>''' <br />
<br />
'''<span lang="EN">(d) Impairment-related work expenses. For purposes of this section, the term “impairment-related work expenses” means expenses—</span>'''<br />
<br />
'''<span lang="EN"> (1) of a handicapped individual (as defined in section 190(b)(3)) for attendant care services at the individual’s place of employment and other expenses in connection with such place of employment which are necessary for such individual to be able to work, and</span>'''<br />
<br />
'''<span lang="EN"> (2) with respect to which a deduction is allowable under section 162 (determined without regard to this section).</span>''' <br />
<br />
'''<span lang="EN">(e) Determination of adjusted gross income in case of estates and trusts. For purposes of this section, the adjusted gross income of an estate or trust shall be computed in the same manner as in the case of an individual, except that—</span>'''<br />
<br />
'''<span lang="EN"> (1) the deductions for costs which are paid or incurred in connection with the administration of the estate or trust and which would not have been incurred if the property were not held in such trust or estate, and</span>'''<br />
<br />
'''<span lang="EN"> (2) the deductions allowable under sections 642(b), 651, and 661,</span>'''<br />
<br />
'''<span lang="EN">shall be treated as allowable in arriving at adjusted gross income. Under regulations, appropriate adjustments shall be made in the application of part I of subchapter J of this chapter to take into account the provisions of this section.</span>''' <br />
<br />
'''<span lang="EN">(f) Coordination with other limitation. This section shall be applied before the application of the dollar limitation of the second sentence of section 162(a) (relating to trade or business expenses).</span>'''<br />
<br />
'''<span lang="EN">(g) Suspension for taxable years 2018 through 2025. Notwithstanding subsection (a), no miscellaneous itemized deduction shall be allowed for any taxable year beginning after December 31, 2017, and before January 1, 2026.</span>'''<br />
|} <br />
<br />
'''<span lang="EN">EXAMPLE</span>''' <span lang="EN">→ Calculating Taxable Income</span> <br />
<br />
<span lang="EN">Problem: John and Jane Doe; married with no children; both work at ACME Corp.; additional income: rent out basement apartment to law student.</span> <br />
<br />
{| class="wikitable"<br />
| colspan="2" |'''<span lang="EN">2018 Income and Expenses for John and Jane Doe</span>'''<br />
|-<br />
|'''<span lang="EN">Combined Salaries --- $95,000</span>'''<br />
|<span lang="EN">Mortgage Interest (§163) --- $16,000</span><br />
|-<br />
|'''<span lang="EN">Rental Income --- $5,000</span>'''<br />
|'''<span lang="EN">Rental Expenses (§212) --- $2,000</span>'''<br />
|-<br />
|'''<span lang="EN">Education Loan Interest (§221) --- $8,000</span>'''<br />
|<span lang="EN">Charitable Contributions (§170) --- $500</span><br />
|-<br />
|<span lang="EN">Medical Expenses (§213) --- $2,000</span><br />
|<span lang="EN">Unreimbursed Work Expenses (§162) --- $1,000</span><br />
|-<br />
|<span lang="EN">Tax Preparation Fee (§212) --- $1,000</span><br />
| <br />
|} <br />
<br />
<span lang="EN">STEP ONE: '''Gross Income''' → $100,000 (combined salaries + rental income)</span> <br />
<br />
<span lang="EN">STEP TWO: '''Deductions''' Under §62(a) → Education Loan Interest §62(a)(4) ABOVE THE LINE!</span><br />
<br />
<span lang="EN"> Rental Expenses §62(a)(17)</span><br />
<br />
<span lang="EN"> $10,000</span> <br />
<br />
<span lang="EN">ADJUSTED GROSS INCOME = $90,000 (gross income less deductions under §62(a)).</span> <br />
<br />
<span lang="EN">STEP THREE: Less Qualified Business Income → N/A, not a qualified business under §199A</span> <br />
<br />
<span lang="EN">STEP FOUR: Less Standard Deduction OR</span><br />
<br />
<span lang="EN"> Less Itemized Deductions</span> <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">Standard Deduction</span>'''<br />
|'''<span lang="EN">Itemized Deductions</span>'''<br />
|-<br />
|<span lang="EN">Look to §63(c) → Basic Standard Deduction §63(c)(2)</span> <br />
<br />
<span lang="EN">If married filing jointly, 200% of $3,000 §63(c)(2)(A)-(C)</span> <br />
<br />
<span lang="EN">BUT look to '''SPECIAL RULES''':</span><br />
<br />
<span lang="EN">§63(c)(7)(A)(ii) → Special rules for 2018</span> <br />
<br />
<span lang="EN">Replace $3,000 with $12,000 above</span> <br />
<br />
<span lang="EN">$12,000 x 200% = TOTAL STANDARD → '''<u>$24,000</u>'''</span><br />
|<span lang="EN">Regular v. Miscellaneous</span> <br />
<br />
<span lang="EN">Regular → on the list in §67(b)</span> <br />
<br />
<span lang="EN">Miscellaneous → anything not on list in §67(b)</span> <br />
<br />
<u><span lang="EN">Regular</span></u><br />
<br />
<span lang="EN">Mortgage Interest --- §67(b)(1) → $16, 000</span><br />
<br />
<span lang="EN">Charitable Contributions --- §67(b)(4) → $500</span><br />
<br />
<span lang="EN">Medical Expenses --- §67(b)(5) → $2,000</span> <br />
<br />
<u><span lang="EN">Miscellaneous</span></u><br />
<br />
<span lang="EN">Accountant/Tax Prep. Fees → $1,000</span><br />
<br />
<span lang="EN">Unreimbursed Work Expenses → $1,000</span> <br />
<br />
''<span lang="EN">*normally, you’d add up misc. and reg. to get total itemized, but due to §67(g), no misc. at this time.</span>'' <br />
<br />
''<span lang="EN">2% floor on miscellaneous, but currently inactive</span>'' <br />
<br />
<span lang="EN">TOTAL ITEMIZED → '''<u>$18,500</u>'''</span><br />
|} <br />
<br />
'''<span lang="EN">STEP FIVE: TOTAL TAXABLE INCOME → $66,000</span>''' <span lang="EN">(AGI less standard deduction)</span> <br />
<br />
'''<span lang="EN">Tax Credits</span>''' <br />
<br />
<span lang="EN">Tax credit → dollar for dollar reduction in the tax bill that you owe; typically, cannot bring tax owed below $0 (cannot cause a refund), but there are a few exceptions:</span><br />
<br />
<span lang="EN">● Credit for taxes withheld: money you already paid the government (anything in excess of actual tax owed will go back to the taxpayer</span><br />
<br />
<span lang="EN">● Earned income tax credit: to help low-income families with cash; you must be working and earning income to benefit from this tax credit</span> <br />
<br />
<span lang="EN">Taxpayer preference for tax-reducing strategies:</span><br />
<br />
<span lang="EN">1) Tax credits (BEST, actual dollar for dollar reduction)</span><br />
<br />
<span lang="EN">2) Above the line deductions (preferred because percentage reduction in AGI)</span><br />
<br />
<span lang="EN">3) Below the line deductions (comes after AGI, least preferable, but still good!)</span> <br />
<br />
<span lang="EN">Child Tax Credit → most subject to change currently; expanded with 2018 tax plan, used to replace eliminated personal exemption deduction</span><br />
<br />
<span lang="EN">● Changes “phase out” → you can make more before being phased out</span><br />
<br />
<span lang="EN">● Currently, only goes up to including 16 year olds</span><br />
<br />
<span lang="EN">● Expanded credit → neediest families are benefitting the least</span><br />
<br />
<span lang="EN">● You need an SSN to get the credit (children too), so no mixed-immigrant status families (must be a citizen, TINs are not enough)</span><br />
<br />
<br />
'''<span lang="EN">What is “Income”?</span>''' <br />
<br />
<span lang="EN">Haig-Simons (NOT GOOD LAW) → Income = change in wealth + consumption</span><br />
<br />
<span lang="EN">Issues: no realization, phantom income, NOT THE CALCULATION WE USE</span> <br />
<br />
<span lang="EN">Phantom income → cancellation of debt, loan forgiveness (increase in tax bill, no money to pay it)</span> <br />
<br />
<u><span lang="EN">Eisner v. Macomber (1920)</span></u> <span lang="EN">- SCOTUS [π owned stock that increased when company experienced growth]</span><br />
<br />
<span lang="EN">RULE: Under the 16th Amendment a stock dividend paid as additional shares of stock is not taxable income.</span> <br />
<br />
<span lang="EN">Case Notes: '''no income until sale and realization of actual $'''</span><br />
<br />
<span lang="EN">● Income is payment, labor, or a combination of both</span><br />
<br />
<span lang="EN">● A stock dividend paid as additional shares is an adjustment to the taxpayer’s invested capital</span><br />
<br />
<span lang="EN">● A pro rate stock dividend paid by a corporation is not taxable if:</span><br />
<br />
<span lang="EN">1) Shareholders receive no cash;</span><br />
<br />
<span lang="EN">2) Proportionate ownership is not altered; and</span><br />
<br />
<span lang="EN">3) Shareholders do not realize income by sale of shares</span> <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">Recognition</span>'''<br />
|'''<span lang="EN">Realization</span>'''<br />
|-<br />
|<span lang="EN">A particular situation in the tax code exists; “we are putting it on a tax return”</span> <br />
<br />
<span lang="EN">Realization is a prerequisite to recognition. If you have realization, then you have recognition.</span><br />
|<span lang="EN">realization requirement → where the taxpayer must receive or lose something of monetary value</span> <br />
<br />
<span lang="EN">If you are engaged in the marketplace, you likely will have a realization event.</span><br />
|} <br />
<br />
'''<span lang="EN">Punitive Damages</span>''' <br />
<br />
<u><span lang="EN">Commissioner v. Glenshaw Glass (1955)</span></u> <span lang="EN">- SCOTUS [Ds collected punitive damages for fed. antitrust action]</span><br />
<br />
<span lang="EN">RULE: punitive damages are taxable as gross income.</span> <br />
<br />
<span lang="EN">Case Notes: JUDICIAL DEFINITION: “income derived from any source whatsoever”</span><br />
<br />
<span lang="EN">● Congress implied no intent to exclude punitive damages</span><br />
<br />
<span lang="EN">● Section 22 of the 1939 Code describes gross income as “income derived from any source whatsoever”</span> <br />
<br />
{| class="wikitable"<br />
|'''<u><span lang="EN">Glenshaw Glass</span></u> <span lang="EN">Test (to determine “income”)</span>''' <br />
<br />
# '''<span lang="EN">ASSESSED WEALTH</span>'''<br />
# '''<span lang="EN">CLEARLY REALIZED</span>'''<br />
# '''<span lang="EN">COMPLETE DOMINION</span>'''<br />
|} <br />
<br />
'''<span lang="EN">Treasure Trove</span>''' <br />
<br />
<span lang="EN">Cesarini v. United States (1969) - USDC [πs found cash in used piano purchased at auction]</span><br />
<br />
<span lang="EN">RULE: all income is subject to tax unless an express exemption applies.</span> <br />
<br />
<span lang="EN">Case Notes: '''money is taxable when it is discovered, not when the treasure chest was purchased'''</span><br />
<br />
<span lang="EN">● REALIZATION EVENT is the finding of the treasure</span><br />
<br />
<span lang="EN">● Treas. Reg. §1.61-14 → treasure trove is gross income, tax code does not exempt found money from gross income</span><br />
<br />
<span lang="EN">● §61(a) → gross income is “all income from whatever source derived”</span><br />
<br />
<span lang="EN">● Treasure trove can be cash or items and is taxable income</span> <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">§ 1.61-14 Miscellaneous items of gross income.</span>'''<br />
<br />
<span lang="EN">(a) In general. In addition to the items enumerated in section 61(a), there are many other kinds of gross income.</span> <br />
<br />
<span lang="EN">For example, '''punitive damages''' such as treble damages under the antitrust laws and exemplary damages for fraud are gross income. Another person's payment of the taxpayer's income taxes constitutes gross income to the taxpayer unless excluded by law. '''Illegal gains''' constitute gross income. '''Treasure trove''', to the extent of its value in United States currency, constitutes gross income for the taxable year in which it is reduced to undisputed possession.</span><br />
<br />
<span lang="EN">(b) Cross references.</span><br />
<br />
<span lang="EN"> (1) Prizes and awards, see section 74 and regulations thereunder;</span><br />
<br />
<span lang="EN"> (2) Damages for personal injury or sickness, see section 104 and the regulations thereunder;</span><br />
<br />
<span lang="EN"> (3) Income taxes paid by lessee corporation, see section 110 and regulations thereunder;</span><br />
<br />
<span lang="EN"> (4) Scholarships and fellowship grants, see section 117 and regulations thereunder;</span><br />
<br />
<span lang="EN"> (5) Miscellaneous exemptions under other acts of Congress, see section 122;</span><br />
<br />
<span lang="EN"> (6) Tax-free covenant bonds, see section 1451 and regulations thereunder.</span><br />
<br />
<span lang="EN"> (7) Notional principal contracts, see § 1.446-3.</span><br />
|} <br />
<br />
'''<span lang="EN">Circular 230</span>''' <span lang="EN">→ when giving legal advice, you must have substantial authority on anything you put on a tax return and chance of audit is <u>not</u> a factor in determining “substantial authority”; not putting something (omitting) on a tax return '''is''' taking a position.</span> <br />
<br />
<span lang="EN">If client finds…</span><br />
<br />
<span lang="EN">● $500 → must report $500 of gross income</span><br />
<br />
<span lang="EN">● A diamond ring → must report gross income</span> <br />
<br />
'''<span lang="EN">Bargain Purchase</span>''' <span lang="EN">→ if you buy a house, that includes anything in the home, and find a valuable painting, you got a painting and a house for the price of a house, but the value of the painting is '''<u>not</u>''' now taxable income to you. (i.e. bite into an oyster and find a pearl).</span> <br />
<br />
'''<span lang="EN">Illegal Income</span>''' <br />
<br />
<u><span lang="EN">James v. United States (1961)</span></u> <span lang="EN">- SCOTUS [D acquired $738k through embezzlement, did not declare]</span><br />
<br />
<span lang="EN">RULE: Embezzlement gains and other illegal income are taxable under federal law.</span> <br />
<br />
<span lang="EN">Case Notes: distinguishes <u>Wilcox</u>, which held that no claim of right = no taxable income.</span><br />
<br />
<span lang="EN">● A federal taxpayer must report illegally acquired income, including embezzled money, as taxable income</span><br />
<br />
<span lang="EN">● Statutorily, the recent Code includes all income however obtained, most case law treats all income as taxable, even if another person is legally entitled to recover the income from the recipient.</span> <br />
<br />
'''<span lang="EN">Compensation for Services - Payments to Third Parties</span>''' <br />
<br />
{| class="wikitable"<br />
|<span lang="EN">26 U.S. Code § 61 - Gross income defined</span><br />
<br />
<span lang="EN">(a) General definition. Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:</span><br />
<br />
<span lang="EN"> (1) Compensation for services, including fees, commissions, fringe benefits, and similar items;</span><br />
|} <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code § 74 - Prizes and awards</span>'''<br />
<br />
'''<span lang="EN">(a) General rule. Except as otherwise provided in this section or in section 117 (relating to qualified scholarships), gross income includes amounts received as prizes and awards.</span>'''<br />
<br />
'''<span lang="EN">(b) Exception for certain prizes and awards transferred to charities. Gross income does not include amounts received as prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement, but only if—</span>'''<br />
<br />
'''<span lang="EN"> (1) the recipient was selected without any action on his part to enter the contest or proceeding;</span>'''<br />
<br />
'''<span lang="EN"> (2) the recipient is not required to render substantial future services as a condition to receiving the prize or award; and</span>'''<br />
<br />
'''<span lang="EN"> (3) the prize or award is transferred by the payor to a governmental unit or organization described in paragraph (1) or (2) of section 170(c) pursuant to a designation made by the recipient.</span>''' <br />
<br />
'''<span lang="EN">(c) Exception for certain employee achievement awards</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. Gross income shall not include the value of an employee achievement award (as defined in section 274(j)) received by the taxpayer if the cost to the employer of the employee achievement award does not exceed the amount allowable as a deduction to the employer for the cost of the employee achievement award.</span>'''<br />
<br />
'''<span lang="EN"> (2) Excess deduction award. If the cost to the employer of the employee achievement award received by the taxpayer exceeds the amount allowable as a deduction to the employer, then gross income includes the greater of—</span>'''<br />
<br />
'''<span lang="EN"> (A) an amount equal to the portion of the cost to the employer of the award that is not allowable as a deduction to the employer (but not in excess of the value of the award), or</span>'''<br />
<br />
'''<span lang="EN"> (B) the amount by which the value of the award exceeds the amount allowable as a deduction to the employer.</span>''' <br />
<br />
'''<span lang="EN">The remaining portion of the value of such award shall not be included in the gross income of the recipient.</span>'''<br />
<br />
'''<span lang="EN">(3) Treatment of tax-exempt employers</span>''' <br />
<br />
'''<span lang="EN">In the case of an employer exempt from taxation under this subtitle, any reference in this subsection to the amount allowable as a deduction to the employer shall be treated as a reference to the amount which would be allowable as a deduction to the employer if the employer were not exempt from taxation under this subtitle.</span>'''<br />
<br />
'''<span lang="EN"> (4) Cross reference. For provisions excluding certain de minimis fringes from gross income, see section 132(e).</span>'''<br />
<br />
'''<span lang="EN">(d) Exception for Olympic and Paralympic medals and prizes</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. Gross income shall not include the value of any medal awarded in, or any prize money received from the United States Olympic Committee on account of, competition in the Olympic Games or Paralympic Games.</span>'''<br />
<br />
'''<span lang="EN"> (2) Limitation based on adjusted gross income</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. Paragraph (1) shall not apply to any taxpayer for any taxable year if the adjusted gross income (determined without regard to this subsection) of such taxpayer for such taxable year exceeds $1,000,000 (half of such amount in the case of a married individual filing a separate return).</span>'''<br />
<br />
'''<span lang="EN"> (B) Coordination with other limitations. For purposes of sections 86, 135, 137, 219, 221, 222, and 469, adjusted gross income shall be determined after the application of paragraph (1) and before the application of subparagraph (A).</span>'''<br />
|} <br />
<br />
<u><span lang="EN">Old Colony Trust Co. v. Commissioner (1929)</span></u> <span lang="EN">- SCOTUS [D was president, resolution to pay officers income tax]</span><br />
<br />
<span lang="EN">RULE: Payment by an employer of an employee’s income taxes constitutes taxable gain to the employee</span> <br />
<br />
<span lang="EN">Case Notes: discharging financial obligations is financial gain to the employee, and taxable</span><br />
<br />
<span lang="EN">● Any payment made for services rendered by an employee constitutes taxable income to the employee.</span><br />
<br />
<span lang="EN">● Whether the employer makes the payment directly to the employee or to a third party on behalf of the employee is inconsequential.</span><br />
<br />
<span lang="EN">● Taxes paid in consideration of employee services do not constitute a tax-free gift.</span> <br />
<br />
<u><span lang="EN">McCann v. United States (1981)</span></u> <span lang="EN">- Court of Claims [π qualified for all expenses trip based on sales numbers]</span><br />
<br />
<span lang="EN">RULE: Gross income includes all-expenses-paid trips rewarded to employees for exceptional services rendered.</span> <br />
<br />
<span lang="EN">Case Notes: despite not being money, the trip was a financial benefit to the employee, and taxable</span><br />
<br />
<span lang="EN">● §74(a) provides that gross income includes prizes and awards</span><br />
<br />
<span lang="EN">● Fair market value of an all-expenses-paid trip should be included in gross income</span> <br />
<br />
<span lang="EN">UNDER TCJA: Entertainment expenses are '''<u>not</u>''' deductible from 2018-2025; conferences included but tours and shows excluded</span> <br />
<br />
<u><span lang="EN">United States v. Gotcher (1968)</span></u> <span lang="EN">- 5th Cir. [π & wife went to Germany on biz trip to tour facilities and improve sales]</span><br />
<br />
<span lang="EN">RULE: If an employer sends and employee on an expenses-paid trip primarily so that the employee can better promote the employer’s business, the value of the trip is excluded from the employee’s gross income for federal tax purposes.</span> <br />
<br />
<span lang="EN">Case Notes: P went for '''dominant purpose''' of employer; wife is gross income</span><br />
<br />
<span lang="EN">● Under §61 of the 1954 Code, the trip’s value is included in the employee’s gross income only if the employee gains economically from the trip by receiving a benefit without having to pay for it, and only if the trip is '''primarily for the employee’s benefit'''.</span> <br />
<br />
<span lang="EN">● '''DOMINANT PURPOSE TEST''' → if the trip is for the employer, it is not taxable income</span><br />
<br />
<span lang="EN">● '''Primary purpose''' → incidental enjoyment by employee is OK so long as the primary benefit is to employer</span> <br />
<br />
'''<span lang="EN">Meals and Lodging - Furnished on an Employer’s Premises</span>''' <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code § 119 - Meals or lodging furnished for the convenience of the employer</span>'''<br />
<br />
'''<span lang="EN">(a) Meals and lodging furnished to employee, his spouse, and his dependents, pursuant to employment. There shall be excluded from gross income of an employee the value of any meals or lodging furnished to him, his spouse, or any of his dependents by or on behalf of his employer for the convenience of the employer, but only if—</span>'''<br />
<br />
'''<span lang="EN"> (1) in the case of meals, the meals are furnished on the business premises of the employer, or</span>'''<br />
<br />
'''<span lang="EN"> (2) in the case of lodging, the employee is required to accept such lodging on the business premises of his employer as a condition of his employment.</span>''' <br />
<br />
'''<span lang="EN">(b) Special rules. For purposes of subsection (a)—</span>'''<br />
<br />
'''<span lang="EN"> (1) Provisions of employment contract or State statute not to be determinative</span>'''<br />
<br />
'''<span lang="EN">In determining whether meals or lodging are furnished for the convenience of the employer, the provisions of an employment contract or of a State statute fixing terms of employment shall not be determinative of whether the meals or lodging are intended as compensation.</span>'''<br />
<br />
'''<span lang="EN"> (2) Certain factors not taken into account with respect to meals</span>'''<br />
<br />
'''<span lang="EN">In determining whether meals are furnished for the convenience of the employer, the fact that a charge is made for such meals, and the fact that the employee may accept or decline such meals, shall not be taken into account.</span>'''<br />
<br />
'''<span lang="EN"> (3) Certain fixed charges for meals</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. If—</span>'''<br />
<br />
'''<span lang="EN"> (i) an employee is required to pay on a periodic basis a fixed charge for his meals, and</span>'''<br />
<br />
'''<span lang="EN"> (ii) such meals are furnished by the employer for the convenience of the employer,</span>'''<br />
<br />
'''<span lang="EN">there shall be excluded from the employee’s gross income an amount equal to such fixed charge.</span>'''<br />
<br />
'''<span lang="EN"> (B) Application of subparagraph (A)Subparagraph (A) shall apply—</span>'''<br />
<br />
'''<span lang="EN"> (i) whether the employee pays the fixed charge out of his stated compensation or out of his own funds, and</span>'''<br />
<br />
'''<span lang="EN"> (ii) only if the employee is required to make the payment whether he accepts or declines the meals.</span>'''<br />
<br />
'''<span lang="EN"> (4) Meals furnished to employees on business premises where meals of most employees are otherwise excludable. All meals furnished on the business premises of an employer to such employer’s employees shall be treated as furnished for the convenience of the employer if, without regard to this paragraph, more than half of the employees to whom such meals are furnished on such premises are furnished such meals for the convenience of the employer.</span>'''<br />
<br />
'''<span lang="EN">(c) Employees living in certain camps</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. In the case of an individual who is furnished lodging in a camp located in a foreign country by or on behalf of his employer, such camp shall be considered to be part of the business premises of the employer.</span>'''<br />
<br />
'''<span lang="EN"> (2) Camp. For purposes of this section, a camp constitutes lodging which is—</span>'''<br />
<br />
'''<span lang="EN"> (A) provided by or on behalf of the employer for the convenience of the employer because the place at which such individual renders services is in a remote area where satisfactory housing is not available on the open market,</span>'''<br />
<br />
'''<span lang="EN"> (B) located, as near as practicable, in the vicinity of the place at which such individual renders services, and</span>'''<br />
<br />
'''<span lang="EN"> (C) furnished in a common area (or enclave) which is not available to the public and which normally accommodates 10 or more employees.</span>''' <br />
<br />
'''<span lang="EN">(d) Lodging furnished by certain educational institutions to employees</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. In the case of an employee of an educational institution, gross income shall not include the value of qualified campus lodging furnished to such employee during the taxable year.</span>'''<br />
<br />
'''<span lang="EN"> (2) Exception in cases of inadequate rent. Paragraph (1) shall not apply to the extent of the excess of—</span>'''<br />
<br />
'''<span lang="EN"> (A) the lesser of—</span>'''<br />
<br />
'''<span lang="EN"> (i) 5 percent of the appraised value of the qualified campus lodging, or</span>'''<br />
<br />
'''<span lang="EN"> (ii) the average of the rentals paid by individuals (other than employees or students of the educational institution) during such calendar year for lodging provided by the educational institution which is comparable to the qualified campus lodging provided to the employee, over</span>'''<br />
<br />
'''<span lang="EN"> (B) the rent paid by the employee for the qualified campus lodging during such calendar year.</span>'''<br />
<br />
'''<span lang="EN">The appraised value under subparagraph (A)(i) shall be determined as of the close of the calendar year in which the taxable year begins, or, in the case of a rental period not greater than 1 year, at any time during the calendar year in which such period begins.</span>'''<br />
<br />
'''<span lang="EN"> (3) Qualified campus lodging. For purposes of this subsection, the term “qualified campus lodging” means lodging to which subsection (a) does not apply and which is—</span>'''<br />
<br />
'''<span lang="EN"> (A) located on, or in the proximity of, a campus of the educational institution, and</span>'''<br />
<br />
'''<span lang="EN"> (B) furnished to the employee, his spouse, and any of his dependents by or on behalf of such institution for use as a residence.</span>'''<br />
<br />
'''<span lang="EN"> (4) Educational institution, etc.For purposes of this subsection—</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. The term “educational institution” means—</span>'''<br />
<br />
'''<span lang="EN"> (i) an institution described in section 170(b)(1)(A)(ii) (or an entity organized under State law and composed of public institutions so described), or</span>'''<br />
<br />
'''<span lang="EN"> (ii) an academic health center.</span>'''<br />
<br />
'''<span lang="EN"> (B) Academic health center. For purposes of subparagraph (A), the term “academic health center” means an entity—</span>'''<br />
<br />
'''<span lang="EN"> (i) which is described in section 170(b)(1)(A)(iii),</span>'''<br />
<br />
'''<span lang="EN"> (ii) which receives (during the calendar year in which the taxable year of the taxpayer begins) payments under subsection (d)(5)(B) or (h) of section 1886 of the Social Security Act (relating to graduate medical education), and</span>'''<br />
<br />
'''<span lang="EN"> (iii) which has as one of its principal purposes or functions the providing and teaching of basic and clinical medical science and research with the entity’s own faculty.</span>'''<br />
|} <br />
<br />
<span lang="EN">Meals and Lodging - §119(a)</span> <br />
<br />
{| class="wikitable"<br />
| <span lang="EN"> <u>Meals</u></span><br />
| <span lang="EN"> <u>Lodging</u></span><br />
|-<br />
|<span lang="EN">● Furnished by employer</span><br />
<br />
<span lang="EN">● For convenience of employer</span><br />
<br />
<span lang="EN">● On business premises of employer</span><br />
|<span lang="EN">● Furnished by employer</span><br />
<br />
<span lang="EN">● For convenience of employer</span><br />
<br />
<span lang="EN">● On business premises of employer</span><br />
<br />
<span lang="EN">● Employee required to accept as a condition of employment</span><br />
|} <br />
<br />
<span lang="EN">Dominant purpose → first ask, is the main purpose business or pleasure?</span> <br />
<br />
<span lang="EN">Employee morale is '''<u>not</u>''' a valid reason for “employer convenience”</span> <br />
<br />
<u><span lang="EN">Commissioner v. Kowalski (1977)</span></u> <span lang="EN">- SCOTUS [state troopers given cash meal allowances when out on duty]</span><br />
<br />
<span lang="EN">RULE: Under federal tax law, cash meal allowances are included in gross income.</span> <br />
<br />
<span lang="EN">Case Notes: Only §119 can be used to find an exception</span><br />
<br />
<span lang="EN">● Cash meal allowances are not excluded under §119 or the common-law convenience-of-the-employer doctrine (which did not survive the recent codification of federal law anyways)</span><br />
<br />
<span lang="EN">● §119 excludes meals provided by the employer directly, but not cash reimbursements, which must be included in gross income.</span> <br />
<br />
<u><span lang="EN">Adams v. United States (1978)</span></u> <span lang="EN">- Claims Court [π CEO in Japan req. to live in company-provided housing]</span><br />
<br />
<span lang="EN">RULE: Employer-provided housing is excludable from a taxpayer’s gross income if: (1) the employment is conditioned upon acceptance of the housing, (2) the housing is for the employer’s convenience, and (3) the housing is on the employer’s business premises.</span> <br />
<br />
<span lang="EN">Case Notes: Japanese housing should be completely excluded from income</span><br />
<br />
<span lang="EN">● There must be a strong link between the residence and business interest to find “convenience of the employer”</span> <br />
<br />
'''<span lang="EN">Statutory Fringe Benefits</span>''' <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code § 132 - Certain fringe benefits</span>'''<br />
<br />
'''<span lang="EN">(a) Exclusion from gross income. Gross income shall not include any fringe benefit which qualifies as a—</span>'''<br />
<br />
'''<span lang="EN"> (1) no-additional-cost service,</span>'''<br />
<br />
'''<span lang="EN"> (2) qualified employee discount,</span>'''<br />
<br />
'''<span lang="EN"> (3) working condition fringe,</span>'''<br />
<br />
'''<span lang="EN"> (4) de minimis fringe,</span>'''<br />
<br />
'''<span lang="EN"> (5) qualified transportation fringe,</span>'''<br />
<br />
'''<span lang="EN"> (6) qualified moving expense reimbursement,</span>'''<br />
<br />
'''<span lang="EN"> (7) qualified retirement planning services, or</span>'''<br />
<br />
'''<span lang="EN"> (8) qualified military base realignment and closure fringe.</span>''' <br />
<br />
'''<span lang="EN">(b) No-additional-cost service defined. For purposes of this section, the term “no-additional-cost service” means any service provided by an employer to an employee for use by such employee if—</span>'''<br />
<br />
'''<span lang="EN"> (1) such service is offered for sale to customers in the ordinary course of the line of business of the employer in which the employee is performing services, and</span>'''<br />
<br />
'''<span lang="EN"> (2) the employer incurs no substantial additional cost (including forgone revenue) in providing such service to the employee (determined without regard to any amount paid by the employee for such service).</span>''' <br />
<br />
'''<span lang="EN">(c) Qualified employee discount defined. For purposes of this section—</span>'''<br />
<br />
'''<span lang="EN"> (1) Qualified employee discount. The term “qualified employee discount” means any employee discount with respect to qualified property or services to the extent such discount does not exceed—</span>'''<br />
<br />
'''<span lang="EN"> (A) in the case of property, the gross profit percentage of the price at which the property is being offered by the employer to customers, or</span>'''<br />
<br />
'''<span lang="EN"> (B) in the case of services, 20 percent of the price at which the services are being offered by the employer to customers.</span>'''<br />
<br />
'''<span lang="EN"> (2) Gross profit percentage</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. The term “gross profit percentage” means the percent which—</span>'''<br />
<br />
'''<span lang="EN"> (i) the excess of the aggregate sales price of property sold by the employer to customers over the aggregate cost of such property to the employer, is of</span>'''<br />
<br />
'''<span lang="EN"> (ii) the aggregate sale price of such property.</span>'''<br />
<br />
'''<span lang="EN"> (B) Determination of gross profit percentage. Gross profit percentage shall be determined on the basis of—</span>'''<br />
<br />
'''<span lang="EN"> (i) all property offered to customers in the ordinary course of the line of business of the employer in which the employee is performing services (or a reasonable classification of property selected by the employer), and</span>'''<br />
<br />
'''<span lang="EN"> (ii) the employer’s experience during a representative period.</span>'''<br />
<br />
'''<span lang="EN"> (3) Employee discount defined. The term “employee discount” means the amount by which—</span>'''<br />
<br />
'''<span lang="EN"> (A) the price at which the property or services are provided by the employer to an employee for use by such employee, is less than</span>'''<br />
<br />
'''<span lang="EN"> (B) the price at which such property or services are being offered by the employer to customers.</span>'''<br />
<br />
'''<span lang="EN"> (4) Qualified property or services. The term “qualified property or services” means any property (other than real property and other than personal property of a kind held for investment) or services which are offered for sale to customers in the ordinary course of the line of business of the employer in which the employee is performing services.</span>'''<br />
<br />
'''<span lang="EN">(d) Working condition fringe defined. For purposes of this section, the term “working condition fringe” means any property or services provided to an employee of the employer to the extent that, if the employee paid for such property or services, such payment would be allowable as a deduction under section 162 or 167.</span>'''<br />
<br />
'''<span lang="EN">(e) De minimis fringe defined. For purposes of this section—</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. The term “de minimis fringe” means any property or service the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer’s employees) so small as to make accounting for it unreasonable or administratively impracticable.</span>'''<br />
<br />
'''<span lang="EN"> (2) Treatment of certain eating facilities. The operation by an employer of any eating facility for employees shall be treated as a de minimis fringe if—</span>'''<br />
<br />
'''<span lang="EN"> (A) such facility is located on or near the business premises of the employer, and</span>'''<br />
<br />
'''<span lang="EN"> (B) revenue derived from such facility normally equals or exceeds the direct operating costs of such facility.</span>''' <br />
<br />
'''<span lang="EN">The preceding sentence shall apply with respect to any highly compensated employee only if access to the facility is available on substantially the same terms to each member of a group of employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of highly compensated employees. For purposes of subparagraph (B), an employee entitled under section 119 to exclude the value of a meal provided at such facility shall be treated as having paid an amount for such meal equal to the direct operating costs of the facility attributable to such meal.</span>''' <br />
<br />
'''<span lang="EN">(f) Qualified transportation fringe</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. For purposes of this section, the term “qualified transportation fringe” means any of the following provided by an employer to an employee:</span>'''<br />
<br />
'''<span lang="EN"> (A) Transportation in a commuter highway vehicle if such transportation is in connection with travel between the employee’s residence and place of employment.</span>'''<br />
<br />
'''<span lang="EN"> (B) Any transit pass.</span>'''<br />
<br />
'''<span lang="EN"> (C) Qualified parking.</span>'''<br />
<br />
'''<span lang="EN"> (D) Any qualified bicycle commuting reimbursement.</span>'''<br />
<br />
'''<span lang="EN"> (2) Limitation on exclusion. The amount of the fringe benefits which are provided by an employer to any employee and which may be excluded from gross income under subsection (a)(5) shall not exceed—</span>'''<br />
<br />
'''<span lang="EN"> (A) $175 per month in the case of the aggregate of the benefits described in subparagraphs (A) and (B) of paragraph (1),</span>'''<br />
<br />
'''<span lang="EN"> (B) $175 per month in the case of qualified parking, and</span>'''<br />
<br />
'''<span lang="EN"> (C) the applicable annual limitation in the case of any qualified bicycle commuting reimbursement.</span>'''<br />
<br />
'''<span lang="EN"> (3) Cash reimbursements. For purposes of this subsection, the term “qualified transportation fringe” includes a cash reimbursement by an employer to an employee for a benefit described in paragraph (1). The preceding sentence shall apply to a cash reimbursement for any transit pass only if a voucher or similar item which may be exchanged only for a transit pass is not readily available for direct distribution by the employer to the employee.</span>'''<br />
<br />
'''<span lang="EN"> (4) No constructive receipt. No amount shall be included in the gross income of an employee solely because the employee may choose between any qualified transportation fringe (other than a qualified bicycle commuting reimbursement) and compensation which would otherwise be includible in gross income of such employee.</span>'''<br />
<br />
'''<span lang="EN"> (5) Definitions. For purposes of this subsection—</span>'''<br />
<br />
'''<span lang="EN"> (A) Transit pass. The term “transit pass” means any pass, token, farecard, voucher, or similar item entitling a person to transportation (or transportation at a reduced price) if such transportation is—</span>'''<br />
<br />
'''<span lang="EN"> (i) on mass transit facilities (whether or not publicly owned), or</span>'''<br />
<br />
'''<span lang="EN"> (ii) provided by any person in the business of transporting persons for compensation or hire if such transportation is provided in a vehicle meeting the requirements of subparagraph (B)(i).</span>'''<br />
<br />
'''<span lang="EN"> (B) Commuter highway vehicle. The term “commuter highway vehicle” means any highway vehicle—</span>'''<br />
<br />
'''<span lang="EN"> (i) the seating capacity of which is at least 6 adults (not including the driver), and</span>'''<br />
<br />
'''<span lang="EN"> (ii) at least 80 percent of the mileage use of which can reasonably be expected to be—</span>'''<br />
<br />
'''<span lang="EN"> (I) for purposes of transporting employees in connection with travel between their residences and their place of employment, and</span>'''<br />
<br />
'''<span lang="EN"> (II) on trips during which the number of employees transported for such purposes is at least ½ of the adult seating capacity of such vehicle (not including the driver).</span>'''<br />
<br />
'''<span lang="EN"> (C) Qualified parking. The term “qualified parking” means parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work by transportation described in subparagraph (A), in a commuter highway vehicle, or by carpool. Such term shall not include any parking on or near property used by the employee for residential purposes.</span>'''<br />
<br />
'''<span lang="EN"> (D) Transportation provided by employer</span>'''<br />
<br />
'''<span lang="EN">Transportation referred to in paragraph (1)(A) shall be considered to be provided by an employer if such transportation is furnished in a commuter highway vehicle operated by or for the employer.</span>'''<br />
<br />
'''<span lang="EN"> (E) Employee</span>'''<br />
<br />
'''<span lang="EN">For purposes of this subsection, the term “employee” does not include an individual who is an employee within the meaning of section 401(c)(1).</span>'''<br />
<br />
'''<span lang="EN"> (F) Definitions related to bicycle commuting reimbursement</span>'''<br />
<br />
'''<span lang="EN"> (i) Qualified bicycle commuting reimbursement. The term “qualified bicycle commuting reimbursement” means, with respect to any calendar year, any employer reimbursement during the 15-month period beginning with the first day of such calendar year for reasonable expenses incurred by the employee during such calendar year for the purchase of a bicycle and bicycle improvements, repair, and storage, if such bicycle is regularly used for travel between the employee’s residence and place of employment.</span>'''<br />
<br />
'''<span lang="EN"> (ii) Applicable annual limitation. The term “applicable annual limitation” means, with respect to any employee for any calendar year, the product of $20 multiplied by the number of qualified bicycle commuting months during such year.</span>'''<br />
<br />
'''<span lang="EN"> (iii) Qualified bicycle commuting month. The term “qualified bicycle commuting month” means, with respect to any employee, any month during which such employee—</span>'''<br />
<br />
'''<span lang="EN"> (I) regularly uses the bicycle for a substantial portion of the travel between the employee’s residence and place of employment, and</span>'''<br />
<br />
'''<span lang="EN"> (II) does not receive any benefit described in subparagraph (A), (B), or (C) of paragraph (1).</span>'''<br />
<br />
'''<span lang="EN"> (6) Inflation adjustment</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. In the case of any taxable year beginning in a calendar year after 1999, the dollar amounts contained in subparagraphs (A) and (B) of paragraph (2) shall be increased by an amount equal to—</span>'''<br />
<br />
'''<span lang="EN"> (i) such dollar amount, multiplied by</span>'''<br />
<br />
'''<span lang="EN"> (ii) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting “calendar year 1998” for “calendar year 2016” in subparagraph (A)(ii) thereof.</span>''' <br />
<br />
'''<span lang="EN">In the case of any taxable year beginning in a calendar year after 2002, clause (ii) shall be applied by substituting “calendar year 2001” for “calendar year 1998” for purposes of adjusting the dollar amount contained in paragraph (2)(A).</span>'''<br />
<br />
'''<span lang="EN"> (B) Rounding. If any increase determined under subparagraph (A) is not a multiple of $5, such increase shall be rounded to the next lowest multiple of $5.</span>'''<br />
<br />
'''<span lang="EN"> (7) Coordination with other provisions. For purposes of this section, the terms “working condition fringe” and “de minimis fringe” shall not include any qualified transportation fringe (determined without regard to paragraph (2)).</span>'''<br />
<br />
'''<span lang="EN"> (8) Suspension of qualified bicycle commuting reimbursement exclusion. Paragraph (1)(D) shall not apply to any taxable year beginning after December 31, 2017, and before January 1, 2026.</span>'''<br />
<br />
'''<span lang="EN">(g) Qualified moving expense reimbursement. For purposes of this section—</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. The term “qualified moving expense reimbursement” means any amount received (directly or indirectly) by an individual from an employer as a payment for (or a reimbursement of) expenses which would be deductible as moving expenses under section 217 if directly paid or incurred by the individual. Such term shall not include any payment for (or reimbursement of) an expense actually deducted by the individual in a prior taxable year.</span>'''<br />
<br />
'''<span lang="EN"> (2) Suspension for taxable years 2018 through 2025. Except in the case of a member of the Armed Forces of the United States on active duty who moves pursuant to a military order and incident to a permanent change of station, subsection (a)(6) shall not apply to any taxable year beginning after December 31, 2017, and before January 1, 2026.</span>'''<br />
<br />
'''<span lang="EN">(h) Certain individuals treated as employees for purposes of subsections (a)(1) and (2)For purposes of paragraphs (1) and (2) of subsection (a)—</span>'''<br />
<br />
'''<span lang="EN"> (1) Retired and disabled employees and surviving spouse of employee treated as employee. With respect to a line of business of an employer, the term “employee” includes—</span>'''<br />
<br />
'''<span lang="EN"> (A) any individual who was formerly employed by such employer in such line of business and who separated from service with such employer in such line of business by reason of retirement or disability, and</span>'''<br />
<br />
'''<span lang="EN"> (B) any widow or widower of any individual who died while employed by such employer in such line of business or while an employee within the meaning of subparagraph (A).</span>'''<br />
<br />
'''<span lang="EN"> (2) Spouse and dependent children</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. Any use by the spouse or a dependent child of the employee shall be treated as use by the employee.</span>'''<br />
<br />
'''<span lang="EN"> (B) Dependent child. For purposes of subparagraph (A), the term “dependent child” means any child (as defined in section 152(f)(1)) of the employee—</span>'''<br />
<br />
'''<span lang="EN"> (i) who is a dependent of the employee, or</span>'''<br />
<br />
'''<span lang="EN"> (ii) both of whose parents are deceased and who has not attained age 25.</span>''' <br />
<br />
'''<span lang="EN">For purposes of the preceding sentence, any child to whom section 152(e) applies shall be treated as the dependent of both parents.</span>'''<br />
<br />
'''<span lang="EN"> (3) Special rule for parents in the case of air transportation. Any use of air transportation by a parent of an employee (determined without regard to paragraph (1)(B)) shall be treated as use by the employee.</span>'''<br />
<br />
'''<span lang="EN">(i) Reciprocal agreements. For purposes of paragraph (1) of subsection (a), any service provided by an employer to an employee of another employer shall be treated as provided by the employer of such employee if—</span>'''<br />
<br />
'''<span lang="EN"> (1) such service is provided pursuant to a written agreement between such employers, and</span>'''<br />
<br />
'''<span lang="EN"> (2) neither of such employers incurs any substantial additional costs (including foregone revenue) in providing such service or pursuant to such agreement.</span>''' <br />
<br />
'''<span lang="EN">(j) Special rules</span>'''<br />
<br />
'''<span lang="EN"> (1) Exclusions under subsection (a)(1) and (2) apply to highly compensated employees only if no discrimination. Paragraphs (1) and (2) of subsection (a) shall apply with respect to any fringe benefit described therein provided with respect to any highly compensated employee only if such fringe benefit is available on substantially the same terms to each member of a group of employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of highly compensated employees.</span>'''<br />
<br />
'''<span lang="EN"> (2) Special rule for leased sections of department stores</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. For purposes of paragraph (2) of subsection (a), in the case of a leased section of a department store—</span>'''<br />
<br />
'''<span lang="EN"> (i) such section shall be treated as part of the line of business of the person operating the department store, and</span>'''<br />
<br />
'''<span lang="EN"> (ii) employees in the leased section shall be treated as employees of the person operating the department store.</span>'''<br />
<br />
'''<span lang="EN"> (B) Leased section of department store. For purposes of subparagraph (A), a leased section of a department store is any part of a department store where over-the-counter sales of property are made under a lease or similar arrangement where it appears to the general public that individuals making such sales are employed by the person operating the department store.</span>'''<br />
<br />
'''<span lang="EN"> (3) Auto salesmen</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. For purposes of subsection (a)(3), qualified automobile demonstration use shall be treated as a working condition fringe.</span>'''<br />
<br />
'''<span lang="EN"> (B) Qualified automobile demonstration use. For purposes of subparagraph (A), the term “qualified automobile demonstration use” means any use of an automobile by a full-time automobile salesman in the sales area in which the automobile dealer’s sales office is located if—</span>'''<br />
<br />
'''<span lang="EN"> (i) such use is provided primarily to facilitate the salesman’s performance of services for the employer, and</span>'''<br />
<br />
'''<span lang="EN"> (ii) there are substantial restrictions on the personal use of such automobile by such salesman.</span>'''<br />
<br />
'''<span lang="EN"> (4) On-premises gyms and other athletic facilities</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. Gross income shall not include the value of any on-premises athletic facility provided by an employer to his employees.</span>'''<br />
<br />
'''<span lang="EN"> (B) On-premises athletic facility. For purposes of this paragraph, the term “on-premises athletic facility” means any gym or other athletic facility—</span>'''<br />
<br />
'''<span lang="EN"> (i) which is located on the premises of the employer,</span>'''<br />
<br />
'''<span lang="EN"> (ii) which is operated by the employer, and</span>'''<br />
<br />
'''<span lang="EN"> (iii) substantially all the use of which is by employees of the employer, their spouses, and their dependent children (within the meaning of subsection (h)).</span>'''<br />
<br />
'''<span lang="EN"> (5) Special rule for affiliates of airlines</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. If—</span>'''<br />
<br />
'''<span lang="EN"> (i) a qualified affiliate is a member of an affiliated group another member of which operates an airline, and</span>'''<br />
<br />
'''<span lang="EN"> (ii) employees of the qualified affiliate who are directly engaged in providing airline-related services are entitled to no-additional-cost service with respect to air transportation provided by such other member, then, for purposes of applying paragraph (1) of subsection (a) to such no-additional-cost service provided to such employees, such qualified affiliate shall be treated as engaged in the same line of business as such other member.</span>'''<br />
<br />
'''<span lang="EN"> (B) Qualified affiliate. For purposes of this paragraph, the term “qualified affiliate” means any corporation which is predominantly engaged in airline-related services.</span>'''<br />
<br />
'''<span lang="EN"> (C) Airline-related services. For purposes of this paragraph, the term “airline-related services” means any of the following services provided in connection with air transportation:</span>'''<br />
<br />
'''<span lang="EN"> (i) Catering.</span>'''<br />
<br />
'''<span lang="EN"> (ii) Baggage handling.</span>'''<br />
<br />
'''<span lang="EN"> (iii) Ticketing and reservations.</span>'''<br />
<br />
'''<span lang="EN"> (iv) Flight planning and weather analysis.</span>'''<br />
<br />
'''<span lang="EN"> (v) Restaurants and gift shops located at an airport.</span>'''<br />
<br />
'''<span lang="EN"> (vi) Such other similar services provided to the airline as the Secretary may prescribe.</span>'''<br />
<br />
'''<span lang="EN"> (D) Affiliated group. For purposes of this paragraph, the term “affiliated group” has the meaning given such term by section 1504(a).</span>'''<br />
<br />
'''<span lang="EN"> (6) Highly compensated employee. For purposes of this section, the term “highly compensated employee” has the meaning given such term by section 414(q).</span>'''<br />
<br />
'''<span lang="EN"> (7) Air cargo. For purposes of subsection (b), the transportation of cargo by air and the transportation of passengers by air shall be treated as the same service.</span>'''<br />
<br />
'''<span lang="EN"> (8) Application of section to otherwise taxable educational or training benefits. Amounts paid or expenses incurred by the employer for education or training provided to the employee which are not excludable from gross income under section 127 shall be excluded from gross income under this section if (and only if) such amounts or expenses are a working condition fringe.</span>'''<br />
<br />
'''<span lang="EN">(k) Customers not to include employees. For purposes of this section (other than subsection (c)(2)), the term “customers” shall only include customers who are not employees.</span>'''<br />
<br />
'''<span lang="EN">(l) Section not to apply to fringe benefits expressly provided for elsewhere. This section (other than subsections (e) and (g)) shall not apply to any fringe benefits of a type the tax treatment of which is expressly provided for in any other section of this chapter.</span>'''<br />
<br />
'''<span lang="EN">(m) Qualified retirement planning services</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. For purposes of this section, the term “qualified retirement planning services” means any retirement planning advice or information provided to an employee and his spouse by an employer maintaining a qualified employer plan.</span>'''<br />
<br />
'''<span lang="EN"> (2) Nondiscrimination rule. Subsection (a)(7) shall apply in the case of highly compensated employees only if such services are available on substantially the same terms to each member of the group of employees normally provided education and information regarding the employer’s qualified employer plan.</span>'''<br />
<br />
'''<span lang="EN"> (3) Qualified employer plan. For purposes of this subsection, the term “qualified employer plan” means a plan, contract, pension, or account described in section 219(g)(5).</span>'''<br />
<br />
'''<span lang="EN">(n) Qualified military base realignment and closure fringe. For purposes of this section—</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. The term “qualified military base realignment and closure fringe” means 1 or more payments under the authority of section 1013 of the Demonstration Cities and Metropolitan Development Act of 1966 (42 U.S.C. 3374) (as in effect on the date of the enactment of the American Recovery and Reinvestment Tax Act of 2009).</span>'''<br />
<br />
'''<span lang="EN"> (2) Limitation. With respect to any property, such term shall not include any payment referred to in paragraph (1) to the extent that the sum of all of such payments related to such property exceeds the maximum amount described in subsection (c) of such section (as in effect on such date).</span>'''<br />
<br />
'''<span lang="EN">(o) Regulations. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.</span>'''<br />
|} <br />
<br />
<span lang="EN">Statutory Fringe Benefits → §132(a) lists eight types of employee fringe benefits specifically excluded from gross income:</span><br />
<br />
<span lang="EN">1) No-additional-cost service → space available; business is already offering something, no customer took it (i.e. airline tickets for employees, unbooked hotel rooms available to employee for a night for free); '''no substantial additional cost to employer'''</span><br />
<br />
<span lang="EN">2) Qualified employee discount → gross profit % or 20% cap on services; qualified property or services: offered for sale to customers in the '''ordinary course or line of business''' in which the employee is performing the services (i.e. can’t offer discounted massage to retail employee)</span><br />
<br />
<span lang="EN">3) Working condition fringe → normally deductible under §162 or §167; does not include transportation costs</span><br />
<br />
<span lang="EN">4) De minimis fringe (holiday gifts) → infrequent, small value, administratively not feasible/impractical to claim; does not include transportation costs</span><br />
<br />
<span lang="EN">5) Qualified transportation fringe → limitation on qualified transportation expenses, typically $175</span> <br />
<br />
<span lang="EN">6) Qualified moving expense reimbursement</span><br />
<br />
<span lang="EN">7) Qualified retirement planning services</span><br />
<br />
8) Qualified military base realignment and closure fringe<br />
<br />
<span lang="EN">**Other sections of the Code provide other fringe benefit exclusions as well.</span><br />
<br />
<br />
'''<span lang="EN">Property Received for Services</span>''' <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code § 83 - Property transferred in connection with performance of services</span>'''<br />
<br />
'''<span lang="EN">(a) General rule If, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed, the excess of—</span>'''<br />
<br />
'''<span lang="EN"> (1) the fair market value of such property (determined without regard to any restriction other than a restriction which by its terms will never lapse) at the first time the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, over</span>'''<br />
<br />
'''<span lang="EN"> (2) the amount (if any) paid for such property, shall be included in the gross income of the person who performed such services in the first taxable year in which the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever is applicable. The preceding sentence shall not apply if such person sells or otherwise disposes of such property in an arm’s length transaction before his rights in such property become transferable or not subject to a substantial risk of forfeiture.</span>''' <br />
<br />
'''<span lang="EN">(b) Election to include in gross income in year of transfer</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. Any person who performs services in connection with which property is transferred to any person may elect to include in his gross income for the taxable year in which such property is transferred, the excess of—</span>'''<br />
<br />
'''<span lang="EN"> (A) the fair market value of such property at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse), over</span>'''<br />
<br />
'''<span lang="EN"> (B) the amount (if any) paid for such property. If such election is made, subsection (a) shall not apply with respect to the transfer of such property, and if such property is subsequently forfeited, no deduction shall be allowed in respect of such forfeiture.</span>'''<br />
<br />
'''<span lang="EN"> (2) Election An election under paragraph (1) with respect to any transfer of property shall be made in such manner as the Secretary prescribes and shall be made not later than 30 days after the date of such transfer. Such election may not be revoked except with the consent of the Secretary.</span>'''<br />
<br />
'''<span lang="EN">(c) Special rules. For purposes of this section—</span>'''<br />
<br />
'''<span lang="EN"> (1) Substantial risk of forfeiture. The rights of a person in property are subject to a substantial risk of forfeiture if such person’s rights to full enjoyment of such property are conditioned upon the future performance of substantial services by any individual.</span>'''<br />
<br />
'''<span lang="EN"> (2) Transferability of property. The rights of a person in property are transferable only if the rights in such property of any transferee are not subject to a substantial risk of forfeiture.</span>'''<br />
<br />
'''<span lang="EN"> (3) Sales which may give rise to suit under section 16(b) of the Securities Exchange Act of 1934. So long as the sale of property at a profit could subject a person to suit under section 16(b) of the Securities Exchange Act of 1934, such person’s rights in such property are—</span>'''<br />
<br />
'''<span lang="EN"> (A) subject to a substantial risk of forfeiture, and</span>'''<br />
<br />
'''<span lang="EN"> (B) not transferable.</span>'''<br />
<br />
'''<span lang="EN"> (4) For purposes of determining an individual’s basis in property transferred in connection with the performance of services, rules similar to the rules of section 72(w) shall apply.</span>''' <br />
<br />
'''<span lang="EN">(d) Certain restrictions which will never lapse</span>'''<br />
<br />
'''<span lang="EN"> (1) Valuation. In the case of property subject to a restriction which by its terms will never lapse, and which allows the transferee to sell such property only at a price determined under a formula, the price so determined shall be deemed to be the fair market value of the property unless established to the contrary by the Secretary, and the burden of proof shall be on the Secretary with respect to such value.</span>'''<br />
<br />
'''<span lang="EN"> (2) Cancellation If, in the case of property subject to a restriction which by its terms will never lapse, the restriction is canceled, then, unless the taxpayer establishes—</span>'''<br />
<br />
'''<span lang="EN"> (A) that such cancellation was not compensatory, and</span>'''<br />
<br />
'''<span lang="EN"> (B) that the person, if any, who would be allowed a deduction if the cancellation were treated as compensatory, will treat the transaction as not compensatory, as evidenced in such manner as the Secretary shall prescribe by regulations, the excess of the fair market value of the property (computed without regard to the restrictions) at the time of cancellation over the sum of—</span>'''<br />
<br />
'''<span lang="EN"> (C) the fair market value of such property (computed by taking the restriction into account) immediately before the cancellation, and</span>'''<br />
<br />
'''<span lang="EN"> (D) the amount, if any, paid for the cancellation, shall be treated as compensation for the taxable year in which such cancellation occurs.</span>''' <br />
<br />
'''<span lang="EN">(e) Applicability of section. This section shall not apply to—</span>'''<br />
<br />
'''<span lang="EN"> (1) a transaction to which section 421 applies,</span>'''<br />
<br />
'''<span lang="EN"> (2) a transfer to or from a trust described in section 401(a) or a transfer under an annuity plan which meets the requirements of section 404(a)(2),</span>'''<br />
<br />
'''<span lang="EN"> (3) the transfer of an option without a readily ascertainable fair market value,</span>'''<br />
<br />
'''<span lang="EN"> (4) the transfer of property pursuant to the exercise of an option with a readily ascertainable fair market value at the date of grant, or</span>'''<br />
<br />
'''<span lang="EN"> (5) group-term life insurance to which section 79 applies.</span>''' <br />
<br />
'''<span lang="EN">(f) Holding period. In determining the period for which the taxpayer has held property to which subsection (a) applies, there shall be included only the period beginning at the first time his rights in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier.</span>'''<br />
<br />
'''<span lang="EN">(g) Certain exchanges. If property to which subsection (a) applies is exchanged for property subject to restrictions and conditions substantially similar to those to which the property given in such exchange was subject, and if section 354, 355, 356, or 1036 (or so much of section 1031 as relates to section 1036) applied to such exchange, or if such exchange was pursuant to the exercise of a conversion privilege—</span>'''<br />
<br />
'''<span lang="EN"> (1) such exchange shall be disregarded for purposes of subsection (a), and</span>'''<br />
<br />
'''<span lang="EN"> (2) the property received shall be treated as property to which subsection (a) applies.</span>''' <br />
<br />
'''<span lang="EN">(h) Deduction by employer. In the case of a transfer of property to which this section applies or a cancellation of a restriction described in subsection (d), there shall be allowed as a deduction under section 162, to the person for whom were performed the services in connection with which such property was transferred, an amount equal to the amount included under subsection (a), (b), or (d)(2) in the gross income of the person who performed such services. Such deduction shall be allowed for the taxable year of such person in which or with which ends the taxable year in which such amount is included in the gross income of the person who performed such services.</span>'''<br />
<br />
'''<span lang="EN">(i) Qualified equity grants</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. For purposes of this subtitle—</span>'''<br />
<br />
'''<span lang="EN"> (A) Timing of inclusion. If qualified stock is transferred to a qualified employee who makes an election with respect to such stock under this subsection, subsection (a) shall be applied by including the amount determined under such subsection with respect to such stock in income of the employee in the taxable year determined under subparagraph (B) in lieu of the taxable year described in subsection (a).</span>'''<br />
<br />
'''<span lang="EN"> (B) Taxable year determined. The taxable year determined under this subparagraph is the taxable year of the employee which includes the earliest of—</span>'''<br />
<br />
'''<span lang="EN"> (i) the first date such qualified stock becomes transferable (including, solely for purposes of this clause, becoming transferable to the employer),</span>'''<br />
<br />
'''<span lang="EN"> (ii) the date the employee first becomes an excluded employee,</span>'''<br />
<br />
'''<span lang="EN"> (iii) the first date on which any stock of the corporation which issued the qualified stock becomes readily tradable on an established securities market (as determined by the Secretary, but not including any market unless such market is recognized as an established securities market by the Secretary for purposes of a provision of this title other than this subsection),</span>'''<br />
<br />
'''<span lang="EN"> (iv) the date that is 5 years after the first date the rights of the employee in such stock are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, or</span>'''<br />
<br />
'''<span lang="EN"> (v) the date on which the employee revokes (at such time and in such manner as the Secretary provides) the election under this subsection with respect to such stock.</span>'''<br />
<br />
'''<span lang="EN"> (2) Qualified stock</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. For purposes of this subsection, the term “qualified stock” means, with respect to any qualified employee, any stock in a corporation which is the employer of such employee, if—</span>'''<br />
<br />
'''<span lang="EN"> (i) such stock is received—</span>'''<br />
<br />
'''<span lang="EN"> (I) in connection with the exercise of an option, or</span>'''<br />
<br />
'''<span lang="EN"> (II) in settlement of a restricted stock unit, and</span>'''<br />
<br />
'''<span lang="EN"> (ii) such option or restricted stock unit was granted by the corporation—</span>'''<br />
<br />
'''<span lang="EN"> (I) in connection with the performance of services as an employee, and</span>'''<br />
<br />
'''<span lang="EN"> (II) during a calendar year in which such corporation was an eligible corporation.</span>'''<br />
<br />
'''<span lang="EN"> (B) Limitation. The term “qualified stock” shall not include any stock if the employee may sell such stock to, or otherwise receive cash in lieu of stock from, the corporation at the time that the rights of the employee in such stock first become transferable or not subject to a substantial risk of forfeiture.</span>'''<br />
<br />
'''<span lang="EN"> (C) Eligible corporation. For purposes of subparagraph (A)(ii)(II)—</span>'''<br />
<br />
'''<span lang="EN"> (i) In general. The term “eligible corporation” means, with respect to any calendar year, any corporation if—</span>'''<br />
<br />
'''<span lang="EN"> (I) no stock of such corporation (or any predecessor of such corporation) is readily tradable on an established securities market (as determined under paragraph (1)(B)(iii)) during any preceding calendar year, and</span>'''<br />
<br />
'''<span lang="EN"> (II) such corporation has a written plan under which, in such calendar year, not less than 80 percent of all employees who provide services to such corporation in the United States (or any possession of the United States) are granted stock options, or are granted restricted stock units, with the same rights and privileges to receive qualified stock.</span>'''<br />
<br />
'''<span lang="EN"> (ii) Same rights and privileges. For purposes of clause (i)(II)—</span>'''<br />
<br />
'''<span lang="EN"> (I) except as provided in subclauses (II) and (III), the determination of rights and privileges with respect to stock shall be made in a similar manner as under section 423(b)(5),</span>'''<br />
<br />
'''<span lang="EN"> (II) employees shall not fail to be treated as having the same rights and privileges to receive qualified stock solely because the number of shares available to all employees is not equal in amount, so long as the number of shares available to each employee is more than a de minimis amount, and</span>'''<br />
<br />
'''<span lang="EN"> (III) rights and privileges with respect to the exercise of an option shall not be treated as the same as rights and privileges with respect to the settlement of a restricted stock unit.</span>'''<br />
<br />
'''<span lang="EN"> (iii) Employee. For purposes of clause (i)(II), the term “employee” shall not include any employee described in section 4980E(d)(4) or any excluded employee.</span>'''<br />
<br />
'''<span lang="EN"> (iv) Special rule for calendar years before 2018. In the case of any calendar year beginning before January 1, 2018, clause (i)(II) shall be applied without regard to whether the rights and privileges with respect to the qualified stock are the same.</span>'''<br />
<br />
'''<span lang="EN"> (3) Qualified employee; excluded employee. For purposes of this subsection—</span>'''<br />
<br />
'''<span lang="EN"> </span>'''<br />
<br />
'''<span lang="EN"> (A) In general. The term “qualified employee” means any individual who—</span>'''<br />
<br />
'''<span lang="EN"> (i) is not an excluded employee, and</span>'''<br />
<br />
'''<span lang="EN"> (ii) agrees in the election made under this subsection to meet such requirements as are determined by the Secretary to be necessary to ensure that the withholding requirements of the corporation under chapter 24 with respect to the qualified stock are met.</span>'''<br />
<br />
'''<span lang="EN"> (B) Excluded employee. The term “excluded employee” means, with respect to any corporation, any individual—</span>'''<br />
<br />
'''<span lang="EN"> (i) who is a 1-percent owner (within the meaning of section 416(i)(1)(B)(ii)) at any time during the calendar year or who was such a 1 percent owner at any time during the 10 preceding calendar years,</span>'''<br />
<br />
'''<span lang="EN"> (ii) who is or has been at any prior time—</span>'''<br />
<br />
'''<span lang="EN"> (I) the chief executive officer of such corporation or an individual acting in such a capacity, or</span>'''<br />
<br />
'''<span lang="EN"> (II) the chief financial officer of such corporation or an individual acting in such a capacity,</span>'''<br />
<br />
'''<span lang="EN">(iii) who bears a relationship described in section 318(a)(1) to any individual described in subclause (I) or (II) of clause (ii), or</span>'''<br />
<br />
'''<span lang="EN"> (iv) who is one of the 4 highest compensated officers of such corporation for the taxable year, or was one of the 4 highest compensated officers of such corporation for any of the 10 preceding taxable years, determined with respect to each such taxable year on the basis of the shareholder disclosure rules for compensation under the Securities Exchange Act of 1934 (as if such rules applied to such corporation).</span>'''<br />
<br />
'''<span lang="EN"> (4) Election</span>'''<br />
<br />
'''<span lang="EN"> (A) Time for making election. An election with respect to qualified stock shall be made under this subsection no later than 30 days after the first date the rights of the employee in such stock are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, and shall be made in a manner similar to the manner in which an election is made under subsection (b).</span>'''<br />
<br />
'''<span lang="EN"> (B) Limitations. No election may be made under this section with respect to any qualified stock if—</span>'''<br />
<br />
'''<span lang="EN"> (i) the qualified employee has made an election under subsection (b) with respect to such qualified stock,</span>'''<br />
<br />
'''<span lang="EN"> (ii) any stock of the corporation which issued the qualified stock is readily tradable on an established securities market (as determined under paragraph (1)(B)(iii)) at any time before the election is made, or</span>'''<br />
<br />
'''<span lang="EN"> (iii) such corporation purchased any of its outstanding stock in the calendar year preceding the calendar year which includes the first date the rights of the employee in such stock are transferable or are not subject to a substantial risk of forfeiture, unless—</span>'''<br />
<br />
'''<span lang="EN"> (I) not less than 25 percent of the total dollar amount of the stock so purchased is deferral stock, and</span>'''<br />
<br />
'''<span lang="EN"> (II) the determination of which individuals from whom deferral stock is purchased is made on a reasonable basis.</span>'''<br />
<br />
'''<span lang="EN"> (C) Definitions and special rules related to limitation on stock redemptions</span>'''<br />
<br />
'''<span lang="EN"> (i) Deferral stock. For purposes of this paragraph, the term “deferral stock” means stock with respect to which an election is in effect under this subsection.</span>'''<br />
<br />
'''<span lang="EN"> (ii) Deferral stock with respect to any individual not taken into account if individual holds deferral stock with longer deferral period. Stock purchased by a corporation from any individual shall not be treated as deferral stock for purposes of subparagraph (B)(iii) if such individual (immediately after such purchase) holds any deferral stock with respect to which an election has been in effect under this subsection for a longer period than the election with respect to the stock so purchased.</span>'''<br />
<br />
'''<span lang="EN"> (iii) Purchase of all outstanding deferral stock. The requirements of subclauses (I) and (II) of subparagraph (B)(iii) shall be treated as met if the stock so purchased includes all of the corporation’s outstanding deferral stock.</span>'''<br />
<br />
'''<span lang="EN"> (iv) Reporting. Any corporation which has outstanding deferral stock as of the beginning of any calendar year and which purchases any of its outstanding stock during such calendar year shall include on its return of tax for the taxable year in which, or with which, such calendar year ends the total dollar amount of its outstanding stock so purchased during such calendar year and such other information as the Secretary requires for purposes of administering this paragraph.</span>'''<br />
<br />
'''<span lang="EN"> (5) Controlled groups. For purposes of this subsection, all persons treated as a single employer under section 414(b) shall be treated as 1 corporation.</span>'''<br />
<br />
'''<span lang="EN"> (6) Notice requirement. Any corporation which transfers qualified stock to a qualified employee shall, at the time that (or a reasonable period before) an amount attributable to such stock would (but for this subsection) first be includible in the gross income of such employee—</span>'''<br />
<br />
'''<span lang="EN"> (A) certify to such employee that such stock is qualified stock, and</span>'''<br />
<br />
'''<span lang="EN"> (B) notify such employee—</span>'''<br />
<br />
'''<span lang="EN"> (i) that the employee may be eligible to elect to defer income on such stock under this subsection, and</span>'''<br />
<br />
'''<span lang="EN"> (ii) that, if the employee makes such an election—</span>'''<br />
<br />
'''<span lang="EN"> (I) the amount of income recognized at the end of the deferral period will be based on the value of the stock at the time at which the rights of the employee in such stock first become transferable or not subject to substantial risk of forfeiture, notwithstanding whether the value of the stock has declined during the deferral period,</span>'''<br />
<br />
'''<span lang="EN"> (II) the amount of such income recognized at the end of the deferral period will be subject to withholding under section 3401(i) at the rate determined under section 3402(t), and</span>'''<br />
<br />
'''<span lang="EN"> (III) the responsibilities of the employee (as determined by the Secretary under paragraph (3)(A)(ii)) with respect to such withholding.</span>'''<br />
<br />
'''<span lang="EN"> (7) Restricted stock units. This section (other than this subsection), including any election under subsection (b), shall not apply to restricted stock units.</span>'''<br />
|} <br />
<br />
'''<span lang="EN">Contingent Compensation</span>''' <span lang="EN">→ “golden handcuffs”; consideration, the full enjoyment of which is conditioned upon performance of additional services in the future; frequently come in the form of stock or equity interest.</span> <br />
<br />
<span lang="EN">Deferred Compensation →</span><br />
<br />
<span lang="EN">● 401K/403B plans</span><br />
<br />
<span lang="EN">● Incentive stock options → restrictive stock agreement</span><br />
<br />
<span lang="EN">● Pension plans</span> <br />
<br />
<span lang="EN">§83 Election is '''irrevocable''' - must be made within 30 days of the stock grant.</span> <br />
<br />
<span lang="EN">Substantial risk of forfeiture → voluntary term → yes; “for cause” termination → no (involuntary)</span> <br />
<br />
'''<span lang="EN">Gifts and Bequests</span>''' <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code § 102 - Gifts and inheritances</span>'''<br />
<br />
'''<span lang="EN">(a) General rule. Gross income does not include the value of property acquired by gift, bequest, devise, or inheritance.</span>'''<br />
<br />
'''<span lang="EN">(b) Income. Subsection (a) shall not exclude from gross income—</span>'''<br />
<br />
'''<span lang="EN"> (1) the income from any property referred to in subsection (a); or</span>'''<br />
<br />
'''<span lang="EN"> (2) where the gift, bequest, devise, or inheritance is of income from property, the amount of such income.</span>'''<br />
<br />
'''<span lang="EN">Where, under the terms of the gift, bequest, devise, or inheritance, the payment, crediting, or distribution thereof is to be made at intervals, then, to the extent that it is paid or credited or to be distributed out of income from property, it shall be treated for purposes of paragraph (2) as a gift, bequest, devise, or inheritance of income from property. Any amount included in the gross income of a beneficiary under subchapter J shall be treated for purposes of paragraph (2) as a gift, bequest, devise, or inheritance of income from property.</span>''' <br />
<br />
'''<span lang="EN">(c) Employee gifts</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. Subsection (a) shall not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, an employee.</span>'''<br />
<br />
'''<span lang="EN"> (2) Cross references. For provisions excluding certain employee achievement awards from gross income, see section 74(c).</span>'''<br />
<br />
'''<span lang="EN">For provisions excluding certain de minimis fringes from gross income, see section 132(e).</span>'''<br />
|} <br />
<br />
<span lang="EN">Gifts and Bequests - §102(a) → gross income does not include the value of property acquired by gift, bequest, devise, or inheritance</span> <br />
<br />
<span lang="EN">A → $50,000 wages → federal income tax on wages '''VIOLATES HORIZONTAL'''</span><br />
<br />
<span lang="EN">B → $50,000 gift → no taxes '''EQUITY'''</span> <br />
<br />
<span lang="EN">Reasoning for gift exclusion:</span><br />
<br />
<span lang="EN">● Administrative convenience - hard to track, imposes into family affairs, difficult to determine value</span><br />
<br />
<span lang="EN">● Federal wealth transfer taxes - gifted amounts already subject to tax at the hands of the donor, excessive taxation</span><br />
<br />
<span lang="EN">● Encourage generosity - donors are more willing to give if no tax</span> <br />
<br />
'''<span lang="EN">Tax consequences to the donor</span>''' <span lang="EN">→ the transfer of property by gift is seen as personal consumption by the donor, so there is no deduction; appreciated property will '''not''' result in any tax consequences for the donor (current value higher than what donor paid originally)</span> <br />
<br />
<span lang="EN">Gifts of Income - §102(b)</span> <br />
<br />
<span lang="EN">What is a “gift”? Code and Regulations are unclear - look to case law.</span> <br />
<br />
<u><span lang="EN">Commissioner v. Duberstein (1960)</span></u> <span lang="EN">- SCOTUS [D got car after helping biz; Δ left church and got “pension”]</span><br />
<br />
<span lang="EN">RULE: A transfer is not a gift if made out of obligation or anticipation of future benefits</span> <br />
<br />
<span lang="EN">Case Notes: '''<u>DUBERSTEIN</u> STANDARD → detached and disinterested generosity''' (determines if “gift”)</span><br />
<br />
<span lang="EN">● The transfer must be entirely voluntary, but the transferor must lack any ulterior motive or desire to secure a benefit</span><br />
<br />
<span lang="EN">● Transferor’s mere characterization of a transfer as a gift is insufficient</span><br />
<br />
<span lang="EN">● Controlling factor is transferor’s intent - courts must look to the transferor's “dominant purpose” when determining the intent; case by case determination, great deference to the factfinder.</span> <br />
<br />
{| class="wikitable"<br />
|'''<u><span lang="EN">DUBERSTEIN</span></u> <span lang="EN">STANDARD</span>'''<br />
<br />
'''<span lang="EN">“Detached and disinterested generosity”</span>''' <br />
<br />
<span lang="EN">● Donors intent to gift contemplated,, but more than just an intent to give, many factors considered</span><br />
<br />
<span lang="EN">● There cannot be a legal or moral obligation for the gift</span><br />
<br />
<span lang="EN">● Gift is not taxable income to recipient but also cannot be claimed as a deduction by the giver, either</span><br />
|} <br />
<br />
<span lang="EN">Employee Gifts - §102(c)</span> <br />
<br />
<u><span lang="EN">Olk v. United States (1976)</span></u> <span lang="EN">- 9th Cir. [π craps dealer rec’d tokes from players]</span><br />
<br />
<span lang="EN">RULE: A federal taxpayer receives taxable gross income when a donor voluntarily gives the taxpayer money for the taxpayer’s personal service to the donor.</span><br />
<br />
<span lang="EN">Case Notes: Considered commercial gratuity - taxable if:</span><br />
<br />
# <span lang="EN">Service included some personal or functional conduct</span><br />
# <span lang="EN">Gratuity conformed to local practices</span><br />
# <span lang="EN">Gratuity is easily valued</span> <br />
<br />
<span lang="EN">§102(a) Exclusion → applies to both '''inter vivos transfers''' and '''transfers made at death'''.</span> <br />
<br />
<u><span lang="EN">Wolder v. Commissioner (1974)</span></u> <span lang="EN">- 2nd Cir. [D promised legal services for life in exch. for securities from merger]</span><br />
<br />
<span lang="EN">RULE: A bequest made in return for lifetime legal services constitutes taxable income</span> <br />
<br />
<span lang="EN">Case Notes: if the purpose of the bequest is to compensate for services, then it is taxable</span><br />
<br />
<span lang="EN">● Property acquired by bequest does not constitute taxable income, but where a bequest is made in return for services rendered, that bequest should constitute taxable gain.</span> <br />
<br />
'''Revenue Ruling 67-375 (1967)''' → a distribution of property under the terms of a will in satisfaction of a written agreement under which the taxpayers were required to perform services for the testator is compensation for services, includable in their gross income in the taxable year of receipt.<br />
'''<span lang="EN">Loans and the Cancellation of Debt</span>''' <br />
<br />
<span lang="EN">Basic rules of loans:</span><br />
<br />
<span lang="EN">(1) A loan is '''not''' gross income to the borrower</span><br />
<br />
<span lang="EN">(2) The lender may not deduct the amount of the loan</span><br />
<br />
<span lang="EN">(3) The amount paid to satisfy the loan obligation is not deductive by the borrower</span><br />
<br />
<span lang="EN">(4) Repayment of the loan is '''not''' gross income to the lender</span><br />
<br />
<span lang="EN">(5) Interest paid to the lender '''is included''' in the lender’s gross income</span><br />
<br />
<span lang="EN">(6) Interest paid to the lender '''may be deductible''' by the borrower</span> <br />
<br />
<span lang="EN">Cancellation of Debt → if a lender forgives or cancels an outstanding debt, there may be income tax consequences to the borrower.</span> <br />
<br />
<u><span lang="EN">United States v. Kirby Lumber Co. (1931)</span></u> <span lang="EN">- SCOTUS [π issued bonds but bought them back that year for less]</span><br />
<br />
<span lang="EN">RULE: A corporation that buys back a bond at less than its issuing price realizes taxable income</span> <br />
<br />
<span lang="EN">Case Notes: π did not experience any loss, only gain</span><br />
<br />
<span lang="EN">● This practice essentially discharges a portion of the outstanding debt.</span> <br />
<br />
{| class="wikitable"<br />
|<span lang="EN">26 U.S. Code § 61 - Gross income defined</span><br />
<br />
<span lang="EN">(a) General definition. Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:</span><br />
<br />
<span lang="EN"> (12) Income from discharge of indebtedness;</span><br />
|} <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code § 108 - Income from discharge of indebtedness</span>'''<br />
<br />
'''<span lang="EN">(a) Exclusion from gross income</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if—</span>'''<br />
<br />
'''<span lang="EN"> (A) the discharge occurs in a title 11 case,</span>'''<br />
<br />
'''<span lang="EN"> (B) the discharge occurs when the taxpayer is insolvent,</span>'''<br />
<br />
'''<span lang="EN"> (C) the indebtedness discharged is qualified farm indebtedness,</span>'''<br />
<br />
'''<span lang="EN"> (D) in the case of a taxpayer other than a C corporation, the indebtedness discharged is qualified real property business indebtedness, or</span>'''<br />
<br />
'''<span lang="EN"> (E) the indebtedness discharged is qualified principal residence indebtedness which is discharged—</span>'''<br />
<br />
'''<span lang="EN"> (i) before January 1, 2018, or</span>'''<br />
<br />
'''<span lang="EN"> (ii) subject to an arrangement that is entered into and evidenced in writing before January 1, 2018.</span>''' <br />
<br />
'''<span lang="EN">…..</span>''' <br />
<br />
'''<span lang="EN">(d) Meaning of terms; special rules relating to certain provisions</span>'''<br />
<br />
'''<span lang="EN"> (1) Indebtedness of taxpayer For purposes of this section, the term “indebtedness of the taxpayer” means any indebtedness—</span>'''<br />
<br />
'''<span lang="EN"> (A) for which the taxpayer is liable, or</span>'''<br />
<br />
'''<span lang="EN"> (B) subject to which the taxpayer holds property.</span>'''<br />
|} <br />
<br />
<span lang="EN">Example: B owes A $50,000 loan repayment; A agrees to accept $45,000 from various sources: compensation for services income of 10k, gain on property of 15k - basis of 20k, discharge of indebtedness income 5k</span><br />
<br />
<span lang="EN">Gain on transfer of property → 15k COUNTS AS INCOME</span><br />
<br />
<span lang="EN">Discharge of indebtedness → 5k</span><br />
<br />
<span lang="EN">Services → 10k</span><br />
<br />
<span lang="EN">IF YOU WORK OFF DEBT - it counts as income</span> <br />
<br />
'''<span lang="EN">Contested Liability Theory</span>''' <br />
<br />
<u><span lang="EN">Zarin v. Commissioner (1990)</span></u> <span lang="EN">- 3rd Cir. [π got credit line at casino, after lawsuit, owed less]</span><br />
<br />
<span lang="EN">RULE: The discharge of indebtedness resulting from a settlement fixing the amount of a disputed debt is not taxable as income.</span><br />
<br />
<span lang="EN">Case Notes: Where a taxpayer contests his amount of debt in good faith, the resulting settlement is regarded as the amount of the debt, with no other tax consequences for the taxpayer</span><br />
<br />
<span lang="EN">● Under §108 and §61(a)(12), a taxpayer who is discharged from indebtedness realizes income in that amount where:</span><br />
<br />
<span lang="EN">(1) Taxpayer is liable for the indebtedness; or</span><br />
<br />
<span lang="EN">(2) Taxpayer has an indebtedness by which he holds property</span> <br />
<br />
<span lang="EN">Contested Liability Doctrine → if a taxpayer, in good faith, disputed the amount of debt, a subsequent settlement would be treated as the amount of debt cognizable for tax purposes.</span> <br />
<br />
'''<span lang="EN">Gains from Dealing in Property</span>''' <br />
<br />
<span lang="EN">A got stock worth 10k, by end of year was worth 18k</span><br />
<br />
<span lang="EN">No gain on appreciation of stock unless there is a SALE - $10,000 FMV is the INCOME and the BASIS.</span> <br />
<br />
{| class="wikitable"<br />
|<span lang="EN">26 U.S. Code § 61 - Gross income defined</span><br />
<br />
<span lang="EN">(a) General definition. Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:</span><br />
<br />
<span lang="EN"> (3) Gains derived from dealings in property;</span><br />
|} <br />
<br />
<u><span lang="EN">Doyle v. Mitchell</span></u> <span lang="EN">→ no gross income until recovery of capital investment</span><br />
<br />
<span lang="EN">● In order to determine whether there has been a '''gain''' or '''loss''', and the amount of the gain or loss, withdraw from the gross proceeds an amount sufficient to restore the capital value that existed at the start</span> <br />
<br />
'''<span lang="EN">Computation of Gain or Loss</span>''' <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code § 1001 - Determination of amount of and recognition of gain or loss</span>'''<br />
<br />
'''<span lang="EN">(a) Computation of gain or loss. The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 1011 for determining gain, and the loss shall be the excess of the adjusted basis provided in such section for determining loss over the amount realized.</span>'''<br />
<br />
'''<span lang="EN">(b) Amount realized. The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received. In determining the amount realized—</span>'''<br />
<br />
'''<span lang="EN"> (1) there shall not be taken into account any amount received as reimbursement for real property taxes which are treated under section 164(d) as imposed on the purchaser, and</span>'''<br />
<br />
'''<span lang="EN"> (2) there shall be taken into account amounts representing real property taxes which are treated under section 164(d) as imposed on the taxpayer if such taxes are to be paid by the purchaser.</span>''' <br />
<br />
'''<span lang="EN">(c) Recognition of gain or loss. Except as otherwise provided in this subtitle, the entire amount of the gain or loss, determined under this section, on the sale or exchange of property shall be recognized.</span>'''<br />
<br />
'''<span lang="EN">(d) Installment sales. Nothing in this section shall be construed to prevent (in the case of property sold under contract providing for payment in installments) the taxation of that portion of any installment payment representing gain or profit in the year in which such payment is received.</span>'''<br />
<br />
'''<span lang="EN">(e) Certain term interests</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. In determining gain or loss from the sale or other disposition of a term interest in property, that portion of the adjusted basis of such interest which is determined pursuant to section 1014, 1015, or 1041 (to the extent that such adjusted basis is a portion of the entire adjusted basis of the property) shall be disregarded.</span>'''<br />
<br />
'''<span lang="EN"> (2) Term interest in property defined. For purposes of paragraph (1), the term “term interest in property” means—</span>'''<br />
<br />
'''<span lang="EN"> (A) a life interest in property,</span>'''<br />
<br />
'''<span lang="EN"> (B) an interest in property for a term of years, or</span>'''<br />
<br />
'''<span lang="EN"> (C) an income interest in a trust.</span>'''<br />
<br />
'''<span lang="EN"> (3) Exception. Paragraph (1) shall not apply to a sale or other disposition which is a part of a transaction in which the entire interest in property is transferred to any person or persons.</span>'''<br />
|} <br />
<br />
<u><span lang="EN">GAIN</span></u><br />
<br />
<span lang="EN">excess of '''amount realized''' over '''adjusted basis''' in the property exchanged</span> <br />
<br />
<u><span lang="EN">LOSS</span></u><br />
<br />
<span lang="EN">excess of '''adjusted basis''' over '''amount realized''' in the property exchanged</span> <br />
<br />
<span lang="EN">Adjusted basis → the cost of what the taxpayer gives up in exchange</span><br />
<br />
<span lang="EN">Amount realized → value of what the taxpayer receives in the exchange</span> <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">Realized Gain (RG)</span>'''<br />
|'''<span lang="EN">Realized Loss (RL)</span>'''<br />
|-<br />
|<span lang="EN">Amount Realized (AR) - Adjusted Basis (AB)</span><br />
|<span lang="EN">Adjusted Basis (AB) - Amount Realized (AR)</span><br />
|} <br />
<br />
<span lang="EN">Examples: AR is 300K, anything in excess of AB is a '''gain'''</span><br />
<br />
<span lang="EN">● Taxpayer sells building for $300K cash</span><br />
<br />
<span lang="EN">● Taxpayer sells building for $250K and car for $50k</span><br />
<br />
<span lang="EN">● Taxpayer sells building for $100K, another for $100K, and securities for $100K</span> <br />
<br />
<span lang="EN">Realization event → creates an opportunity to tax a gain (or take a loss); can be a death, sale or exchange, or statutory event like the end of a taxable year; '''RECOGNIZE WHEN AN EXCHANGE HAS OCCURRED'''</span> <br />
<br />
'''<span lang="EN">EXAMPLES:</span>'''<br />
<br />
<u><span lang="EN">Helvering v. Bruun (1940)</span></u> <span lang="EN">- SCOTUS [tenant built improvements on landlord P’s property, evicted]</span><br />
<br />
<span lang="EN">RULE: Under federal tax law, a taxpayer realizes a taxable gain from land improvements at the end of a lease agreement.</span> <br />
<br />
<span lang="EN">Case Notes: just because P’s gain was in the form of property received, doesn’t exclude it as a gain</span><br />
<br />
<span lang="EN">● Realization does not have to occur as a cash gain from the sale of an asset, it can also occur from profit obtained at the end of a transaction</span><br />
<br />
<span lang="EN">● A lease agreement is a transaction</span> <br />
<br />
{| class="wikitable"<br />
| <span lang="EN"> <u>Bruun</u> Realization Triggering Events →</span><br />
<br />
<span lang="EN">(1) A property exchange (surrender interest)</span><br />
<br />
<span lang="EN">(2) Relief of a legal obligation owed to a third party (<u>Old Colony</u>)</span><br />
<br />
<span lang="EN">(3) Relief of a legal obligation owed to the party receiving property (<u>Kirby Lumber</u>)</span><br />
<br />
<span lang="EN">(4) “other “ profit transactions (<u>Bruun</u>)</span><br />
|} <br />
<br />
<span lang="EN">BRUUN is now '''<u>OVERRULED</u>''' by §109 and §1019</span> <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code § 109 - Improvements by lessee on lessor’s property</span>'''<br />
<br />
'''<span lang="EN">Gross income does not include income (other than rent) derived by a lessor of real property on the termination of a lease, representing the value of such property attributable to buildings erected or other improvements made by the lessee.</span>'''<br />
|} <br />
{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code § 1019 - Property on which lessee has made improvements</span>'''<br />
<br />
'''<span lang="EN">Neither the basis nor the adjusted basis of any portion of real property shall, in the case of the lessor of such property, be increased or diminished on account of income derived by the lessor in respect of such property and excludable from gross income under section 109 (relating to improvements by lessee on lessor’s property).</span>'''<br />
|} <br />
<br />
<span lang="EN">BUT, still good law from <u>Bruun</u> → the repossession of an asset with an enhanced value from a transaction with another party '''<u>is</u>''' gross income.</span> <br />
<br />
'''<span lang="EN">Adjusted Basis</span>''' <br />
<br />
<span lang="EN">Adjusted basis → per §1011(a), adjusted basis is a taxpayer’s basis, as adjusted</span> <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code § 1011 - Adjusted basis for determining gain or loss</span>'''<br />
<br />
'''<span lang="EN">(a) General rule. The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis (determined under section 1012 or other applicable sections of this subchapter and subchapters C (relating to corporate distributions and adjustments), K (relating to partners and partnerships), and P (relating to capital gains and losses)), adjusted as provided in section 1016.</span>'''<br />
<br />
'''<span lang="EN">(b) Bargain sale to a charitable organization. If a deduction is allowable under section 170 (relating to charitable contributions) by reason of a sale, then the adjusted basis for determining the gain from such sale shall be that portion of the adjusted basis which bears the same ratio to the adjusted basis as the amount realized bears to the fair market value of the property.</span>'''<br />
|} <br />
<br />
<span lang="EN">STEP ONE: §1012 - what is “basis”?</span> <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code § 1012 - Basis of property—cost</span>'''<br />
<br />
'''<span lang="EN">(a) In general. The basis of property shall be the cost of such property, except as otherwise provided in this subchapter and subchapters C (relating to corporate distributions and adjustments), K (relating to partners and partnerships), and P (relating to capital gains and losses).</span>'''<br />
<br />
'''<span lang="EN">(b) Special rule for apportioned real estate taxes. The cost of real property shall not include any amount in respect of real property taxes which are treated under section 164(d) as imposed on the taxpayer.</span>'''<br />
<br />
'''<span lang="EN">(c) Determinations by account</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. In the case of the sale, exchange, or other disposition of a specified security on or after the applicable date, the conventions prescribed by regulations under this section shall be applied on an account by account basis.</span>'''<br />
<br />
'''<span lang="EN"> (2) Application to certain regulated investment companies</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. Except as provided in subparagraph (B), any stock for which an average basis method is permissible under this section which is acquired before January 1, 2012, shall be treated as a separate account from any such stock acquired on or after such date.</span>'''<br />
<br />
'''<span lang="EN"> (B) Election for treatment as single account. If a regulated investment company described in subparagraph (A) elects to have this subparagraph apply with respect to one or more of its stockholders—</span>'''<br />
<br />
'''<span lang="EN"> (i) subparagraph (A) shall not apply with respect to any stock in such regulated investment company held by such stockholders, and</span>'''<br />
<br />
'''<span lang="EN"> (ii) all stock in such regulated investment company which is held by such stockholders shall be treated as covered securities described in section 6045(g)(3) without regard to the date of the acquisition of such stock.</span>'''<br />
<br />
'''<span lang="EN">A rule similar to the rule of the preceding sentence shall apply with respect to a broker holding such stock as a nominee.</span>'''<br />
<br />
'''<span lang="EN"> (3) Definitions. For purposes of this section, the terms “specified security” and “applicable date” shall have the meaning given such terms in section 6045(g).</span>'''<br />
<br />
'''<span lang="EN">(d) Average basis for stock acquired pursuant to a dividend reinvestment plan</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. In the case of any stock acquired after December 31, 2011, in connection with a dividend reinvestment plan, the basis of such stock while held as part of such plan shall be determined using one of the methods which may be used for determining the basis of stock in a regulated investment company.</span>'''<br />
<br />
'''<span lang="EN"> (2) Treatment after transfer. In the case of the transfer to another account of stock to which paragraph (1) applies, such stock shall have a cost basis in such other account equal to its basis in the dividend reinvestment plan immediately before such transfer (properly adjusted for any fees or other charges taken into account in connection with such transfer).</span>'''<br />
<br />
'''<span lang="EN"> (3) Separate accounts; election for treatment as single account</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. Rules similar to the rules of subsection (c)(2) shall apply for purposes of this subsection.</span>'''<br />
<br />
'''<span lang="EN"> (B) Average basis method. Notwithstanding paragraph (1), in the case of an election under rules similar to the rules of subsection (c)(2)(B) with respect to stock held in connection with a dividend reinvestment plan, the average basis method is permissible with respect to all such stock without regard to the date of the acquisition of such stock.</span>'''<br />
<br />
'''<span lang="EN"> (4) Dividend reinvestment plan. For purposes of this subsection—</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. The term “dividend reinvestment plan” means any arrangement under which dividends on any stock are reinvested in stock identical to the stock with respect to which the dividends are paid.</span>'''<br />
<br />
'''<span lang="EN"> (B) Initial stock acquisition treated as acquired in connection with plan. Stock shall be treated as acquired in connection with a dividend reinvestment plan if such stock is acquired pursuant to such plan or if the dividends paid on such stock are subject to such plan.</span>'''<br />
|} <br />
<br />
<span lang="EN">STEP TWO: Taxpayer’s cost basis is then adjusted under §1016</span> <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code § 1016 - Adjustments to basis</span>'''<br />
<br />
'''<span lang="EN">(a) General rule. Proper adjustment in respect of the property shall in all cases be made—</span>'''<br />
<br />
'''<span lang="EN"> (1) for expenditures, receipts, losses, or other items, properly chargeable to capital account, but no such adjustment shall be made—</span>'''<br />
<br />
'''<span lang="EN"> (A) for—</span>'''<br />
<br />
'''<span lang="EN"> (i) taxes or other carrying charges described in section 266; or</span>'''<br />
<br />
'''<span lang="EN"> (ii) expenditures described in section 173 (relating to circulation expenditures),</span>'''<br />
<br />
'''<span lang="EN">for which deductions have been taken by the taxpayer in determining taxable income for the taxable year or prior taxable years; or</span>'''<br />
<br />
'''<span lang="EN"> (B) for mortality, expense, or other reasonable charges incurred under an annuity or life insurance contract;</span>'''<br />
<br />
'''<span lang="EN"> (2) in respect of any period since February 28, 1913, for exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent of the amount—</span>'''<br />
<br />
'''<span lang="EN"> (A) allowed as deductions in computing taxable income under this subtitle or prior income tax laws, and</span>'''<br />
<br />
'''<span lang="EN"> (B) resulting (by reason of the deductions so allowed) in a reduction for any taxable year of the taxpayer’s taxes under this subtitle (other than chapter 2, relating to tax on self-employment income), or prior income, war-profits, or excess-profits tax laws, but not less than the amount allowable under this subtitle or prior income tax laws. Where no method has been adopted under section 167 (relating to depreciation deduction), the amount allowable shall be determined under the straight line method. Subparagraph (B) of this paragraph shall not apply in respect of any period since February 28, 1913, and before January 1, 1952, unless an election has been made under section 1020 (as in effect before the date of the enactment of the Tax Reform Act of 1976). Where for any taxable year before the taxable year 1932 the depletion allowance was based on discovery value or a percentage of income, then the adjustment for depletion for such year shall be based on the depletion which would have been allowable for such year if computed without reference to discovery value or a percentage of income;</span>'''<br />
<br />
'''<span lang="EN"> (3) in respect of any period—</span>'''<br />
<br />
'''<span lang="EN"> (A) before March 1, 1913,</span>'''<br />
<br />
'''<span lang="EN"> (B) since February 28, 1913, during which such property was held by a person or an organization not subject to income taxation under this chapter or prior income tax laws,</span>'''<br />
<br />
'''<span lang="EN"> (C) since February 28, 1913, and before January 1, 1958, during which such property was held by a person subject to tax under part I of subchapter L (or the corresponding provisions of prior income tax laws), to the extent that paragraph (2) does not apply, and</span>'''<br />
<br />
'''<span lang="EN"> (D) since February 28, 1913, during which such property was held by a person subject to tax under part II [1] of subchapter L (or the corresponding provisions of prior income tax laws), to the extent that paragraph (2) does not apply,</span>'''<br />
<br />
'''<span lang="EN">for exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent sustained;</span>'''<br />
<br />
'''<span lang="EN"> (4) in the case of stock (to the extent not provided for in the foregoing paragraphs) for the amount of distributions previously made which, under the law applicable to the year in which the distribution was made, either were tax-free or were applicable in reduction of basis (not including distributions made by a corporation which was classified as a personal service corporation under the provisions of the Revenue Act of 1918 (40 Stat. 1057), or the Revenue Act of 1921 (42 Stat. 227), out of its earnings or profits which were taxable in accordance with the provisions of section 218 of the Revenue Act of 1918 or 1921);</span>'''<br />
<br />
'''<span lang="EN"> (5) in the case of any bond (as defined in section 171(d)) the interest on which is wholly exempt from the tax imposed by this subtitle, to the extent of the amortizable bond premium disallowable as a deduction pursuant to section 171(a)(2), and in the case of any other bond (as defined in section 171(d)) to the extent of the deductions allowable pursuant to section 171(a)(1) (or the amount applied to reduce interest payments under section 171(e)(2)) with respect thereto;</span>'''<br />
<br />
'''<span lang="EN"> (6) in the case of any municipal bond (as defined in section 75(b)), to the extent provided in section 75(a)(2);</span>'''<br />
<br />
'''<span lang="EN"> (7) in the case of a residence the acquisition of which resulted, under section 1034 (as in effect on the day before the date of the enactment of the Taxpayer Relief Act of 1997), in the nonrecognition of any part of the gain realized on the sale, exchange, or involuntary conversion of another residence, to the extent provided in section 1034(e) (as so in effect);</span>'''<br />
<br />
'''<span lang="EN"> (8) in the case of property pledged to the Commodity Credit Corporation, to the extent of the amount received as a loan from the Commodity Credit Corporation and treated by the taxpayer as income for the year in which received pursuant to section 77, and to the extent of any deficiency on such loan with respect to which the taxpayer has been relieved from liability;</span>'''<br />
<br />
'''<span lang="EN"> </span>'''<br />
<br />
'''<span lang="EN"> (9) for amounts allowed as deductions as deferred expenses under section 616(b) (relating to certain expenditures in the development of mines) and resulting in a reduction of the taxpayer’s taxes under this subtitle, but not less than the amounts allowable under such section for the taxable year and prior years;</span>'''<br />
<br />
'''<span lang="EN"> [(10) Repealed. Pub. L. 94–455, title XIX, § 1901(b)(21)(G), Oct. 4, 1976, 90 Stat. 1798]</span>'''<br />
<br />
'''<span lang="EN"> (11) for deductions to the extent disallowed under section 268 (relating to sale of land with unharvested crops), notwithstanding the provisions of any other paragraph of this subsection;</span>'''<br />
<br />
'''<span lang="EN"> [(12) Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(75), Dec. 19, 2014, 128 Stat. 4049]</span>'''<br />
<br />
'''<span lang="EN"> [(13) Repealed. Pub. L. 108–357, title IV, § 413(c)(19), Oct. 22, 2004, 118 Stat. 1509]</span>'''<br />
<br />
'''<span lang="EN"> (14) for amounts allowed as deductions as deferred expenses under section 174(b)(1) 1 (relating to research and experimental expenditures) and resulting in a reduction of the taxpayers’ taxes under this subtitle, but not less than the amounts allowable under such section for the taxable year and prior years;</span>'''<br />
<br />
'''<span lang="EN"> (15) for deductions to the extent disallowed under section 272 (relating to disposal of coal or domestic iron ore), notwithstanding the provisions of any other paragraph of this subsection;</span>'''<br />
<br />
'''<span lang="EN"> (16) in the case of any evidence of indebtedness referred to in section 811(b) (relating to amortization of premium and accrual of discount in the case of life insurance companies), to the extent of the adjustments required under section 811(b) (or the corresponding provisions of prior income tax laws) for the taxable year and all prior taxable years;</span>'''<br />
<br />
'''<span lang="EN"> (17) to the extent provided in section 1367 in the case of stock of, and indebtedness owed to, shareholders of an S corporation;</span>'''<br />
<br />
'''<span lang="EN"> (18) to the extent provided in section 961 in the case of stock in controlled foreign corporations (or foreign corporations which were controlled foreign corporations) and of property by reason of which a person is considered as owning such stock;</span>'''<br />
<br />
'''<span lang="EN"> (19) to the extent provided in section 50(c), in the case of expenditures with respect to which a credit has been allowed under section 38;</span>'''<br />
<br />
'''<span lang="EN"> (20) for amounts allowed as deductions under section 59(e) (relating to optional 10-year writeoff of certain tax preferences);</span>'''<br />
<br />
'''<span lang="EN"> (21) to the extent provided in section 1059 (relating to reduction in basis for extraordinary dividends);</span>'''<br />
<br />
'''<span lang="EN"> (22) in the case of qualified replacement property the acquisition of which resulted under section 1042 in the nonrecognition of any part of the gain realized on the sale or exchange of any property, to the extent provided in section 1042(d),[2]</span>'''<br />
<br />
'''<span lang="EN"> (23) in the case of property the acquisition of which resulted under section 1043, 1045, or 1397B in the nonrecognition of any part of the gain realized on the sale of other property, to the extent provided in section 1043(c), 1045(b)(3), or 1397B(b)(4), as the case may be,2</span>'''<br />
<br />
'''<span lang="EN"> [(24) Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(34)(G), Dec. 19, 2014, 128 Stat. 4042]</span>'''<br />
<br />
'''<span lang="EN"> [(25) Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(2)(D), Dec. 19, 2014, 128 Stat. 4037]</span>'''<br />
<br />
'''<span lang="EN"> (26) to the extent provided in sections 23(g) and 137(e),2</span>'''<br />
<br />
'''<span lang="EN"> (27) in the case of a residence with respect to which a credit was allowed under section 1400C, to the extent provided in section 1400C(h),2</span>'''<br />
<br />
'''<span lang="EN"> (28) in the case of a facility with respect to which a credit was allowed under section 45F, to the extent provided in section 45F(f)(1),2</span>'''<br />
<br />
'''<span lang="EN"> (29) in the case of railroad track with respect to which a credit was allowed under section 45G, to the extent provided in section 45G(e)(3),2</span>'''<br />
<br />
'''<span lang="EN"> (30) to the extent provided in section 179B(c),2</span>'''<br />
<br />
'''<span lang="EN"> (31) to the extent provided in section 179D(e),2</span>'''<br />
<br />
'''<span lang="EN"> (32) to the extent provided in section 45L(e), in the case of amounts with respect to which a credit has been allowed under section 45L,2</span>'''<br />
<br />
'''<span lang="EN"> (33) to the extent provided in section 25C(f), in the case of amounts with respect to which a credit has been allowed under section 25C,2</span>'''<br />
<br />
'''<span lang="EN"> (34) to the extent provided in section 25D(f), in the case of amounts with respect to which a credit has been allowed under section 25D,2</span>'''<br />
<br />
'''<span lang="EN"> (35) to the extent provided in section 30B(h)(4),2</span>'''<br />
<br />
'''<span lang="EN"> (36) to the extent provided in section 30C(e)(1),2</span>'''<br />
<br />
'''<span lang="EN"> (37) to the extent provided in section 30D(f)(1),2 and</span>'''<br />
<br />
'''<span lang="EN"> (38) to the extent provided in subsections (b)(2) and (c) of section 1400Z–2.</span>''' <br />
<br />
'''<span lang="EN">(b) Substituted basis. Whenever it appears that the basis of property in the hands of the taxpayer is a substituted basis, then the adjustments provided in subsection (a) shall be made after first making in respect of such substituted basis proper adjustments of a similar nature in respect of the period during which the property was held by the transferor, donor, or grantor, or during which the other property was held by the person for whom the basis is to be determined. A similar rule shall be applied in the case of a series of substituted bases.</span>'''<br />
<br />
'''<span lang="EN">(c) Increase in basis of property on which additional estate tax is imposed</span>'''<br />
<br />
'''<span lang="EN"> (1) Tax imposed with respect to entire interest. If an additional estate tax is imposed under section 2032A(c)(1) with respect to any interest in property and the qualified heir makes an election under this subsection with respect to the imposition of such tax, the adjusted basis of such interest shall be increased by an amount equal to the excess of—</span>'''<br />
<br />
'''<span lang="EN"> (A) the fair market value of such interest on the date of the decedent’s death (or the alternate valuation date under section 2032, if the executor of the decedent’s estate elected the application of such section), over</span>'''<br />
<br />
'''<span lang="EN"> (B) the value of such interest determined under section 2032A(a).</span>'''<br />
<br />
'''<span lang="EN"> (2) Partial dispositions</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. In the case of any partial disposition for which an election under this subsection is made, the increase in basis under paragraph (1) shall be an amount—</span>'''<br />
<br />
'''<span lang="EN"> (i) which bears the same ratio to the increase which would be determined under paragraph (1) (without regard to this paragraph) with respect to the entire interest, as</span>'''<br />
<br />
'''<span lang="EN"> (ii) the amount of the tax imposed under section 2032A(c)(1) with respect to such disposition bears to the adjusted tax difference attributable to the entire interest (as determined under section 2032A(c)(2)(B)).</span>'''<br />
<br />
'''<span lang="EN"> (B) Partial disposition. For purposes of subparagraph (A), the term “partial disposition” means any disposition or cessation to which subsection (c)(2)(D), (h)(1)(B), or (i)(1)(B) of section 2032A applies.</span>'''<br />
<br />
'''<span lang="EN"> (3) Time adjustment made. Any increase in basis under this subsection shall be deemed to have occurred immediately before the disposition or cessation resulting in the imposition of the tax under section 2032A(c)(1).</span>'''<br />
<br />
'''<span lang="EN"> (4) Special rule in the case of substituted property. If the tax under section 2032A(c)(1) is imposed with respect to qualified replacement property (as defined in section 2032A(h)(3)(B)) or qualified exchange property (as defined in section 2032A(i)(3)), the increase in basis under paragraph (1) shall be made by reference to the property involuntarily converted or exchanged (as the case may be).</span>'''<br />
<br />
'''<span lang="EN"> (5) Election</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. An election under this subsection shall be made at such time and in such manner as the Secretary shall by regulations prescribe. Such an election, once made, shall be irrevocable.</span>'''<br />
<br />
'''<span lang="EN"> (B) Interest on recaptured amount. If an election is made under this subsection with respect to any additional estate tax imposed under section 2032A(c)(1), for purposes of section 6601 (relating to interest on underpayments), the last date prescribed for payment of such tax shall be deemed to be the last date prescribed for payment of the tax imposed by section 2001 with respect to the estate of the decedent (as determined for purposes of section 6601).</span>'''<br />
<br />
'''<span lang="EN">(d) Reduction in basis of automobile on which gas guzzler tax was imposed. If—</span>'''<br />
<br />
'''<span lang="EN"> (1) the taxpayer acquires any automobile with respect to which a tax was imposed by section 4064, and</span>'''<br />
<br />
'''<span lang="EN"> (2) the use of such automobile by the taxpayer begins not more than 1 year after the date of the first sale for ultimate use of such automobile, the basis of such automobile shall be reduced by the amount of the tax imposed by section 4064 with respect to such automobile. In the case of importation, if the date of entry or withdrawal from warehouse for consumption is later than the date of the first sale for ultimate use, such later date shall be substituted for the date of such first sale in the preceding sentence.</span>''' <br />
<br />
'''<span lang="EN">(e) Cross reference. For treatment of separate mineral interests as one property, see section 614.</span>'''<br />
|} <br />
<br />
'''<span lang="EN">Depreciation</span>''' <span lang="EN">→ the amount a taxpayer can take as a deduction for the wear and tear of an asset in a particular year; not based on “actual” or “economic” but instead on statutorily created schedules.</span> <br />
<br />
<span lang="EN">Example → taxpayer owns personal residence originally acquired for $200,000</span><br />
<br />
<span lang="EN">● Taxpayer constructs attached deck, cost of improvement is added to taxpayer’s basis in the residence (now $225,000)</span><br />
<br />
<span lang="EN">● Taxpayer cannot deduct the $25,000 used for materials</span> <br />
<br />
<span lang="EN">Example → taxpayer spends $10,000 for business copier with a useful life of 5 years</span><br />
<br />
<span lang="EN">● Can taxpayer deduct entire amount up front, or must they depreciate the cost over the expected life of the property?</span><br />
<br />
<span lang="EN">● If they must '''depreciate''' → they are entitled to deduct a portion of the cost over the 5 year period; as this is done, basis should be reduced each year by the amount of the depreciation deduction (total cost divided by usable life = $2,000 per year). This allows taxpayer to gradually get their money back in the form of a deduction.</span> <br />
<br />
'''<span lang="EN">Adjusted Basis</span>''' <span lang="EN">→ reflects the taxpayer’s ongoing investment in an asset from a tax perspective; when the asset is sold or exchanged, the adjusted basis tells us how much unrecovered “cost” the taxpayer continues to have in the property; only to the extent the amount realized exceeds the unrecovered cost should the taxpayer have taxable gain.</span> <br />
<br />
'''<span lang="EN">TP generally cannot deduct the cost in year one because the copier will provide a benefit beyond the taxable year (so depreciation deduction).</span>''' <br />
<br />
<span lang="EN">Example (copier cont.) → depreciation schedule</span> <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">Year 1</span>'''<br />
|<span lang="EN">$10,000 FMV</span><br />
|-<br />
|'''<span lang="EN">Year 2</span>'''<br />
|<span lang="EN">$8,000 adjusted basis</span><br />
|-<br />
|'''<span lang="EN">Year 3</span>'''<br />
|<span lang="EN">$6,000 adjusted basis</span><br />
|-<br />
|'''<span lang="EN">Year 4</span>'''<br />
|<span lang="EN">$4,000 adjusted basis</span><br />
|-<br />
|'''<span lang="EN">Year 5</span>'''<br />
|<span lang="EN">$2,000 adjusted basis</span><br />
|-<br />
|'''<span lang="EN">Value after 5 Years</span>'''<br />
|<span lang="EN">$0 ($2,000 depreciation deduction each year)</span><br />
|} <br />
<br />
<span lang="EN">If business sold copier in year 6 for $1,000, the taxpayer would be taxed on $1,000 of gain (the amount realized of $1,000 less the adjusted basis of $0).</span> <br />
<br />
{| class="wikitable"<br />
|<span lang="EN">26 U.S. Code § 1001 - Determination of amount of and recognition of gain or loss</span> <br />
<br />
<span lang="EN">(c) Recognition of gain or loss. Except as otherwise provided in this subtitle, the entire amount of the gain or loss, determined under this section, on the sale or exchange of property shall be recognized.</span><br />
|} <br />
<br />
<span lang="EN">Per §1012 → taxpayer’s basis in the property is their “cost”</span> <br />
<br />
<u><span lang="EN">Philadelphia Park Amusement Co. v. United States (1954)</span></u> <span lang="EN">- Claims [50 year franchise in exch. for bridge built]</span><br />
<br />
<span lang="EN">RULE: The cost basis of property received in a taxable exchange is the fair market value of the property received.</span> <br />
<br />
<span lang="EN">Case Notes: in order to prevent distorted assessments of liability against taxpayers, cost basis of property received should be the fair market value of property received</span><br />
<br />
<span lang="EN">● Taxpayer’s basis in the property received is equal to the property’s FMV</span><br />
<br />
<span lang="EN">● Each taxable year stands alone</span><br />
<br />
<span lang="EN">● If the value of property received is hard to value, taxpayer can look to the value of the property surrendered</span> <br />
<br />
# <span lang="EN">Following a taxable exchange, the taxpayer’s basis in property received in the exchange is always equal to the FMV of the property received</span><br />
## <span lang="EN">Any gain recognized in the exchange is part of the “cost” to acquire the property received in the exchange</span><br />
## <span lang="EN">Example: TP sells $20 painting in exchange for $100 rug → TP '''realizes''' and '''recognizes''' $80 gain (rug cost minus painting value - basis); IF TP sells rug for $100 the next day, do they realize another gain? '''NO'''; TP’s “cost” is giving up the $20 painting and the tax-cost of an $80 gain.</span> <br />
<br />
# <span lang="EN">Each taxable year stands alone</span><br />
## <span lang="EN">Base current year tax consequences on what should have happened in the prior year</span><br />
## <span lang="EN">Example: <u>Philadelphia Park</u>; exchange of bridge and franchise occurred the year prior to the year where the depreciation deduction was sought -- TP should have recognized gain in prior year; TP had FMV basis in franchise received in exchange; they did not include in gross income but treated as though they did</span> <br />
<br />
# <span lang="EN">Determining value of difficult property</span> <br />
## <span lang="EN">If unclear or hard to determine, assume the value is equal to the value of the property you gave in exchange</span><br />
## <span lang="EN">Assume all transactions were at arm’s length, absent facts to the contrary</span> <br />
<br />
'''<span lang="EN">Special Basis Rules</span>''' <br />
<br />
'''<span lang="EN">Basis of Property Received by Gift, Bequest, Devise, or Inheritance</span>''' <br />
<br />
<span lang="EN">Inter Vivos gifts →</span><br />
<br />
<span lang="EN">● Donee takes the donor’s adjusted basis in the property</span><br />
<br />
<span lang="EN">● A gives B asset worth $5,000 in which A has a basis of $3,000</span><br />
<br />
<span lang="EN">● B will include nothing in gross income and have basis of $3,000</span><br />
<br />
<span lang="EN">● Transferred basis, carryover basis</span> <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code § 1015 - Basis of property acquired by gifts and transfers in trust</span>'''<br />
<br />
'''<span lang="EN">(a) Gifts after December 31, 1920. If the property was acquired by gift after December 31, 1920, the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift, except that if such basis (adjusted for the period before the date of the gift as provided in section 1016) is greater than the fair market value of the property at the time of the gift, then for the purpose of determining loss the basis shall be such fair market value. If the facts necessary to determine the basis in the hands of the donor or the last preceding owner are unknown to the donee, the Secretary shall, if possible, obtain such facts from such donor or last preceding owner, or any other person cognizant thereof. If the Secretary finds it impossible to obtain such facts, the basis in the hands of such donor or last preceding owner shall be the fair market value of such property as found by the Secretary as of the date or approximate date at which, according to the best information that the Secretary is able to obtain, such property was acquired by such donor or last preceding owner.</span>'''<br />
<br />
'''<span lang="EN">(b) Transfer in trust after December 31, 1920. If the property was acquired after December 31, 1920, by a transfer in trust (other than by a transfer in trust by a gift, bequest, or devise), the basis shall be the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on such transfer under the law applicable to the year in which the transfer was made.</span>'''<br />
<br />
'''<span lang="EN">(c) Gift or transfer in trust before January 1, 1921. If the property was acquired by gift or transfer in trust on or before December 31, 1920, the basis shall be the fair market value of such property at the time of such acquisition.</span>'''<br />
<br />
'''<span lang="EN">(d) Increased basis for gift tax paid</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. If—</span>'''<br />
<br />
'''<span lang="EN"> (A) the property is acquired by gift on or after September 2, 1958, the basis shall be the basis determined under subsection (a), increased (but not above the fair market value of the property at the time of the gift) by the amount of gift tax paid with respect to such gift, or</span>'''<br />
<br />
'''<span lang="EN"> (B) the property was acquired by gift before September 2, 1958, and has not been sold, exchanged, or otherwise disposed of before such date, the basis of the property shall be increased on such date by the amount of gift tax paid with respect to such gift, but such increase shall not exceed an amount equal to the amount by which the fair market value of the property at the time of the gift exceeded the basis of the property in the hands of the donor at the time of the gift.</span>'''<br />
<br />
'''<span lang="EN"> (2) Amount of tax paid with respect to gift. For purposes of paragraph (1), the amount of gift tax paid with respect to any gift is an amount which bears the same ratio to the amount of gift tax paid under chapter 12 with respect to all gifts made by the donor for the calendar year (or preceding calendar period) in which such gift is made as the amount of such gift bears to the taxable gifts (as defined in section 2503(a) but computed without the deduction allowed by section 2521) made by the donor during such calendar year or period. For purposes of the preceding sentence, the amount of any gift shall be the amount included with respect to such gift in determining (for the purposes of section 2503(a)) the total amount of gifts made during the calendar year or period, reduced by the amount of any deduction allowed with respect to such gift under section 2522 (relating to charitable deduction) or under section 2523 (relating to marital deduction).</span>'''<br />
<br />
'''<span lang="EN"> (3) Gifts treated as made one-half by each spouse. For purposes of paragraph (1), where the donor and his spouse elected, under section 2513 to have the gift considered as made one-half by each, the amount of gift tax paid with respect to such gift under chapter 12 shall be the sum of the amounts of tax paid with respect to each half of such gift (computed in the manner provided in paragraph (2)).</span>'''<br />
<br />
'''<span lang="EN"> (4) Treatment as adjustment to basis. For purposes of section 1016(b), an increase in basis under paragraph (1) shall be treated as an adjustment under section 1016(a).</span>'''<br />
<br />
'''<span lang="EN"> (5) Application to gifts before 1955. With respect to any property acquired by gift before 1955, references in this subsection to any provision of this title shall be deemed to refer to the corresponding provision of the Internal Revenue Code of 1939 or prior revenue laws which was effective for the year in which such gift was made.</span>'''<br />
<br />
'''<span lang="EN"> (6) Special rule for gifts made after December 31, 1976</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. In the case of any gift made after December 31, 1976, the increase in basis provided by this subsection with respect to any gift for the gift tax paid under chapter 12 shall be an amount (not in excess of the amount of tax so paid) which bears the same ratio to the amount of tax so paid as—</span>'''<br />
<br />
'''<span lang="EN"> (i) the net appreciation in value of the gift, bears to</span>'''<br />
<br />
'''<span lang="EN"> (ii) the amount of the gift.</span>'''<br />
<br />
'''<span lang="EN"> (B) Net appreciation. For purposes of paragraph (1), the net appreciation in value of any gift is the amount by which the fair market value of the gift exceeds the donor’s adjusted basis immediately before the gift.</span>'''<br />
<br />
'''<span lang="EN">(e) Gifts between spouses. In the case of any property acquired by gift in a transfer described in section 1041(a), the basis of such property in the hands of the transferee shall be determined under section 1041(b)(2) and not this section.</span>'''<br />
|} <br />
<br />
<span lang="EN">Applicable Basis rules under §1015(a) →</span> <br />
<br />
{| class="wikitable"<br />
| <br />
|<span lang="EN">Donee Basis for computing '''GAIN'''</span><br />
|<span lang="EN">Donee basis for computing '''LOSS'''</span><br />
|-<br />
|<span lang="EN">FMV <u>></u> donor’s adjusted basis at the time of the gift</span><br />
|<span lang="EN">Donor’s adjusted basis</span><br />
|<span lang="EN">Donor’s adjusted basis</span><br />
|-<br />
|<span lang="EN">FMV < donor’s adjusted basis at the time of gift</span><br />
|<span lang="EN">Donor’s adjusted basis</span><br />
|<span lang="EN">FMV (loss does not carry over</span><br />
|}<br />
<span lang="EN">Property acquired from a decedent → §1014</span> <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code § 1014 - Basis of property acquired from a decedent</span>'''<br />
<br />
'''<span lang="EN">(a) In general. Except as otherwise provided in this section, the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall, if not sold, exchanged, or otherwise disposed of before the decedent’s death by such person, be—</span>'''<br />
<br />
'''<span lang="EN"> (1) the fair market value of the property at the date of the decedent’s death,</span>'''<br />
<br />
'''<span lang="EN"> (2) in the case of an election under section 2032, its value at the applicable valuation date prescribed by such section,</span>'''<br />
<br />
'''<span lang="EN"> (3) in the case of an election under section 2032A, its value determined under such section, or</span>'''<br />
<br />
'''<span lang="EN"> (4) to the extent of the applicability of the exclusion described in section 2031(c), the basis in the hands of the decedent.</span>''' <br />
<br />
'''<span lang="EN">(b) Property acquired from the decedent. For purposes of subsection (a), the following property shall be considered to have been acquired from or to have passed from the decedent:</span>'''<br />
<br />
'''<span lang="EN"> (1) Property acquired by bequest, devise, or inheritance, or by the decedent’s estate from the decedent;</span>'''<br />
<br />
'''<span lang="EN"> (2) Property transferred by the decedent during his lifetime in trust to pay the income for life to or on the order or direction of the decedent, with the right reserved to the decedent at all times before his death to revoke the trust;</span>'''<br />
<br />
'''<span lang="EN"> (3) In the case of decedents dying after December 31, 1951, property transferred by the decedent during his lifetime in trust to pay the income for life to or on the order or direction of the decedent with the right reserved to the decedent at all times before his death to make any change in the enjoyment thereof through the exercise of a power to alter, amend, or terminate the trust;</span>'''<br />
<br />
'''<span lang="EN"> (4) Property passing without full and adequate consideration under a general power of appointment exercised by the decedent by will;</span>'''<br />
<br />
'''<span lang="EN"> (5) In the case of decedents dying after August 26, 1937, and before January 1, 2005, property acquired by bequest, devise, or inheritance or by the decedent’s estate from the decedent, if the property consists of stock or securities of a foreign corporation, which with respect to its taxable year next preceding the date of the decedent’s death was, under the law applicable to such year, a foreign personal holding company. In such case, the basis shall be the fair market value of such property at the date of the decedent’s death or the basis in the hands of the decedent, whichever is lower;</span>'''<br />
<br />
'''<span lang="EN"> (6) In the case of decedents dying after December 31, 1947, property which represents the surviving spouse’s one-half share of community property held by the decedent and the surviving spouse under the community property laws of any State, or possession of the United States or any foreign country, if at least one-half of the whole of the community interest in such property was includible in determining the value of the decedent’s gross estate under chapter 11 of subtitle B (section 2001 and following, relating to estate tax) or section 811 of the Internal Revenue Code of 1939;</span>'''<br />
<br />
'''<span lang="EN"> [(7) , (8) Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(74)(B), Dec. 19, 2014, 128 Stat. 4049]</span>'''<br />
<br />
'''<span lang="EN"> (9) In the case of decedents dying after December 31, 1953, property acquired from the decedent by reason of death, form of ownership, or other conditions (including property acquired through the exercise or non-exercise of a power of appointment), if by reason thereof the property is required to be included in determining the value of the decedent’s gross estate under chapter 11 of subtitle B or under the Internal Revenue Code of 1939. In such case, if the property is acquired before the death of the decedent, the basis shall be the amount determined under subsection (a) reduced by the amount allowed to the taxpayer as deductions in computing taxable income under this subtitle or prior income tax laws for exhaustion, wear and tear, obsolescence, amortization, and depletion on such property before the death of the decedent. Such basis shall be applicable to the property commencing on the death of the decedent. This paragraph shall not apply to—</span>'''<br />
<br />
'''<span lang="EN"> (A) annuities described in section 72;</span>'''<br />
<br />
'''<span lang="EN"> (B) property to which paragraph (5) would apply if the property had been acquired by bequest; and</span>'''<br />
<br />
'''<span lang="EN"> (C) property described in any other paragraph of this subsection.</span>'''<br />
<br />
'''<span lang="EN"> (10) Property includible in the gross estate of the decedent under section 2044 (relating to certain property for which marital deduction was previously allowed). In any such case, the last 3 sentences of paragraph (9) shall apply as if such property were described in the first sentence of paragraph (9).</span>''' <br />
<br />
'''<span lang="EN">(c) Property representing income in respect of a decedent. This section shall not apply to property which constitutes a right to receive an item of income in respect of a decedent under section 691.</span>'''<br />
<br />
'''<span lang="EN">(d) Special rule with respect to DISC stock. If stock owned by a decedent in a DISC or former DISC (as defined in section 992(a)) acquires a new basis under subsection (a), such basis (determined before the application of this subsection) shall be reduced by the amount (if any) which would have been included in gross income under section 995(c) as a dividend if the decedent had lived and sold the stock at its fair market value on the estate tax valuation date. In computing the gain the decedent would have had if he had lived and sold the stock, his basis shall be determined without regard to the last sentence of section 996(e)(2) (relating to reductions of basis of DISC stock). For purposes of this subsection, the estate tax valuation date is the date of the decedent’s death or, in the case of an election under section 2032, the applicable valuation date prescribed by that section.</span>'''<br />
<br />
'''<span lang="EN">(e) Appreciated property acquired by decedent by gift within 1 year of death</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. In the case of a decedent dying after December 31, 1981, if—</span>'''<br />
<br />
'''<span lang="EN"> (A) appreciated property was acquired by the decedent by gift during the 1-year period ending on the date of the decedent’s death, and</span>'''<br />
<br />
'''<span lang="EN"> (B) such property is acquired from the decedent by (or passes from the decedent to) the donor of such property (or the spouse of such donor), the basis of such property in the hands of such donor (or spouse) shall be the adjusted basis of such property in the hands of the decedent immediately before the death of the decedent.</span>'''<br />
<br />
'''<span lang="EN"> (2) Definitions. For purposes of paragraph (1)—</span>'''<br />
<br />
'''<span lang="EN"> (A) Appreciated property. The term “appreciated property” means any property if the fair market value of such property on the day it was transferred to the decedent by gift exceeds its adjusted basis.</span>'''<br />
<br />
'''<span lang="EN"> (B) Treatment of certain property sold by estate. In the case of any appreciated property described in subparagraph (A) of paragraph (1) sold by the estate of the decedent or by a trust of which the decedent was the grantor, rules similar to the rules of paragraph (1) shall apply to the extent the donor of such property (or the spouse of such donor) is entitled to the proceeds from such sale.</span>'''<br />
<br />
'''<span lang="EN">(f) Basis must be consistent with estate tax return. For purposes of this section—</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. The basis of any property to which subsection (a) applies shall not exceed—</span>'''<br />
<br />
'''<span lang="EN"> (A) in the case of property the final value of which has been determined for purposes of the tax imposed by chapter 11 on the estate of such decedent, such value, and</span>'''<br />
<br />
'''<span lang="EN"> (B) in the case of property not described in subparagraph (A) and with respect to which a statement has been furnished under section 6035(a) identifying the value of such property, such value.</span>'''<br />
<br />
'''<span lang="EN"> (2) Exception. Paragraph (1) shall only apply to any property whose inclusion in the decedent’s estate increased the liability for the tax imposed by chapter 11 (reduced by credits allowable against such tax) on such estate.</span>'''<br />
<br />
'''<span lang="EN"> (3) Determination. For purposes of paragraph (1), the basis of property has been determined for purposes of the tax imposed by chapter 11 if—</span>'''<br />
<br />
'''<span lang="EN"> (A) the value of such property is shown on a return under section 6018 and such value is not contested by the Secretary before the expiration of the time for assessing a tax under chapter 11,</span>'''<br />
<br />
'''<span lang="EN"> (B) in a case not described in subparagraph (A), the value is specified by the Secretary and such value is not timely contested by the executor of the estate, or</span>'''<br />
<br />
'''<span lang="EN"> (C) the value is determined by a court or pursuant to a settlement agreement with the Secretary.</span>'''<br />
<br />
'''<span lang="EN"> </span>'''<br />
<br />
'''<span lang="EN"> (4) Regulations. The Secretary may by regulations provide exceptions to the application of this subsection.</span>'''<br />
|} <br />
<br />
<span lang="EN">“Stepped-up” basis →</span> <br />
<br />
<span lang="EN">● Basis is stepped-down to fair market value</span><br />
<br />
<span lang="EN">● A dies holding asset worth $20,000, B’s basis is $20,000 regardless of A’s adjusted basis in asset</span><br />
<br />
<span lang="EN">● §1014(a) → such property shall have a basis to the recipient equal to the value of the property at the date of the decedent’s death</span><br />
<br />
<span lang="EN">● §1014(f) → limits if an estate tax return is required</span> <br />
<br />
<span lang="EN">Transfers in satisfaction of an obligation - other “accessions to wealth” can constitute part of an “amount realized” → <u>Kenan v. Commissioner</u> - trustee transferred appreciated stock; trust had a real and recognized gain.</span> <br />
<br />
<u><span lang="EN">United States v. Davis (1962)</span></u> <span lang="EN">- SCOTUS [π transf. appreciated shares to ex wife purs. to div. agmt]</span><br />
<br />
<span lang="EN">RULE: for purpose of federal tax law, a transfer of property incident to a divorce is a taxable event</span> <br />
<br />
<span lang="EN">Case Notes: taxable gain should be equal to the value of the stock on the date of transfer</span><br />
<br />
<span lang="EN">● A transfer of property between spouses pursuant to a divorce agreement is a taxable event.</span><br />
<br />
<span lang="EN">● In common-law property states, spouses typically have inchoate statutory rights in one another’s separate property in the event of death or divorce</span><br />
<br />
<span lang="EN">● When one spouse transfers property to the other spouse in exchange for a release from his statutory obligations, the property transfer is an income-realization event</span><br />
<br />
<span lang="EN">● The transferring spouse is released from the personal liability associated with his former marital obligations and realizes a difficult-to-ascertain gain</span><br />
<br />
<span lang="EN">● Because a divorce is an arm’s length transaction, the value of the release of liability is presumably equal to the amount the transferring spouse paid to obtain it</span> <br />
<br />
<span lang="EN">Flavor of Income</span><br />
<br />
<span lang="EN">● Capital gains → receive favorable tax treatment (wealthy: 15-20%, less affluent: 0%)</span><br />
<br />
<span lang="EN">● “Capital gain” → gain from the sale or exchange of “capital assets” held for '''more than one year'''.</span> <br />
<br />
<span lang="EN">“Capital asset” → property held for investment or for personal use; §1221(a) provides '''negative definitions''' (what is NOT a capital asset):</span><br />
<br />
<span lang="EN">(1) Stock in trade of taxpayer, held primarily for sale in course of business</span><br />
<br />
<span lang="EN">(2) Property used in trade or business</span><br />
<br />
<span lang="EN">(3) Intellectual property by taxpayer’s personal efforts</span><br />
<br />
<span lang="EN">(4) Accounts or notes receivable acquired in ordinary course of business for services or property</span><br />
<br />
<span lang="EN">(5) Publication of US government</span><br />
<br />
<span lang="EN">(6) Any commodities derivative financial instrument held by a dealer of commodities</span><br />
<br />
<span lang="EN">(7) Hedging transactions</span><br />
<br />
<span lang="EN">(8) Supplies regularly used by taxpayer in the ordinary course of business</span> <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code § 1221 - Capital asset defined</span>'''<br />
<br />
'''<span lang="EN">(a) In general. For purposes of this subtitle, the term “capital asset” means property held by the taxpayer (whether or not connected with his trade or business), but does not include—</span>'''<br />
<br />
'''<span lang="EN"> (1) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;</span>'''<br />
<br />
'''<span lang="EN"> (2) property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in section 167, or real property used in his trade or business;</span>'''<br />
<br />
'''<span lang="EN"> (3) a patent, invention, model or design (whether or not patented), a secret formula or process, a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by—</span>'''<br />
<br />
'''<span lang="EN"> (A) a taxpayer whose personal efforts created such property,</span>'''<br />
<br />
'''<span lang="EN"> (B) in the case of a letter, memorandum, or similar property, a taxpayer for whom such property was prepared or produced, or</span>'''<br />
<br />
'''<span lang="EN"> (C) a taxpayer in whose hands the basis of such property is determined, for purposes of determining gain from a sale or exchange, in whole or part by reference to the basis of such property in the hands of a taxpayer described in subparagraph (A) or (B);</span>'''<br />
<br />
'''<span lang="EN"> (4) accounts or notes receivable acquired in the ordinary course of trade or business for services rendered or from the sale of property described in paragraph (1);</span>'''<br />
<br />
'''<span lang="EN"> (5) a publication of the United States Government (including the Congressional Record) which is received from the United States Government or any agency thereof, other than by purchase at the price at which it is offered for sale to the public, and which is held by—</span>'''<br />
<br />
'''<span lang="EN"> (A) a taxpayer who so received such publication, or</span>'''<br />
<br />
'''<span lang="EN"> (B) a taxpayer in whose hands the basis of such publication is determined, for purposes of determining gain from a sale or exchange, in whole or in part by reference to the basis of such publication in the hands of a taxpayer described in subparagraph (A);</span>'''<br />
<br />
'''<span lang="EN"> (6) any commodities derivative financial instrument held by a commodities derivatives dealer, unless—</span>'''<br />
<br />
'''<span lang="EN"> (A) it is established to the satisfaction of the Secretary that such instrument has no connection to the activities of such dealer as a dealer, and</span>'''<br />
<br />
'''<span lang="EN"> (B) such instrument is clearly identified in such dealer’s records as being described in subparagraph (A) before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe);</span>'''<br />
<br />
'''<span lang="EN"> (7) any hedging transaction which is clearly identified as such before the close of the day on which it was acquired, originated, or entered into (or such other time as the Secretary may by regulations prescribe); or</span>'''<br />
<br />
'''<span lang="EN"> (8) supplies of a type regularly used or consumed by the taxpayer in the ordinary course of a trade or business of the taxpayer.</span>''' <br />
<br />
'''<span lang="EN">(b) Definitions and special rules</span>'''<br />
<br />
'''<span lang="EN"> (1) Commodities derivative financial instruments. For purposes of subsection (a)(6)—</span>'''<br />
<br />
'''<span lang="EN"> (A) Commodities derivatives dealer. The term “commodities derivatives dealer” means a person which [1] regularly offers to enter into, assume, offset, assign, or terminate positions in commodities derivative financial instruments with customers in the ordinary course of a trade or business.</span>'''<br />
<br />
'''<span lang="EN"> (B) Commodities derivative financial instrument</span>'''<br />
<br />
'''<span lang="EN"> (i) In general. The term “commodities derivative financial instrument” means any contract or financial instrument with respect to commodities (other than a share of stock in a corporation, a beneficial interest in a partnership or trust, a note, bond, debenture, or other evidence of indebtedness, or a section 1256 contract (as defined in section 1256(b))), the value or settlement price of which is calculated by or determined by reference to a specified index.</span>'''<br />
<br />
'''<span lang="EN"> (ii) Specified index. The term “specified index” means any one or more or any combination of—</span>'''<br />
<br />
'''<span lang="EN"> (I) a fixed rate, price, or amount, or</span>'''<br />
<br />
'''<span lang="EN"> (II) a variable rate, price, or amount, which is based on any current, objectively determinable financial or economic information with respect to commodities which is not within the control of any of the parties to the contract or instrument and is not unique to any of the parties’ circumstances.</span>'''<br />
<br />
'''<span lang="EN"> (2) Hedging transaction</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. For purposes of this section, the term “hedging transaction” means any transaction entered into by the taxpayer in the normal course of the taxpayer’s trade or business primarily—</span>'''<br />
<br />
'''<span lang="EN"> (i) to manage risk of price changes or currency fluctuations with respect to ordinary property which is held or to be held by the taxpayer,</span>'''<br />
<br />
'''<span lang="EN"> (ii) to manage risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, by the taxpayer, or</span>'''<br />
<br />
'''<span lang="EN"> (iii) to manage such other risks as the Secretary may prescribe in regulations.</span>'''<br />
<br />
'''<span lang="EN"> (B) Treatment of nonidentification or improper identification of hedging transactions. Notwithstanding subsection (a)(7), the Secretary shall prescribe regulations to properly characterize any income, gain, expense, or loss arising from a transaction—</span>'''<br />
<br />
'''<span lang="EN"> (i) which is a hedging transaction but which was not identified as such in accordance with subsection (a)(7), or</span>'''<br />
<br />
'''<span lang="EN"> (ii) which was so identified but is not a hedging transaction.</span>'''<br />
<br />
'''<span lang="EN"> (3) Sale or exchange of self-created musical works. At the election of the taxpayer, paragraphs (1) and (3) of subsection (a) shall not apply to musical compositions or copyrights in musical works sold or exchanged by a taxpayer described in subsection (a)(3).</span>'''<br />
<br />
'''<span lang="EN"> (4) Regulations. The Secretary shall prescribe such regulations as are appropriate to carry out the purposes of paragraph (6) and (7) of subsection (a) in the case of transactions involving related parties.</span>'''<br />
|} <br />
<br />
<span lang="EN">Personal property → if not used for business, usually qualifies as a capital asset</span><br />
<br />
<span lang="EN">Rationale for preferential treatment of capital gains:</span><br />
<br />
<span lang="EN">● Inflation → necessary to account for taxing gains due to inflation</span><br />
<br />
<span lang="EN">● Bunching → all gains from asset bunched into year of sale</span><br />
<br />
<span lang="EN">● Stimulate savings and investment activities</span><br />
<br />
<span lang="EN">● Cure lock-up problem → encourages sale rather than holding until ones death</span> <br />
<br />
<span lang="EN">American Taxpayer Relief Act of 2012 (ATRA) - extended preferential rates to “qualified dividend income” → aiming to alleviate corporate double taxation (corporations are individuals, and thus taxed at the business level and again at the shareholder level); double taxation justifiable because tax is paid by two different “people”.</span> <br />
<br />
'''<span lang="EN">Qualified dividend income</span>''' <span lang="EN">→ most dividends from domestic corporations; no requirement that dividends come from earnings that were previously subject to tax or attributable to dates prior to enactment.</span> <br />
<br />
'''<span lang="EN">Timing of Income</span>''' <br />
<br />
<span lang="EN">Timing → Preference is to put off or defer paying tax on gross income for as long as possible.</span> <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">Claim of right doctrine</span>''' <span lang="EN">→ causes a taxpayer to recognize income if they receive the income even if they do not have a fixed right to the income</span><br />
|} <br />
<br />
<u><span lang="EN">North American Oil Consolidated v. Burnet (1932)</span></u> <span lang="EN">- SCOTUS [π oil land appointed to rec’vr; won case, got profits]</span><br />
<br />
<span lang="EN">RULE: Net profits earned on a property held in receivership are taxable to the taxpayer (and not the received) in the year the taxpayer unconditionally receives the earnings.</span> <br />
<br />
<span lang="EN">Case Notes: receiver only controlled portion of property; don’t want double filing.</span><br />
<br />
<span lang="EN">● When a receiver holds only <u>part</u> of a company’s property, the net income on that property will be taxable to the company in the year it is unconditionally received</span><br />
<br />
<span lang="EN">● Rev. Act of 1916 §13(c) - receivers who operate property on behalf of a company must file returns for taxable income just as the company ordinarily would</span><br />
<br />
<span lang="EN">● This statute only applies where the receiver operates '''<u>all</u>''' of the company’s property and essentially takes the place of the corporation</span><br />
<br />
<span lang="EN">● Companies are not required to file returns for income they may never receive - filing is only required for income a company has actually or constructively received</span> <br />
<br />
<span lang="EN">● Income is taxable in the year that the taxpayer receives it '''without restriction'''</span> <br />
<br />
{| class="wikitable"<br />
|<span lang="EN">Rev. Act of 1916 §13(c) - RETURNS</span> <br />
<br />
<span lang="EN">(c) In cases wherein receivers, trustees in bankruptcy, or assignees are operating the property or business of corporations, joint-stock signees, companies or associations, or insurance companies, subject to tax imposed by this title, such receivers, trustees, or assignees shall make returns of net income as and for such corporations, joint stock companies or associations, and insurance companies, in the same manner and form as such organizations are hereinbefore required to make returns, and any income tax due on the basis of such returns made by receivers, trustees, or assingees shall be assessed and collected in the same manner as if assessed directly against the organizations of whose businesses or properties they have custody and control;</span><br />
|} <br />
<br />
'''<span lang="EN">Advance Payments and the Issue of Deposits</span>''' <br />
<br />
<u><span lang="EN">Commissioner v. Indianapolis Power & Light Company (1990)</span></u> <span lang="EN">- SCOTUS [π collected deposit from customers]</span><br />
<br />
<span lang="EN">RULE: a federal taxpayer has complete dominion over a deposit which subjects the deposit to income tax as an advance payment, if a taxpayer has a '''guaranteed right''' to keep the money.</span> <br />
<br />
<span lang="EN">Case Notes: without a guaranteed right to keep the money, no advanced payment and no income tax</span><br />
<br />
<span lang="EN">● Advance payments are taxable in the year of receipt; loans and security deposits are not taxable income</span><br />
<br />
<span lang="EN">● The key distinction is whether the taxpayer had complete dominion over the money</span> <br />
<br />
<span lang="EN">● Complete dominion exists where the taxpayer has a guaranteed right to keep the money</span> <br />
<br />
'''<span lang="EN">Assignment of Income</span>''' <br />
<br />
'''<span lang="EN">Income from services</span>''' <span lang="EN">→ income from services is generally taxed to the party who performed the services (<u>Lucas</u>).</span> <br />
<br />
<u><span lang="EN">Lucas v. Earl (1930)</span></u> <span lang="EN">- SCOTUS [π and wife agreed any income held as joint-tenants; wife didn’t have income]</span><br />
<br />
<span lang="EN">RULE: a taxpayer cannot anticipatorily divert earned income to another individual, so as to avoid tax liability</span> <br />
<br />
<span lang="EN">Case Notes: the Rev. Act taxes the income of the individual who '''earns it'''.</span> <br />
<br />
<span lang="EN">Teschner v. Commissioner (1962) - Tax Court [π entered education annuity contest for daughter and won]</span><br />
<br />
<span lang="EN">RULE: Under federal tax law, a taxpayer does not earn income if he never had a right to the income despite performing services to acquire it for another.</span> <br />
<br />
<span lang="EN">Case Notes: if the taxpayer is ineligible for the prize, they never had a right to it; here, taxable to daughter.</span> <br />
<br />
'''<span lang="EN">Income from Property</span>''' <br />
<br />
<u><span lang="EN">Helvering v. Horst (1940)</span></u> <span lang="EN">- SCOTUS [π gifted coupons of negotiable bonds to son before they were due]</span><br />
<br />
<span lang="EN">RULE: a gift of interest coupons detached from bonds amounts to realized income to the donor.</span> <br />
<br />
<span lang="EN">Case Notes: the one who determines how the money is used is the one who realizes the income</span><br />
<br />
<span lang="EN">● Coupons → bearer bonds, presented to debtor for payment</span><br />
<br />
<span lang="EN">● Securing the right to receive income is not a taxable event because income is not taxed until it is realized - realization occurs upon receipt or when taxpayer has control over how it is used</span><br />
<br />
<span lang="EN">● Whether taxpayer gives income before or after receipt, the income is realized because taxpayer exercises control over it</span><br />
<br />
<span lang="EN">● Interest from property is distinguished from interest from earnings and coupons →</span> <br />
<br />
<span lang="EN">○ Property: interest due to property owner and tax liability follows the owner</span><br />
<br />
<span lang="EN">○ Earnings and coupons: interest due to the earner or bond holders personally</span> <br />
<br />
<span lang="EN">Transferring trees with ripe fruit → <u>Horst</u>: transfers of fruit may not be effective to shift the tax on such fruit to another, but transfers of the entire tree may.</span> <br />
<br />
<u><span lang="EN">Salvatore v. Commissioner (1970)</span></u> <span lang="EN">- Tax Court [π inherited biz, let sons run]</span><br />
<br />
<span lang="EN">RULE: The federal tax consequences of a property sale are determined by the substance, not the form, of the transaction</span> <br />
<br />
<span lang="EN">Case Notes: substance over form → Court Holding Co.: substance depends not only on the legal means of transferring title but also every step of sale from negotiations to transfer.</span><br />
<br />
<span lang="EN">● When π accepted offer to sell biz, she was sole owner</span><br />
<br />
<span lang="EN">● Transfer to children without consideration was an “artificial and intermediate step”</span><br />
<br />
<span lang="EN">● $ determined not on interest but on need</span> <br />
<br />
'''<span lang="EN">Tax Planning and Tax Avoidance</span>''' <br />
<br />
<u><span lang="EN">Estate of Stranahan v. Commissioner (1973)</span></u> <span lang="EN">- 6th Cir. [π exchanged stock to son to take full adv. of int. deduction]</span><br />
<br />
<span lang="EN">RULE: a taxpayer may escape tax liability for future income from property if he assigns the future income in a bonafide sale for valuable consideration</span> <br />
<br />
<span lang="EN">Case Notes: a bona fide sale for current stock value and consideration existed, π is not liable for the dividends paid out to son.</span><br />
<br />
<span lang="EN">● <u>Horst</u> → typically, cannot avoid tax liability by transferring or assigning income</span> <br />
<br />
<u><span lang="EN">Commissioner v. Banks Commissioner v. Banaitis (2005)</span></u> <span lang="EN">- SCOTUS [π rec’d settle, claimed amt after atty fees]</span><br />
<br />
<span lang="EN">RULE: the portion of a money judgment or settlement paid to a P’s attorney under a contingent fee agreement is income to the P.</span> <br />
<br />
<span lang="EN">Case Notes: A contingent fee agreement is essentially an anticipatory assignment of a plaintiff’s income, and any income transferred as a result of the agreement remains taxable to the plaintiff.</span><br />
<br />
<span lang="EN">● Income is taxed to the one who earns it. Thus, a taxpayer cannot avoid income tax by anticipatorily assigning his income to another.</span> <br />
<br />
<span lang="EN">● Tax liability attaches to the one who has dominion or control over the source of the income.</span> <br />
<br />
<span lang="EN">● In the litigation context, the plaintiff might realize income in the form of a money judgment or settlement.</span> <br />
<br />
<span lang="EN">● The income-producing asset is the lawsuit itself, and a plaintiff exercises complete dominion and control over this asset throughout the course of litigation.</span> <br />
<br />
<span lang="EN">● Any income derived from the lawsuit, therefore, is taxable to the plaintiff.</span> <br />
<br />
'''<span lang="EN">Tax Treatment of Taxpayer Costs</span>''' <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code §161 - Allowance of deductions</span>'''<br />
<br />
'''<span lang="EN">In computing taxable income under section 63, there shall be allowed as deductions the items specified in this part, subject to the exceptions provided in part IX (sec. 261 and following, relating to items not deductible).</span>'''<br />
|} <br />
<br />
<span lang="EN">Deductibility Factors:</span><br />
<br />
<span lang="EN">1) Depends on the ''nature'' of the cost: “capital expenditure” or an “expense”</span><br />
<br />
<span lang="EN">2) Depends on the type of ''activity'' to which that cost related: business, investment, personal</span> <br />
<br />
<span lang="EN">Capital expenditure → those costs that provide a long-term benefit to the taxpayer, either because they are incurred to acquire a new asset or because they materially add to the value or useful life of some pre-existing asset (costs that should be “capitalized”); generally '''ADD''' to or '''CREATE''' basis.</span> <br />
<br />
<span lang="EN">Expense → costs that do not acquire, improve, or prolong the life of an asset; generally spent on items that last for a short period of time (less than a year); taxpayers may be able to deduct.</span> <br />
<br />
<span lang="EN">Nature of Activity:</span><br />
<br />
<span lang="EN">● Expenses paid or incurred with respect to business and investment are generally deductible (§§162 and 212)</span><br />
<br />
<span lang="EN">● Expenses related to personal activities are generally not deductible (§262)</span> <br />
<br />
<span lang="EN">Handling Capital Expenditures → if a taxpayer must capitalize a cost, they can recover ultimately upon the sale or disposition of the asset (capitalized cost makes up all or part of the adjusted basis in the underlying asset); taxpayer doesn’t always have to wait to recover, and the cost can be recovered over a period of years roughly equivalent to the useful life of the asset:</span><br />
<br />
<span lang="EN">● '''Depreciation''' → tangible property; the property must (among other things) be subject to wear and tear in the hands of the taxpayer (§§617 and 168)</span><br />
<br />
<span lang="EN">● '''Amortization''' → intangible property; statutory requirements in §197.</span> <br />
<br />
{| class="wikitable"<br />
| <br />
|'''<span lang="EN">Personal</span>'''<br />
|'''<span lang="EN">Business</span>'''<br />
|'''<span lang="EN">Investment</span>'''<br />
|-<br />
|<span lang="EN">Capital Expenditures</span><br />
<br />
<span lang="EN">(those that: (1) are used to acquire an asset or some other long-lasting benefit; or (2) permanently improve or extend the useful life of that asset or benefit)</span><br />
|<span lang="EN">NO DEDUCTION</span><br />
<br />
<span lang="EN">§263(a)</span><br />
<br />
<span lang="EN">(taxpayer gets basis)</span><br />
|<span lang="EN">NO DEDUCTION</span><br />
<br />
<span lang="EN">§263(a)</span><br />
<br />
<span lang="EN">(taxpayer gets basis)</span> <br />
<br />
<span lang="EN">But the taxpayer may be able to recover the cost up front or over time</span> <br />
<br />
<span lang="EN">§§167(a); 168; 179; 197</span><br />
|<span lang="EN">NO DEDUCTION</span><br />
<br />
<span lang="EN">§263(a)</span><br />
<br />
<span lang="EN">(taxpayer gets basis)</span> <br />
<br />
<span lang="EN">But taxpayer may be able to recover the cost up front or over time</span> <br />
<br />
<span lang="EN">§§167(a); 168; 197</span><br />
|-<br />
|<span lang="EN">Expenses (outlays that are not capital expenditures)</span><br />
|<span lang="EN">Generally, NO DEDUCTION</span><br />
<br />
<span lang="EN">§262</span><br />
<br />
<span lang="EN">[But see Chapter 9]</span><br />
|<span lang="EN">DEDUCTION</span><br />
<br />
<span lang="EN">§162(a)</span><br />
|<span lang="EN">DEDUCTION</span><br />
<br />
<span lang="EN">§212</span><br />
|-<br />
|<span lang="EN">Realized Losses (loss recognized upon the sale, exchange, or other disposition of an asset)</span><br />
|<span lang="EN">Generally, NO DEDUCTION</span><br />
<br />
<span lang="EN">§262</span><br />
<br />
<span lang="EN">[But see §165(c)(3)]</span><br />
|<span lang="EN">DEDUCTION</span><br />
<br />
<span lang="EN">§165(c)(1)</span><br />
|<span lang="EN">DEDUCTION</span><br />
<br />
<span lang="EN">§165(c)(2)</span><br />
|}<br />
<br />
<br />
'''<span lang="EN">EXAMPLE OF DEPRECIATION</span>'''<br />
<br />
<span lang="EN">Building → Basis of $100,000 with a 20 year useful life</span> <br />
<br />
<span lang="EN">$100,000/20 = $5k depreciation per year</span> <br />
<br />
<u><span lang="EN">Commissioner v. Idaho Power Co. (1974)</span></u> <span lang="EN">- SCOTUS</span><br />
<br />
<span lang="EN">RULE: A federal taxpayer is not entitled to a deduction from gross income for depreciation on equipment that the taxpayer owns and uses in the construction of his own capital facilities.</span> <br />
<br />
<span lang="EN">Case Notes:</span> <br />
<br />
<span lang="EN">● The depreciation cost of using an asset must be attributed to the tax periods that are benefitted by the use.</span><br />
<br />
<span lang="EN">● If a taxpayer uses an asset for one year to produce income for the same year, the asset’s one-year depreciation is a business expense under § 167(a), for which the taxpayer can take a depreciation deduction in the same tax year to help replace the asset when it wears out.</span><br />
<br />
<span lang="EN">● However, if an asset is used in one year to make a capital improvement that will produce income over many years, the accounting focus shifts from the depreciation of the asset to the cost of replacing the capital improvement itself.</span><br />
<br />
<span lang="EN">● Under general accounting principles, capital-improvement costs are computed, or capitalized, over the useful life of the capital improvement.</span><br />
<br />
<span lang="EN">● Section 263(a)(1) requires “amounts paid out” for capital improvements to be capitalized, and this section takes precedence over the business-expense deduction provisions of § 167(a).</span><br />
<br />
<span lang="EN">● Treasury Regulations §§ 1.263(a) and 2(a) and longstanding Internal Revenue Service policy treat capital-construction-related depreciation as one of the amounts paid out for capital improvements.</span> <br />
<br />
'''<span lang="EN">UNICAP Rules → § 263A (DIFFERENT FROM 263(a))</span>'''<span lang="EN">: rules require the capitalization of all direct costs and certain indirect costs allocable to real property and tangible personal property produced by the taxpayer. For purposes of the uniform capitalization rules, to “produce” means to construct, build, install, manufacture, develop, improve, create, raise or grow. Self-constructed assets and property built under contract are treated as property “produced” by the taxpayer and the rules under § 263A(a) govern.</span><br />
<br />
<span lang="EN">● If you fall under § 263A, capitalize everything</span> <br />
<br />
<span lang="EN">● Exception: small business exception in § 263A(i) - any taxpayer who meets the test will be exempt from § 263A. ($25M gross receipts).</span><br />
<br />
<span lang="EN">● § 263A requires everything to be recovered over time, not deducted NOW.</span> <br />
<br />
<span lang="EN">STEP ONE: Does § 263A apply? If so, capitalize everything (taxpayers don’t want this). Do we fit into an exception?</span><br />
<br />
<span lang="EN">Improvement = capitalized, capitalized = don’t recover cost right away</span> <br />
<br />
'''<span lang="EN">Improvements to Tangible Property</span>''' <br />
<br />
<span lang="EN">Taxpayers must capitalize costs to improve tangible property if the costs “better” the property, restore the property to a “like-new” condition, or adapt the property to a new or different use.</span> <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">Reg. § 1.263(a)-3 Amounts paid to improve tangible property.</span>''' <br />
<br />
'''<span lang="EN">(d) Requirement to capitalize amounts paid for improvements.</span>''' <br />
<br />
'''<span lang="EN">Except as provided in paragraph (h) or paragraph (n) of this section or under § 1.263(a)-1(f), a taxpayer generally must capitalize the related amounts (as defined in paragraph (g)(3) of this section) paid to improve a unit of property owned by the taxpayer. However, paragraph (f) of this section applies to the treatment of amounts paid to improve leased property. Section 263A provides the requirement to capitalize the direct and allocable indirect costs of property produced by the taxpayer and property acquired for resale. Section 1016 provides for the addition of capitalized amounts to the basis of the property, and section 168 governs the treatment of additions or improvements for depreciation purposes. For purposes of this section, a unit of property is improved if the amounts paid for activities performed after the property is placed in service by the taxpayer -</span>'''<br />
<br />
'''<span lang="EN"> (1) Are for a betterment to the unit of property (see paragraph (j) of this section);</span>'''<br />
<br />
'''<span lang="EN"> (2) Restore the unit of property (see paragraph (k) of this section); or</span>'''<br />
<br />
'''<span lang="EN"> (3) Adapt the unit of property to a new or different use (see paragraph (l) of this section).</span>'''<br />
|} <br />
<br />
<u><span lang="EN">Fedex Corp. v. United States (2003)</span></u> <span lang="EN">- Tennessee [engine shop visit to repair engine, deducted]</span><br />
<br />
<span lang="EN">RULE: Under federal tax law, a taxpayer must capitalize expenses used to materially add value to property or restore property to a like-new condition.</span> <br />
<br />
<span lang="EN">Case Notes:</span><br />
<br />
<span lang="EN">● Expenses that materially add value to property or return property to a like-new condition must be capitalized on tax returns.</span><br />
<br />
<span lang="EN">● For material valuation purposes, the unit of property in question must be determined by looking at four factors:</span> <br />
<br />
<span lang="EN">○ (1) whether the smaller unit is treated as part of a larger unit,</span> <br />
<br />
<span lang="EN">○ (2) whether the economic life of the smaller property is essential for the economic life of the larger property,</span> <br />
<br />
<span lang="EN">○ (3) whether the larger and smaller units can function separately, and</span> <br />
<br />
<span lang="EN">○ (4) whether the smaller unit can be maintained without removal from the larger unit.</span> <br />
<br />
'''<span lang="EN">Betterments (Additions to Value)</span>''' <span lang="EN">→ taxpayers must capitalize costs of betterments, which generally includes costs that materially increase the value of property.</span><br />
<br />
<span lang="EN">(1) PRE EXISTING DEFECTS: The cost ameliorates a condition or defect that existed prior to the property’s acquisition or production by the taxpayer, no matter whether the taxpayer knew of this condition or defect at the time</span><br />
<br />
<span lang="EN">(2) BETTERMENTS: the cost results in “betterment” of the property or a material addition to the property. This includes costs that improve the property’s quality or strength, or cause the property to be expanded or enlarged</span><br />
<br />
<span lang="EN">(3) INCREASED PRODUCTIVITY: The cost results in a material increase in the property’s capacity, productivity, or efficiency</span> <br />
<br />
'''<span lang="EN">Revenue Ruling 2004-62</span>'''<br />
<br />
<span lang="EN">● It is well established that the costs incurred for silvicultural practices performed in established timber stands are deductible business expenses because they do not materially add value to the timber stand, substantially prolong its useful life or adapt the timber stand to a new or different use.</span><br />
<br />
<span lang="EN">● There is no established rule with respect to fertilization.</span><br />
<br />
<span lang="EN">● The Service rules that a deduction for fertilization costs is proper, for post-establishment fertilization is akin to the deductible post-establishment silvicultural practices in that it does not add to value of the timber or prolong the useful life of any of the taxpayer’s assets (the land and the trees).</span> <br />
<br />
'''<span lang="EN">Restorations v. Repairs →</span>''' <span lang="EN">taxpayers must capitalize costs that “restore” a unit or property</span> <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">Reg. § 1.263(a)-3 Amounts paid to improve tangible property.</span>''' <br />
<br />
'''<span lang="EN">(k) Capitalization of restorations -</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. A taxpayer must capitalize as an improvement an amount paid to restore a unit of property, including an amount paid to make good the exhaustion for which an allowance is or has been made. An amount restores a unit of property only if it -</span>'''<br />
<br />
'''<span lang="EN"> (i) Is for the replacement of a component of a unit of property for which the taxpayer has properly deducted a loss for that component, other than a casualty loss under § 1.165-7;</span>'''<br />
<br />
'''<span lang="EN"> (ii) Is for the replacement of a component of a unit of property for which the taxpayer has properly taken into account the adjusted basis of the component in realizing gain or loss resulting from the sale or exchange of the component;</span>'''<br />
<br />
'''<span lang="EN"> (iii) Is for the restoration of damage to a unit of property for which the taxpayer is required to take a basis adjustment as a result of a casualty loss under section 165, or relating to a casualty event described in section 165, subject to the limitation in paragraph (k)(4) of this section;</span>'''<br />
<br />
'''<span lang="EN"> (iv) Returns the unit of property to its ordinarily efficient operating condition if the property has deteriorated to a state of disrepair and is no longer functional for its intended use;</span>'''<br />
<br />
'''<span lang="EN"> (v) Results in the rebuilding of the unit of property to a like-new condition as determined under paragraph (k)(5) of this section after the end of its class life as defined in paragraph (i)(4) of this section; or</span>'''<br />
<br />
'''<span lang="EN"> (vi) Is for the replacement of a part or combination of parts that comprise a major component or a substantial structural part of a unit of property as determined under paragraph (k)(6) of this section.</span>'''<br />
|} <br />
<br />
<span lang="EN">Restoration costs → generally either return property to its “ordinarily efficient operating condition” after the unit of property has deteriorated so much that it no longer functions as intended, or the cost returns property to a like-new condition.</span><br />
<br />
<span lang="EN">● When a taxpayer has previously taken a deduction for a loss on a component, costs to replace that component must be capitalized</span><br />
<br />
<span lang="EN">● Amounts paid for repairs or maintenance to tangible property can be treated as expenses.</span> <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">Reg. § 1.162-4 Repairs.</span>''' <br />
<br />
'''<span lang="EN">(a) In general. A taxpayer may deduct amounts paid for repairs and maintenance to tangible property if the amounts paid are not otherwise required to be capitalized. Optionally, § 1.263(a)-3(n) provides an election to capitalize amounts paid for repair and maintenance consistent with the taxpayer's books and records.</span>'''<br />
|} <br />
<br />
<span lang="EN">If the costs are deemed “repairs” then the taxpayer gets an immediate deduction under §162 or §212, assuming the costs relate to a business or investment activity. If the costs are “restorations” or “improvements”, the deduction is deferred because the cost is added to the property’s basis.</span> <br />
<br />
<u><span lang="EN">Midland Empire Packing Company v. Commissioner (1950)</span></u> <span lang="EN">- Tax Court</span><br />
<br />
<span lang="EN">RULE: An expenditure is currently deductible as a repair to property if it is made solely to keep the property in an ordinarily efficient operating condition.</span> <br />
<br />
<span lang="EN">Case Notes:</span><br />
<br />
<span lang="EN">● Expenditures to repair property are deductible as an ordinary and necessary business expense.</span> <br />
<br />
<span lang="EN">● On the other hand, expenditures for capital outlay are capitalized and deducted in installments over the capital asset’s useful life.</span> <br />
<br />
<span lang="EN">● In order to determine whether expenditures are repairs or capital outlay, courts must look to the purpose of the expenditure.</span> <br />
<br />
<span lang="EN">● If the expenditure is a replacement of the property in whole or in part, or if it is an improvement intended to add to the property’s value, prolong its life, or change its use, then it is a capital outlay.</span><br />
<br />
<span lang="EN">● Necessary v. ordinary → ordinary does not necessarily mean regular or frequent, and that even a one-time payment can be ordinary if it is a common and accepted manner of dealing with a particular threat to a business (<u>Welch v. Helvering</u>).</span> <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">Repairs</span>'''<br />
|'''<span lang="EN">Improvements</span>'''<br />
|-<br />
|<span lang="EN">Keep property in ordinary efficient working condition</span><br />
|<span lang="EN">Add to value or appreciably prolong the property’s useful life</span><br />
|} <br />
<br />
<u><span lang="EN">Mt, Morris Drive-In Theatre Co. v. Commissioner (1955)</span></u> <span lang="EN">- Tax Court</span><br />
<br />
<span lang="EN">RULE: Under federal tax law, in determining whether construction expenses are deductible business expenses or non-deductible capital expenses, the decisive test is the character of the transaction that gives rise to the expenses.</span> <br />
<br />
<span lang="EN">Case Notes:</span><br />
<br />
<span lang="EN">● In determining whether construction expenses are deductible ordinary and necessary business expenses or non-deductible capital expenses, the decisive test is the character of the transaction that gives rise to the expenses.</span><br />
<br />
<span lang="EN">● A business-expense deduction has been allowed in past cases for the costs of addressing an unforeseeable physical fault or external factor.</span><br />
<br />
<span lang="EN">● The business deduction has also been allowed where a farm spent money to adopt farming techniques that were not in use when the farm began operations.</span><br />
<br />
<span lang="EN">● The business deduction might also be allowed for the expenses of restoring or rearranging an existing capital asset.</span> <br />
<br />
'''<span lang="EN">Adaptations</span>''' <span lang="EN">→ taxpayers must capitalize costs that adapt a property to a new or different use.</span> <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">§ 1.263(a)-3 Amounts paid to improve tangible property.</span>''' <br />
<br />
'''<span lang="EN">(l) Capitalization of amounts to adapt property to a new or different use -</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. A taxpayer must capitalize as an improvement an amount paid to adapt a unit of property to a new or different use. In general, an amount is paid to adapt a unit of property to a new or different use if the adaptation is not consistent with the taxpayer's ordinary use of the unit of property at the time originally placed in service by the taxpayer.</span>'''<br />
<br />
'''<span lang="EN"> (2) Application of adaption rule to buildings. In the case of a building, an amount is paid to improve a building if it is paid to adapt to a new or different use a property specified under paragraph (e)(2)(ii) (building), paragraph (e)(2)(iii)(B) (condominium), paragraph (e)(2)(iv)(B) (cooperative), or paragraph (e)(2)(v)(B) (leased building or leased portion of building) of this section. For example, an amount is paid to improve a building if it is paid to adapt the building structure or any one of its buildings systems to a new or different use.</span>'''<br />
<br />
'''<span lang="EN"> (3) Examples. The following examples illustrate the application of this paragraph (l) only and do not address whether capitalization is required under another provision of this section or under another provision of the Code (for example, section 263A). Unless otherwise stated, assume that the taxpayer has not properly deducted a loss for any unit of property, asset, or component of a unit of property that is removed and replaced.</span>'''<br />
|} <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">Betterments</span>'''<br />
|'''<span lang="EN">Restorations</span>'''<br />
|'''<span lang="EN">Adaptations</span>'''<br />
|-<br />
|<span lang="EN">PRE EXISTING DEFECTS. The cost ameliorates a condition or defect that existed prior to the property’s acquisition of production by the taxpayer, no matter whether the taxpayer knew of this condition or defect at the time.</span><br />
<br />
<span lang="EN">Reg. §1.263(a)-3(j)(1)(i).</span><br />
|<span lang="EN">PREVIOUS DEDUCTION OR SALE. The cost is for the replacement of a component when the taxpayer has already deducted the costs of the original item or accounted for the basis of the item as a part of a sale or exchange.</span><br />
<br />
<span lang="EN">Reg. §1.263(a)-3(k)(1)(i), (ii), (iii)</span><br />
|<span lang="EN">DIFFERENT USE. The cost produces a change that is not consistent with the intended original use of the property.</span><br />
<br />
<span lang="EN">Reg. §1.263(a)-3(i)</span><br />
|-<br />
|<span lang="EN">MATERIAL ADDITION. The cost results in a material addition, including enlargement, expansion, or extension of the property.</span><br />
<br />
<span lang="EN">Reg. §1.263(a)-3(j)(1)(ii).</span><br />
|<span lang="EN">RETURNS TO ORDINARY OPERATION. The cost returns the property to its ordinarily efficient operating condition and the property has deteriorated so much that it is no longer functional for its intended use.</span><br />
<br />
<span lang="EN">Reg. §1.263(a)-3(k)(1)(iv)</span><br />
| <br />
|-<br />
|<span lang="EN">INCREASED PRODUCTIVITY. The cost results in a material increase in the property’s capacity, productivity, efficiency, strength, or quality.</span><br />
<br />
<span lang="EN">Reg. §1.263(a)-3(j)(1)(iii)</span><br />
|<span lang="EN">REBUILD TO LIKE-NEW CONDITION. The cost returns the property to a new, rebuilt, remanufactured condition.</span><br />
<br />
<span lang="EN">Reg. §1.263(a)-3(k)(3).</span><br />
| <br />
|-<br />
| <br />
|<span lang="EN">REPLACEMENT OF A MAJOR COMPONENT. The cost replaces a substantial structural part of the property. This includes components that are a large part of the structure or that perform a discrete and critical function.</span><br />
<br />
<span lang="EN">Reg. §1.263(a)-3(k)(4).</span><br />
| <br />
|} <br />
<br />
<span lang="EN">Problem Example →</span> <br />
<br />
<span lang="EN">K and F own commercial building, lease space as sole business activity; in taxable year, K and F incurred costs below, all directly related to building; current deduction or capitalized costs:</span> <br />
<br />
<span lang="EN">(a) $50,000 to remove asbestos (did not affect building operations) '''→''' '''IRC 263(a)-3(j)(3) Example 2; DEDUCTIBLE'''</span><br />
<br />
<span lang="EN">(b) $3,000 to restore awning that originally cost $1,000 to construct and install, current cost to construct and install is $10,000 → '''case by case basis'''</span><br />
<br />
<span lang="EN">(c) $22,000 to repair the driveway providing access from the main road to parking lot → capitalization of betterments</span><br />
<br />
<span lang="EN">(d) $5,000 to add safety equipment to elevators</span><br />
<br />
<span lang="EN">(e) $2,500 to fix leak</span><br />
<br />
'''<span lang="EN">Costs Related to <u>Intangible</u> Assets</span>''' <br />
<br />
<u><span lang="EN">INDOPCO, Inc. v. Commissioner (1992)</span></u> <span lang="EN">- SCOTUS</span> <br />
<br />
<span lang="EN">RULE: Corporate expenses incurred for the purpose of changing the corporate structure in order to receive future benefits are not deductible as ordinary and necessary business expenses.</span> <br />
<br />
<span lang="EN">Case Notes:</span><br />
<br />
<span lang="EN">● Section 162 of the Internal Revenue Code allows current deductions for ordinary and necessary business expenses incurred during the taxable year while carrying on a trade or business.</span><br />
<br />
<span lang="EN">● On the other hand, § 263 disallows deductions for capital expenditures that are intended to create or enhance an asset or to create a future benefit.</span><br />
<br />
<span lang="EN">● Instead, such expenditures must be amortized and depreciated over a related asset’s useful life or taken as a loss upon dissolution of the entire business.</span><br />
<br />
<span lang="EN">● Deductions are only allowable if the taxpayer can clearly demonstrate an enumerated right to claim a deduction; otherwise, capitalization of expenses is the norm.</span><br />
<br />
<span lang="EN">● In Commissioner v. Lincoln Savings & Loan Association, 403 U.S. 345 (1971), this Court held that a taxpayer’s expenditures that create or enhance a distinct asset should be capitalized.</span><br />
<br />
<span lang="EN">● However, the ruling does not mean that capital expenditures are limited to only those that create or enhance a distinct asset.</span><br />
<br />
<span lang="EN">● This Court also stated in Lincoln Savings that the presence of some future benefit is not necessarily a controlling factor that determines whether an expenditure should be capitalized.</span><br />
<br />
<span lang="EN">● However, that ruling does not preclude a court’s reliance on the presence of a significant future benefit in order to designate an expenditure as a capital outlay.</span> <br />
<br />
<span lang="EN">The test from <u>INDOPCO</u> is sometimes referred to as the “significant future benefits test.” If an expenditure creates a significant future benefit, it should be capitalized.</span> <br />
<br />
<span lang="EN">Revenue Ruling 92-80 → advertising expenses still deductible</span><br />
<br />
<span lang="EN">Revenue Ruling 94-38 → hazardous waste clean-up costs still deductible, except that construction of groundwater treatment facilities would capitalized</span><br />
<br />
<span lang="EN">Revenue Ruling 94-77 → severance benefits still deductible</span><br />
<br />
<span lang="EN">Revenue Ruling 95-32 → certain conservation expenditures still deductible</span><br />
<br />
<span lang="EN">Revenue Ruling 96-62 → training costs still deductible</span> <br />
<br />
<span lang="EN">The INDOPCO Regulations → generally require capitalization of certain amounts paid to acquire or create intangible assets, and require capitalization of expenses that create or enhance a separate and distinct capital asset.</span> <br />
<br />
'''<span lang="EN">Deduction for Expenses</span>''' <br />
<br />
<span lang="EN">STEP ONE: Is it an expense or capital expenditure?</span> <br />
<br />
<span lang="EN">STEP TWO: assuming it is an expense, is that expense deductible? Find specific provision</span><br />
<br />
<span lang="EN">STEP THREE: assuming there is a deduction, where on the tax ladder can the deduction come in?</span><br />
<br />
<span lang="EN">STEP FOUR: check 263A and then 263(a)</span> <br />
<br />
<span lang="EN">Look to Sec. 62(a) → tells you where on the tax ladder the deduction falls, but you still need to look to the specific deduction’s provision to see if you qualify.</span><br />
<br />
<span lang="EN">● Above the line deductions always preferable (second to tax credits)</span><br />
<br />
<span lang="EN">● If not under 62(a), look at ITEMIZED DEDUCTIONS</span> <br />
<br />
<span lang="EN">No catch-all for deductions, need to find a specific deduction existing in the code; all in different provisions, no master list</span> <br />
<br />
<span lang="EN">In general →</span><br />
<br />
<span lang="EN">● Expenses are deductible if they relate to a taxpayer’s “trade or business” activity, or if the expense is paid or incurred in the production or collection of income from an activity that does not rise to the level of a trade or business (an “investment activity”).</span> <br />
<br />
'''<span lang="EN">Trade or Business Expenses</span>''' <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">§ 162(a) - Trade or business expenses</span>''' <br />
<br />
'''<span lang="EN">(a) In general. There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including—</span>'''<br />
<br />
'''<span lang="EN"> (1) a reasonable allowance for salaries or other compensation for personal services actually rendered;</span>'''<br />
<br />
'''<span lang="EN"> (2) traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business; and</span>'''<br />
<br />
'''<span lang="EN"> (3) rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.</span>''' <br />
<br />
'''<span lang="EN">For purposes of the preceding sentence, the place of residence of a Member of Congress (including any Delegate and Resident Commissioner) within the State, congressional district, or possession which he represents in Congress shall be considered his home, but amounts expended by such Members within each taxable year for living expenses shall not be deductible for income tax purposes. For purposes of paragraph (2), the taxpayer shall not be treated as being temporarily away from home during any period of employment if such period exceeds 1 year. The preceding sentence shall not apply to any Federal employee during any period for which such employee is certified by the Attorney General (or the designee thereof) as traveling on behalf of the United States in temporary duty status to investigate or prosecute, or provide support services for the investigation or prosecution of, a Federal crime.</span>'''<br />
|} <br />
<br />
<span lang="EN">Six elements required for a deduction →</span><br />
<br />
<span lang="EN">1) It must be an '''ordinary'''</span><br />
<br />
<span lang="EN">2) And '''necessary'''</span><br />
<br />
<span lang="EN">3) '''Expense'''</span><br />
<br />
<span lang="EN">4) That was '''paid or incurred during the taxable year'''</span><br />
<br />
<span lang="EN">5) '''In carrying on'''</span><br />
<br />
<span lang="EN">6) A '''trade or business''' activity</span> <br />
<br />
'''<span lang="EN">Ordinary and Necessary</span>''' <span lang="EN">→ routine and directly related to the business activity; can be extraordinary and unusual, but the expense must have a business purpose and be related to the activity.</span> <br />
<br />
<u><span lang="EN">Welch v. Helvering (1933)</span></u> <span lang="EN">- SCOTUS [π grain co. secretary repaid company debts and deducted]</span><br />
<br />
<span lang="EN">RULE: Expenditures for ordinary and necessary business expenses may be deducted from gross income if incurred while carrying on a trade or business.</span> <br />
<br />
<span lang="EN">Case Notes:</span><br />
<br />
<span lang="EN">● Section 162 of the Tax Code states that expenses for ordinary and necessary business expenses may be deducted from gross income if incurred while carrying on a trade or business.</span><br />
<br />
<span lang="EN">● Many payments may be deemed a necessary expense, but not all necessary payments are ordinary.</span><br />
<br />
<span lang="EN">● An expense does not need to be a regular and recurring event in order to be ordinary.</span><br />
<br />
<span lang="EN">● Even one-time payments can be ordinary -- For instance, if a company defends itself in a lawsuit by hiring an attorney, the attorney’s fees is probably an ordinary expense within the meaning of § 162.</span><br />
<br />
<span lang="EN">● But ultimately, whether an expense is both necessary and ordinary is a determination based on the specific facts at hand.</span> <br />
<br />
<u><span lang="EN">Jenkins v. Commissioner (1983)</span></u> <span lang="EN">- Tax Court [twitty burger failed, repaid investors]</span><br />
<br />
<span lang="EN">RULE: Under federal tax law, a taxpayer may deduct payments for expenses incurred by another if the taxpayer’s primary motivation is business in nature and there is a sufficient relationship between the expenses and the taxpayer’s business.</span> <br />
<br />
<span lang="EN">Case Notes:</span> <br />
<br />
<span lang="EN">● A taxpayer may deduct an expense if it is an ordinary and necessary expense of the taxpayer’s business.</span><br />
<br />
<span lang="EN">● Generally, a taxpayer may not deduct the expenses of another.</span><br />
<br />
<span lang="EN">● However, an exception exists for expenses that are primarily motivated by business and have a sufficient relationship with the taxpayer’s business.</span> <br />
<br />
<u><span lang="EN">Lohrke</span></u> <span lang="EN">Test: A payment may be deducted if it is an ordinary and necessary expense of a trade or business of the shareholder.</span> <br />
<br />
'''<span lang="EN">In carrying on</span>''' <span lang="EN">→ continuing business; start-up costs not entirely deductible, a portion of such costs may be deducted in the year in which the new business begins and the balance of such costs are to be amortized (deducted on a pro rata basis) over 15 years.</span> <br />
<br />
<u><span lang="EN">Estate of Rockefeller v. Commissioner (1985)</span></u> <span lang="EN">- 2nd Cir. [deducted costs rel. to commissioned position]</span><br />
<br />
<span lang="EN">RULE: A federal taxpayer may deduct business expenses incurred to change positions with substantially similar job duties within the same trade or business.</span> <br />
<br />
<span lang="EN">Case Notes:</span><br />
<br />
<span lang="EN">● A taxpayer may deduct business expenses used to carry on a trade or business, even if the expenses are not for his current position.</span><br />
<br />
<span lang="EN">● The new position sought by the taxpayer must have substantially similar job duties to his current position.</span><br />
<br />
<span lang="EN">● An unemployed taxpayer is still viewed as carrying on the trade or business of his most recent position, unless there is a significant lack of continuity.</span><br />
<br />
<span lang="EN">● For there to be a lack of continuity, the taxpayer must demonstrate an intent to return to a position with substantially similar duties.</span><br />
<br />
<span lang="EN">● The time lapse cannot be too great.</span> <br />
<br />
'''<span lang="EN">Trade or business</span>''' <span lang="EN">→ if an activity is not a “trade or business” it is either an “investment” activity or a “personal” activity.</span> <br />
<br />
<u><span lang="EN">Commissioner v. Groetzinger (1987)</span></u> <span lang="EN">- SCOTUS [lived on gambling wages, loss was tablable]</span><br />
<br />
<span lang="EN">RULE: A federal taxpayer’s expenses are tax deductible if they arise from a trade or business that the taxpayer conducts primarily for income or profit, and not from an activity in which the taxpayer engages sporadically, or as a hobby, or for amusement.</span> <br />
<br />
<span lang="EN">Case Notes:</span><br />
<br />
<span lang="EN">● A federal taxpayer’s expenses are tax deductible if the facts show that those expenses arise from a trade or business that the taxpayer conducts primarily for income or profit, and not from an activity in which the taxpayer engages sporadically, or as a hobby, or for amusement.</span> <br />
<br />
<span lang="EN">● This Court now makes this rule explicit because the federal tax code lacks any clear definition of “trade or business,” even though this phrase appears many times throughout the tax code.</span> <br />
<br />
<span lang="EN">● Also, this Court’s earlier trade-or-business tests are not fully satisfactory.</span> <br />
<br />
<span lang="EN">● In <u>Higgins v. Commissioner, 312 U.S. 212 (1941)</u>, this Court held that the existence of a trade or business must be determined on the facts of each case, and that a trade or business must be engaged in for profit.</span> <br />
<br />
<span lang="EN">● A year earlier in <u>Deputy v. DuPont, 308 U.S. 488 (1940)</u>, this Court assumed that trade or business expenses could include a taxpayer’s expenses from simply managing his or her own estate.</span> <br />
<br />
<span lang="EN">● <u>Higgins</u>, however, specifically found that personal estate-management expenses did not amount to a trade or business.</span> <br />
<br />
<span lang="EN">● Justice Frankfurter suggested in his <u>DuPont</u> concurrence that trade or business necessarily “involves holding oneself out to others as engaged in selling goods and services.”</span> <br />
<br />
<span lang="EN">● However, Justice Frankfurter’s concurrence has never been adopted by this Court.</span> <br />
<br />
<span lang="EN">● In this case, Justice Frankfurter’s test is rejected because the meanings of “holding oneself out,” “goods,” and “services” are too vague to be useful.</span><br />
<br />
'''<span lang="EN">Treatment of Capital Expenditures</span>''' <br />
<br />
'''<span lang="EN">Cost Recovery</span>''' <br />
<br />
<span lang="EN">A taxpayer generally cannot recover the cost of a capital expenditure for federal income tax purposes until the improved property is sold, exchanged, or otherwise disposed of in some form.</span> <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">Depreciation</span>'''<br />
|'''<span lang="EN">Amortization</span>'''<br />
|-<br />
|<span lang="EN">● Tangible assets (i.e. real property)</span><br />
<br />
<span lang="EN">● Cost recovery system governed by §167 and §168</span><br />
<br />
<span lang="EN">● Eligible tangible property must be described in §167(a)</span><br />
<br />
<span lang="EN">● Property must be held for use in a trade or business or for the production of income; personal-use property is not eligible for cost recovery over its useful life</span><br />
|<span lang="EN">● Intangible assets (i.e. loans)</span><br />
<br />
<span lang="EN">● Cost recovery system governed by §191</span><br />
<br />
<span lang="EN">● Eligible intangible property must be described in §197(c)(1) and §197(d)</span><br />
<br />
<span lang="EN">● Property must be held for use in a trade or business or for the production of income; personal-use property is not eligible for cost recovery over its useful life</span><br />
|} <br />
<br />
'''<span lang="EN">Depreciation of Tangible Property</span>''' <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code § 167 - Depreciation</span>'''<br />
<br />
'''<span lang="EN">(a) General rule. There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence)—</span>'''<br />
<br />
'''<span lang="EN"> (1) of property used in the trade or business, or</span>'''<br />
<br />
'''<span lang="EN"> (2) of property held for the production of income.</span>''' <br />
<br />
'''<span lang="EN">(b) Cross reference. For determination of depreciation deduction in case of property to which section 168 applies, see section 168.</span>'''<br />
<br />
'''<span lang="EN">(c) Basis for depreciation</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. The basis on which exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the adjusted basis provided in section 1011, for the purpose of determining the gain on the sale or other disposition of such property.</span>'''<br />
<br />
'''<span lang="EN"> (2) Special rule for property subject to lease. If any property is acquired subject to a lease—</span>'''<br />
<br />
'''<span lang="EN"> (A) no portion of the adjusted basis shall be allocated to the leasehold interest, and</span>'''<br />
<br />
'''<span lang="EN"> (B) the entire adjusted basis shall be taken into account in determining the depreciation deduction (if any) with respect to the property subject to the lease.</span>''' <br />
<br />
'''<span lang="EN">(d) Life tenants and beneficiaries of trusts and estates. In the case of property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust, the allowable deduction shall be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income allocable to each. In the case of an estate, the allowable deduction shall be apportioned between the estate and the heirs, legatees, and devisees on the basis of the income of the estate allocable to each.</span>'''<br />
<br />
'''<span lang="EN">(e) Certain term interests not depreciable</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. No depreciation deduction shall be allowed under this section (and no depreciation or amortization deduction shall be allowed under any other provision of this subtitle) to the taxpayer for any term interest in property for any period during which the remainder interest in such property is held (directly or indirectly) by a related person.</span>'''<br />
<br />
'''<span lang="EN"> (2) Coordination with other provisions</span>'''<br />
<br />
'''<span lang="EN"> (A) Section 273. This subsection shall not apply to any term interest to which section 273 applies.</span>'''<br />
<br />
'''<span lang="EN"> (B) Section 305(e). This subsection shall not apply to the holder of the dividend rights which were separated from any stripped preferred stock to which section 305(e)(1) applies.</span>'''<br />
<br />
'''<span lang="EN"> (3) Basis adjustments. If, but for this subsection, a depreciation or amortization deduction would be allowable to the taxpayer with respect to any term interest in property—</span>'''<br />
<br />
'''<span lang="EN"> (A) the taxpayer’s basis in such property shall be reduced by any depreciation or amortization deductions disallowed under this subsection, and</span>'''<br />
<br />
'''<span lang="EN"> (B) the basis of the remainder interest in such property shall be increased by the amount of such disallowed deductions (properly adjusted for any depreciation deductions allowable under subsection (d) to the taxpayer).</span>'''<br />
<br />
'''<span lang="EN"> (4) Special rules</span>'''<br />
<br />
'''<span lang="EN"> (A) Denial of increase in basis of remainderman. No increase in the basis of the remainder interest shall be made under paragraph (3)(B) for any disallowed deductions attributable to periods during which the term interest was held—</span>'''<br />
<br />
'''<span lang="EN"> (i) by an organization exempt from tax under this subtitle, or</span>'''<br />
<br />
'''<span lang="EN"> (ii) by a nonresident alien individual or foreign corporation but only if income from the term interest is not effectively connected with the conduct of a trade or business in the United States.</span>'''<br />
<br />
'''<span lang="EN"> (B) Coordination with subsection (d). If, but for this subsection, a depreciation or amortization deduction would be allowable to any person with respect to any term interest in property, the principles of subsection (d) shall apply to such person with respect to such term interest.</span>'''<br />
<br />
'''<span lang="EN"> (5) Definitions. For purposes of this subsection—</span>'''<br />
<br />
'''<span lang="EN"> (A) Term interest in property. The term “term interest in property” has the meaning given such term by section 1001(e)(2).</span>'''<br />
<br />
'''<span lang="EN"> (B) Related person. The term “related person” means any person bearing a relationship to the taxpayer described in subsection (b) or (e) of section 267.</span>'''<br />
<br />
'''<span lang="EN"> (6) Regulations. The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection, including regulations preventing avoidance of this subsection through cross-ownership arrangements or otherwise.</span>'''<br />
<br />
'''<span lang="EN">(f) Treatment of certain property excluded from section 197</span>'''<br />
<br />
'''<span lang="EN"> (1) Computer software</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. If a depreciation deduction is allowable under subsection (a) with respect to any computer software, such deduction shall be computed by using the straight line method and a useful life of 36 months.</span>'''<br />
<br />
'''<span lang="EN"> (B) Computer software. For purposes of this section, the term “computer software” has the meaning given to such term by section 197(e)(3)(B); except that such term shall not include any such software which is an amortizable section 197 intangible.</span>'''<br />
<br />
'''<span lang="EN"> (C) Tax-exempt use property subject to lease. In the case of computer software which would be tax-exempt use property as defined in subsection (h) of section 168 if such section applied to computer software, the useful life under subparagraph (A) shall not be less than 125 percent of the lease term (within the meaning of section 168(i)(3)).</span>'''<br />
<br />
'''<span lang="EN"> (2) Certain interests or rights acquired separately. If a depreciation deduction is allowable under subsection (a) with respect to any property described in subparagraph (B), (C), or (D) of section 197(e)(4), such deduction shall be computed in accordance with regulations prescribed by the Secretary. If such property would be tax-exempt use property as defined in subsection (h) of section 168 if such section applied to such property, the useful life under such regulations shall not be less than 125 percent of the lease term (within the meaning of section 168(i)(3)).</span>'''<br />
<br />
'''<span lang="EN"> (3) Mortgage servicing rights. If a depreciation deduction is allowable under subsection (a) with respect to any right described in section 197(e)(6), such deduction shall be computed by using the straight line method and a useful life of 108 months.</span>'''<br />
<br />
'''<span lang="EN">(g) Depreciation under income forecast method</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. If the depreciation deduction allowable under this section to any taxpayer with respect to any property is determined under the income forecast method or any similar method—</span>'''<br />
<br />
'''<span lang="EN"> (A) the income from the property to be taken into account in determining the depreciation deduction under such method shall be equal to the amount of income earned in connection with the property before the close of the 10th taxable year following the taxable year in which the property was placed in service,</span>'''<br />
<br />
'''<span lang="EN"> (B) the adjusted basis of the property shall only include amounts with respect to which the requirements of section 461(h) are satisfied,</span>'''<br />
<br />
'''<span lang="EN"> (C) the depreciation deduction under such method for the 10th taxable year beginning after the taxable year in which the property was placed in service shall be equal to the adjusted basis of such property as of the beginning of such 10th taxable year, and</span>'''<br />
<br />
'''<span lang="EN"> (D) such taxpayer shall pay (or be entitled to receive) interest computed under the look-back method of paragraph (2) for any recomputation year.</span>'''<br />
<br />
'''<span lang="EN"> (2) Look-back method. The interest computed under the look-back method of this paragraph for any recomputation year shall be determined by—</span>'''<br />
<br />
'''<span lang="EN"> (A) first determining the depreciation deductions under this section with respect to such property which would have been allowable for prior taxable years if the determination of the amounts so allowable had been made on the basis of the sum of the following (instead of the estimated income from such property)—</span>'''<br />
<br />
'''<span lang="EN"> (i) the actual income earned in connection with such property for periods before the close of the recomputation year, and</span>'''<br />
<br />
'''<span lang="EN"> (ii) an estimate of the future income to be earned in connection with such property for periods after the recomputation year and before the close of the 10th taxable year following the taxable year in which the property was placed in service,</span>'''<br />
<br />
'''<span lang="EN"> (B) second, determining (solely for purposes of computing such interest) the overpayment or underpayment of tax for each such prior taxable year which would result solely from the application of subparagraph (A), and</span>'''<br />
<br />
'''<span lang="EN"> (C) then using the adjusted overpayment rate (as defined in section 460(b)(7)), compounded daily, on the overpayment or underpayment determined under subparagraph (B).</span>'''<br />
<br />
'''<span lang="EN">For purposes of the preceding sentence, any cost incurred after the property is placed in service (which is not treated as a separate property under paragraph (5)) shall be taken into account by discounting (using the Federal mid-term rate determined under section 1274(d) as of the time such cost is incurred) such cost to its value as of the date the property is placed in service. The taxpayer may elect with respect to any property to have the preceding sentence not apply to such property.</span>'''<br />
<br />
'''<span lang="EN"> (3) Exception from look-back method. Paragraph (1)(D) shall not apply with respect to any property which had a cost basis of $100,000 or less.</span>'''<br />
<br />
'''<span lang="EN"> (4) Recomputation year. For purposes of this subsection, except as provided in regulations, the term “recomputation year” means, with respect to any property, the 3d and the 10th taxable years beginning after the taxable year in which the property was placed in service, unless the actual income earned in connection with the property for the period before the close of such 3d or 10th taxable year is within 10 percent of the income earned in connection with the property for such period which was taken into account under paragraph (1)(A).</span>'''<br />
<br />
'''<span lang="EN"> (5) Special rules</span>'''<br />
<br />
'''<span lang="EN"> (A) Certain costs treated as separate property. For purposes of this subsection, the following costs shall be treated as separate properties:</span>'''<br />
<br />
'''<span lang="EN"> (i) Any costs incurred with respect to any property after the 10th taxable year beginning after the taxable year in which the property was placed in service.</span>'''<br />
<br />
'''<span lang="EN"> (ii) Any costs incurred after the property is placed in service and before the close of such 10th taxable year if such costs are significant and give rise to a significant increase in the income from the property which was not included in the estimated income from the property.</span>'''<br />
<br />
'''<span lang="EN"> (B) Syndication income from television series. In the case of property which is 1 or more episodes in a television series, income from syndicating such series shall not be required to be taken into account under this subsection before the earlier of—</span>'''<br />
<br />
'''<span lang="EN"> (i) the 4th taxable year beginning after the date the first episode in such series is placed in service, or</span>'''<br />
<br />
'''<span lang="EN"> (ii) the earliest taxable year in which the taxpayer has an arrangement relating to the future syndication of such series.</span>'''<br />
<br />
'''<span lang="EN"> (C) Special rules for financial exploitation of characters, etc. For purposes of this subsection, in the case of television and motion picture films, the income from the property shall include income from the exploitation of characters, designs, scripts, scores, and other incidental income associated with such films, but only to the extent that such income is earned in connection with the ultimate use of such items by, or the ultimate sale of merchandise to, persons who are not related persons (within the meaning of section 267(b)) to the taxpayer.</span>'''<br />
<br />
'''<span lang="EN"> (D) Collection of interest. For purposes of subtitle F (other than sections 6654 and 6655), any interest required to be paid by the taxpayer under paragraph (1) for any recomputation year shall be treated as an increase in the tax imposed by this chapter for such year.</span>'''<br />
<br />
'''<span lang="EN"> (E) Treatment of distribution costs. For purposes of this subsection, the income with respect to any property shall be the taxpayer’s gross income from such property.</span>'''<br />
<br />
'''<span lang="EN"> (F) Determinations. For purposes of paragraph (2), determinations of the amount of income earned in connection with any property shall be made in the same manner as for purposes of applying the income forecast method; except that any income from the disposition of such property shall be taken into account.</span>'''<br />
<br />
'''<span lang="EN"> (G) Treatment of pass-thru entities. Rules similar to the rules of section 460(b)(4) shall apply for purposes of this subsection.</span>'''<br />
<br />
'''<span lang="EN"> (6) Limitation on property for which income forecast method may be used. The depreciation deduction allowable under this section may be determined under the income forecast method or any similar method only with respect to—</span>'''<br />
<br />
'''<span lang="EN"> (A) property described in paragraph (3) or (4) of section 168(f),</span>'''<br />
<br />
'''<span lang="EN"> (B) copyrights,</span>'''<br />
<br />
'''<span lang="EN"> (C) books,</span>'''<br />
<br />
'''<span lang="EN"> (D) patents, and</span>'''<br />
<br />
'''<span lang="EN"> (E) other property specified in regulations. Such methods may not be used with respect to any amortizable section 197 intangible (as defined in section 197(c)).</span>'''<br />
<br />
'''<span lang="EN"> (7) Treatment of participations and residuals</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. For purposes of determining the depreciation deduction allowable with respect to a property under this subsection, the taxpayer may include participations and residuals with respect to such property in the adjusted basis of such property for the taxable year in which the property is placed in service, but only to the extent that such participations and residuals relate to income estimated (for purposes of this subsection) to be earned in connection with the property before the close of the 10th taxable year referred to in paragraph (1)(A).</span>'''<br />
<br />
'''<span lang="EN"> (B) Participations and residuals. For purposes of this paragraph, the term “participations and residuals” means, with respect to any property, costs the amount of which by contract varies with the amount of income earned in connection with such property.</span>'''<br />
<br />
'''<span lang="EN"> (C) Special rules relating to recomputation years. If the adjusted basis of any property is determined under this paragraph, paragraph (4) shall be applied by substituting “for each taxable year in such period” for “for such period”.</span>'''<br />
<br />
'''<span lang="EN"> (D) Other special rules</span>'''<br />
<br />
'''<span lang="EN"> (i) Participations and residuals. Notwithstanding subparagraph (A), the taxpayer may exclude participations and residuals from the adjusted basis of such property and deduct such participations and residuals in the taxable year that such participations and residuals are paid.</span>'''<br />
<br />
'''<span lang="EN"> (ii) Coordination with other rules. Deductions computed in accordance with this paragraph shall be allowable notwithstanding paragraph (1)(B), section 263, 263A, 404, 419, or 461(h).</span>'''<br />
<br />
'''<span lang="EN"> (E) Authority to make adjustments. The Secretary shall prescribe appropriate adjustments to the basis of property and to the look-back method for the additional amounts allowable as a deduction solely by reason of this paragraph.</span>'''<br />
<br />
'''<span lang="EN"> (8) Special rules for certain musical works and copyrights</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. If an election is in effect under this paragraph for any taxable year, then, notwithstanding paragraph (1), any expense which—</span>'''<br />
<br />
'''<span lang="EN"> (i) is paid or incurred by the taxpayer in creating or acquiring any applicable musical property placed in service during the taxable year, and</span>'''<br />
<br />
'''<span lang="EN"> (ii) is otherwise properly chargeable to capital account,</span>'''<br />
<br />
'''<span lang="EN">shall be amortized ratably over the 5-year period beginning with the month in which the property was placed in service. The preceding sentence shall not apply to any expense which, without regard to this paragraph, would not be allowable as a deduction.</span>'''<br />
<br />
'''<span lang="EN"> (B) Exclusive method. Except as provided in this paragraph, no depreciation or amortization deduction shall be allowed with respect to any expense to which subparagraph (A) applies.</span>'''<br />
<br />
'''<span lang="EN"> (C) Applicable musical property. For purposes of this paragraph—</span>'''<br />
<br />
'''<span lang="EN"> (i) In general. The term “applicable musical property” means any musical composition (including any accompanying words), or any copyright with respect to a musical composition, which is property to which this subsection applies without regard to this paragraph.</span>'''<br />
<br />
'''<span lang="EN"> (ii) Exceptions. Such term shall not include any property—</span>'''<br />
<br />
'''<span lang="EN"> (I) with respect to which expenses are treated as qualified creative expenses to which section 263A(h) applies,</span>'''<br />
<br />
'''<span lang="EN"> (II) to which a simplified procedure established under section 263A(i)(2) [1] applies, or</span>'''<br />
<br />
'''<span lang="EN"> (III) which is an amortizable section 197 intangible (as defined in section 197(c)).</span>'''<br />
<br />
'''<span lang="EN"> (D) Election. An election under this paragraph shall be made at such time and in such form as the Secretary may prescribe and shall apply to all applicable musical property placed in service during the taxable year for which the election applies.</span>'''<br />
<br />
'''<span lang="EN"> (E) Termination. An election may not be made under this paragraph for any taxable year beginning after December 31, 2010.</span>'''<br />
<br />
'''<span lang="EN">(h) Amortization of geological and geophysical expenditures</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. Any geological and geophysical expenses paid or incurred in connection with the exploration for, or development of, oil or gas within the United States (as defined in section 638) shall be allowed as a deduction ratably over the 24-month period beginning on the date that such expense was paid or incurred.</span>'''<br />
<br />
'''<span lang="EN"> (2) Half-year convention. For purposes of paragraph (1), any payment paid or incurred during the taxable year shall be treated as paid or incurred on the mid-point of such taxable year.</span>'''<br />
<br />
'''<span lang="EN"> (3) Exclusive method. Except as provided in this subsection, no depreciation or amortization deduction shall be allowed with respect to such payments.</span>'''<br />
<br />
'''<span lang="EN"> (4) Treatment upon abandonment. If any property with respect to which geological and geophysical expenses are paid or incurred is retired or abandoned during the 24-month period described in paragraph (1), no deduction shall be allowed on account of such retirement or abandonment and the amortization deduction under this subsection shall continue with respect to such payment.</span>'''<br />
<br />
'''<span lang="EN"> (5) Special rule for major integrated oil companies</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. In the case of a major integrated oil company, paragraphs (1) and (4) shall be applied by substituting “7-year” for “24 month”.</span>'''<br />
<br />
'''<span lang="EN"> (B) Major integrated oil company. For purposes of this paragraph, the term “major integrated oil company” means, with respect to any taxable year, a producer of crude oil—</span>'''<br />
<br />
'''<span lang="EN"> (i) which has an average daily worldwide production of crude oil of at least 500,000 barrels for the taxable year,</span>'''<br />
<br />
'''<span lang="EN"> (ii) which had gross receipts in excess of $1,000,000,000 for its last taxable year ending during calendar year 2005, and</span>'''<br />
<br />
'''<span lang="EN"> (iii) to which subsection (c) of section 613A does not apply by reason of paragraph (4) of section 613A(d), determined—</span>'''<br />
<br />
'''<span lang="EN"> (I) by substituting “15 percent” for “5 percent” each place it occurs in paragraph (3) of section 613A(d), and</span>'''<br />
<br />
'''<span lang="EN"> (II) without regard to whether subsection (c) of section 613A does not apply by reason of paragraph (2) of section 613A(d).</span>''' <br />
<br />
'''<span lang="EN">For purposes of clauses (i) and (ii), all persons treated as a single employer under subsections (a) and (b) of section 52 shall be treated as 1 person and, in case of a short taxable year, the rule under section 448(c)(3)(B) shall apply.</span>''' <br />
<br />
'''<span lang="EN">(i) Cross references</span>'''<br />
<br />
'''<span lang="EN"> (1) For additional rule applicable to depreciation of improvements in the case of mines, oil and gas wells, other natural deposits, and timber, see section 611.</span>'''<br />
<br />
'''<span lang="EN"> (2) For amortization of goodwill and certain other intangibles, see section 197.</span>'''<br />
|} <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code § 168 - Accelerated cost recovery system</span>'''<br />
<br />
'''<span lang="EN">(a) General rule. Except as otherwise provided in this section, the depreciation deduction provided by section 167(a) for any tangible property shall be determined by using—</span>'''<br />
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'''<span lang="EN"> (1) the applicable depreciation method,</span>'''<br />
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'''<span lang="EN"> (2) the applicable recovery period, and</span>'''<br />
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'''<span lang="EN"> (3) the applicable convention.</span>''' <br />
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'''<span lang="EN">(b) Applicable depreciation method. For purposes of this section—</span>'''<br />
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'''<span lang="EN"> (1) In general. Except as provided in paragraphs (2) and (3), the applicable depreciation method is—</span>'''<br />
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'''<span lang="EN"> (A) the 200 percent declining balance method,</span>'''<br />
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'''<span lang="EN"> (B) switching to the straight line method for the 1st taxable year for which using the straight line method with respect to the adjusted basis as of the beginning of such year will yield a larger allowance.</span>'''<br />
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'''<span lang="EN"> (2) 150 percent declining balance method in certain cases. Paragraph (1) shall be applied by substituting “150 percent” for “200 percent” in the case of—</span>'''<br />
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'''<span lang="EN"> (A) any 15-year or 20-year property not referred to in paragraph (3),</span>'''<br />
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'''<span lang="EN"> (B) any property (other than property described in paragraph (3)) which is a qualified smart electric meter or qualified smart electric grid system, or</span>'''<br />
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'''<span lang="EN"> (C) any property (other than property described in paragraph (3)) with respect to which the taxpayer elects under paragraph (5) to have the provisions of this paragraph apply.</span>'''<br />
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'''<span lang="EN"> (3) Property to which straight line method applies. The applicable depreciation method shall be the straight line method in the case of the following property:</span>'''<br />
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'''<span lang="EN"> (A) Nonresidential real property.</span>'''<br />
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'''<span lang="EN"> (B) Residential rental property.</span>'''<br />
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'''<span lang="EN"> (C) Any railroad grading or tunnel bore.</span>'''<br />
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'''<span lang="EN"> (D) Property with respect to which the taxpayer elects under paragraph (5) to have the provisions of this paragraph apply.</span>'''<br />
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'''<span lang="EN"> (E) Property described in subsection (e)(3)(D)(ii).</span>'''<br />
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'''<span lang="EN"> (F) Water utility property described in subsection (e)(5).</span>'''<br />
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'''<span lang="EN"> (G) Qualified improvement property described in subsection (e)(6).</span>'''<br />
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'''<span lang="EN"> (4) Salvage value treated as zero. Salvage value shall be treated as zero.</span>'''<br />
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'''<span lang="EN"> (5) Election. An election under paragraph (2)(D) or (3)(D) may be made with respect to 1 or more classes of property for any taxable year and once made with respect to any class shall apply to all property in such class placed in service during such taxable year. Such an election, once made, shall be irrevocable.</span>'''<br />
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'''<span lang="EN">(c) Applicable recovery period. For purposes of this section, the applicable recovery period shall be determined in accordance with the following table: In the case of _____ the applicable recovery period is:</span>'''<br />
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'''<span lang="EN">3-year property -- 3 years </span>'''<br />
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'''<span lang="EN">5-year property -- 5 years </span>'''<br />
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'''<span lang="EN">7-year property -- 7 years </span>'''<br />
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'''<span lang="EN">10-year property -- 10 years </span>'''<br />
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'''<span lang="EN">15-year property -- 15 years </span>'''<br />
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'''<span lang="EN">20-year property -- 20 years </span>'''<br />
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'''<span lang="EN">Water utility property -- 25 years </span>'''<br />
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'''<span lang="EN">Residential rental property -- 27.5 years </span>'''<br />
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'''<span lang="EN">Nonresidential real property -- 39 years.</span>'''<br />
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'''<span lang="EN">Any railroad grading or tunnel bore -- 50 years.</span>'''<br />
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'''<span lang="EN">(d) Applicable convention. For purposes of this section—</span>'''<br />
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'''<span lang="EN"> (1) In general. Except as otherwise provided in this subsection, the applicable convention is the half-year convention.</span>'''<br />
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'''<span lang="EN"> (2) Real property. In the case of—</span>'''<br />
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'''<span lang="EN"> (A) nonresidential real property,</span>'''<br />
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'''<span lang="EN"> (B) residential rental property, and</span>'''<br />
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'''<span lang="EN"> (C) any railroad grading or tunnel bore, the applicable convention is the mid-month convention.</span>'''<br />
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'''<span lang="EN"> (3) Special rule where substantial property placed in service during last 3 months of taxable year</span>'''<br />
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'''<span lang="EN"> (A) In general. Except as provided in regulations, if during any taxable year—</span>'''<br />
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'''<span lang="EN"> (i) the aggregate bases of property to which this section applies placed in service during the last 3 months of the taxable year, exceed</span>'''<br />
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'''<span lang="EN"> (ii) 40 percent of the aggregate bases of property to which this section applies placed in service during such taxable year, the applicable convention for all property to which this section applies placed in service during such taxable year shall be the mid-quarter convention.</span>'''<br />
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'''<span lang="EN"> (B) Certain property not taken into account. For purposes of subparagraph (A), there shall not be taken into account—</span>'''<br />
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'''<span lang="EN"> (i) any nonresidential real property [1] residential rental property, and railroad grading or tunnel bore, and</span>'''<br />
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'''<span lang="EN"> (ii) any other property placed in service and disposed of during the same taxable year.</span>'''<br />
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'''<span lang="EN"> (4) Definitions</span>'''<br />
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'''<span lang="EN"> (A) Half-year convention. The half-year convention is a convention which treats all property placed in service during any taxable year (or disposed of during any taxable year) as placed in service (or disposed of) on the mid-point of such taxable year.</span>'''<br />
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'''<span lang="EN"> (B) Mid-month convention. The mid-month convention is a convention which treats all property placed in service during any month (or disposed of during any month) as placed in service (or disposed of) on the mid-point of such month.</span>'''<br />
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'''<span lang="EN"> (C) Mid-quarter convention. The mid-quarter convention is a convention which treats all property placed in service during any quarter of a taxable year (or disposed of during any quarter of a taxable year) as placed in service (or disposed of) on the mid-point of such quarter.</span>'''<br />
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'''<span lang="EN">(e) Classification of property. For purposes of this section—</span>'''<br />
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'''<span lang="EN"> (1) In general. Except as otherwise provided in this subsection, property shall be classified under the following table: Property shall be treated as _____ if such property has a class life (in years) of ____</span>'''<br />
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'''<span lang="EN">3-year property -- 4 or less</span>'''<br />
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'''<span lang="EN">5-year property -- More than 4 but less than 10</span>'''<br />
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'''<span lang="EN">7-year property -- 10 or more but less than 16</span>'''<br />
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'''<span lang="EN">10-year property -- 16 or more but less than 20</span>'''<br />
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'''<span lang="EN">15-year property -- 20 or more but less than 25</span>'''<br />
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'''<span lang="EN">20-year property -- 25 or more.</span>'''<br />
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'''<span lang="EN"> (2) Residential rental or nonresidential real property</span>'''<br />
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'''<span lang="EN"> (A) Residential rental property</span>'''<br />
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'''<span lang="EN"> (i) Residential rental property. The term “residential rental property” means any building or structure if 80 percent or more of the gross rental income from such building or structure for the taxable year is rental income from dwelling units.</span>'''<br />
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'''<span lang="EN"> (ii) Definitions. For purposes of clause (i)—</span>'''<br />
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'''<span lang="EN"> (I) the term “dwelling unit” means a house or apartment used to provide living accommodations in a building or structure, but does not include a unit in a hotel, motel, or other establishment more than one-half of the units in which are used on a transient basis, and</span>'''<br />
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'''<span lang="EN"> (II) if any portion of the building or structure is occupied by the taxpayer, the gross rental income from such building or structure shall include the rental value of the portion so occupied.</span>'''<br />
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'''<span lang="EN"> (B) Nonresidential real property. The term “nonresidential real property” means section 1250 property which is not—</span>'''<br />
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'''<span lang="EN"> (i) residential rental property, or</span>'''<br />
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'''<span lang="EN"> (ii) property with a class life of less than 27.5 years.</span>'''<br />
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'''<span lang="EN"> (3) Classification of certain property</span>'''<br />
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'''<span lang="EN"> (A) 3-year property. The term “3-year property” includes—</span>'''<br />
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'''<span lang="EN"> (i) any race horse—</span>'''<br />
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'''<span lang="EN"> (I) which is placed in service before January 1, 2018, and</span>'''<br />
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'''<span lang="EN"> (II) which is placed in service after December 31, 2017, and which is more than 2 years old at the time such horse is placed in service by such purchaser,</span>'''<br />
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'''<span lang="EN"> (ii) any horse other than a race horse which is more than 12 years old at the time it is placed in service, and</span>'''<br />
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'''<span lang="EN"> (iii) any qualified rent-to-own property.</span>'''<br />
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'''<span lang="EN"> (B) 5-year property. The term “5-year property” includes—</span>'''<br />
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'''<span lang="EN"> (i) any automobile or light general purpose truck,</span>'''<br />
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'''<span lang="EN"> (ii) any semiconductor manufacturing equipment,</span>'''<br />
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'''<span lang="EN"> (iii) any computer-based telephone central office switching equipment,</span>'''<br />
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'''<span lang="EN"> (iv) any qualified technological equipment,</span>'''<br />
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'''<span lang="EN"> (v) any section 1245 property used in connection with research and experimentation,</span>'''<br />
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'''<span lang="EN"> (vi) any property which—</span>'''<br />
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'''<span lang="EN"> (I) is described in subparagraph (A) of section 48(a)(3) (or would be so described if “solar or wind energy” were substituted for “solar energy” in clause (i) thereof and the last sentence of such section did not apply to such subparagraph),</span>'''<br />
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'''<span lang="EN"> (II) is described in paragraph (15) of section 48(l) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) and is a qualifying small power production facility within the meaning of section 3(17)(C) of the Federal Power Act (16 U.S.C. 796(17)(C)), as in effect on September 1, 1986, or</span>'''<br />
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'''<span lang="EN"> (III) is described in section 48(l)(3)(A)(ix) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990), and</span>'''<br />
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'''<span lang="EN"> (vii) any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) which is used in a farming business (as defined in section 263A(e)(4)), the original use of which commences with the taxpayer after December 31, 2017.</span>'''<br />
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'''<span lang="EN">Nothing in any provision of law shall be construed to treat property as not being described in clause (vi)(I) (or the corresponding provisions of prior law) by reason of being public utility property (within the meaning of section 48(a)(3)).</span>'''<br />
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'''<span lang="EN"> (C) 7-year property. The term “7-year property” includes—</span>'''<br />
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'''<span lang="EN"> (i) any railroad track, and </span>'''<br />
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'''<span lang="EN"> (ii) any motorsports entertainment complex,</span>'''<br />
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'''<span lang="EN"> (iii) any Alaska natural gas pipeline,</span>'''<br />
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'''<span lang="EN"> (iv) any natural gas gathering line the original use of which commences with the taxpayer after April 11, 2005, and</span>'''<br />
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'''<span lang="EN"> </span>'''<br />
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'''<span lang="EN"> (v) any property which—</span>'''<br />
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'''<span lang="EN"> (I) does not have a class life, and</span>'''<br />
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'''<span lang="EN"> (II) is not otherwise classified under paragraph (2) or this paragraph.</span>'''<br />
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'''<span lang="EN"> (D) 10-year property. The term “10-year property” includes—</span>'''<br />
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'''<span lang="EN"> (i) any single purpose agricultural or horticultural structure (within the meaning of subsection (i)(13)),</span>'''<br />
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'''<span lang="EN"> (ii) any tree or vine bearing fruit or nuts,</span>'''<br />
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'''<span lang="EN"> (iii) any qualified smart electric meter, and</span>'''<br />
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'''<span lang="EN"> (iv) any qualified smart electric grid system.</span>'''<br />
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'''<span lang="EN"> (E) 15-year property. The term “15-year property” includes—</span>'''<br />
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'''<span lang="EN"> (i) any municipal wastewater treatment plant,</span>'''<br />
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'''<span lang="EN"> (ii) any telephone distribution plant and comparable equipment used for 2-way exchange of voice and data communications,</span>'''<br />
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'''<span lang="EN"> (iii) any section 1250 property which is a retail motor fuels outlet (whether or not food or other convenience items are sold at the outlet),</span>'''<br />
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'''<span lang="EN"> (iv) initial clearing and grading land improvements with respect to gas utility property,</span>'''<br />
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'''<span lang="EN"> (v) any section 1245 property (as defined in section 1245(a)(3)) used in the transmission at 69 or more kilovolts of electricity for sale and the original use of which commences with the taxpayer after April 11, 2005, and</span>'''<br />
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'''<span lang="EN"> (vi) any natural gas distribution line the original use of which commences with the taxpayer after April 11, 2005, and which is placed in service before January 1, 2011.</span>'''<br />
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'''<span lang="EN"> (F) 20-year property. The term “20-year property” means initial clearing and grading land improvements with respect to any electric utility transmission and distribution plant.</span>'''<br />
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'''<span lang="EN"> (4) Railroad grading or tunnel bore. The term “railroad grading or tunnel bore” means all improvements resulting from excavations (including tunneling), construction of embankments, clearings, diversions of roads and streams, sodding of slopes, and from similar work necessary to provide, construct, reconstruct, alter, protect, improve, replace, or restore a roadbed or right-of-way for railroad track.</span>'''<br />
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'''<span lang="EN"> (5) Water utility property. The term “water utility property” means property—</span>'''<br />
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'''<span lang="EN"> (A) which is an integral part of the gathering, treatment, or commercial distribution of water, and which, without regard to this paragraph, would be 20-year property, and</span>'''<br />
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'''<span lang="EN"> (B) any municipal sewer.</span>'''<br />
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'''<span lang="EN"> (6) Qualified improvement property</span>'''<br />
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'''<span lang="EN"> (A) In general. The term “qualified improvement property” means any improvement to an interior portion of a building which is nonresidential real property if such improvement is placed in service after the date such building was first placed in service.</span>'''<br />
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'''<span lang="EN"> </span>'''<br />
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'''<span lang="EN"> (B) Certain improvements not included. Such term shall not include any improvement for which the expenditure is attributable to—</span>'''<br />
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'''<span lang="EN"> (i) the enlargement of the building,</span>'''<br />
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'''<span lang="EN"> (ii) any elevator or escalator, or</span>'''<br />
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'''<span lang="EN"> (iii) the internal structural framework of the building.</span>''' <br />
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'''<span lang="EN">(f) Property to which section does not apply [EXCLUDED]</span>'''<br />
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'''<span lang="EN">(g) Alternative depreciation system for certain property</span>'''<br />
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'''<span lang="EN"> (1) In general. In the case of—</span>'''<br />
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'''<span lang="EN"> (A) any tangible property which during the taxable year is used predominantly outside the United States,</span>'''<br />
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'''<span lang="EN"> (B) any tax-exempt use property,</span>'''<br />
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'''<span lang="EN"> (C) any tax-exempt bond financed property,</span>'''<br />
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'''<span lang="EN"> (D) any imported property covered by an Executive order under paragraph (6),</span>'''<br />
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'''<span lang="EN"> (E) any property to which an election under paragraph (7) applies,</span>'''<br />
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'''<span lang="EN"> (F) any property described in paragraph (8), and</span>'''<br />
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'''<span lang="EN"> (G) any property with a recovery period of 10 years or more which is held by an electing farming business (as defined in section 163(j)(7)(C)), the depreciation deduction provided by section 167(a) shall be determined under the alternative depreciation system.</span>'''<br />
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'''<span lang="EN"> (2) Alternative depreciation system. For purposes of paragraph (1), the alternative depreciation system is depreciation determined by using—</span>'''<br />
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'''<span lang="EN"> (A) the straight line method (without regard to salvage value),</span>'''<br />
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'''<span lang="EN"> (B) the applicable convention determined under subsection (d), and</span>'''<br />
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'''<span lang="EN"> (C) a recovery period determined under the following table: In the case of __________ the recovery period shall be ______</span>'''<br />
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'''<span lang="EN"> (i) Property not described in clause (ii) or (iii) -- The class life.</span>'''<br />
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'''<span lang="EN"> (ii) Personal property with no class life -- 12 years.</span>'''<br />
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'''<span lang="EN"> (iii) Residential rental property -- 30 years</span>'''<br />
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'''<span lang="EN"> (iv) Nonresidential real property -- 40 years</span>'''<br />
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'''<span lang="EN"> (v) Any railroad grading or tunnel bore or water utility property -- 50 years</span>'''<br />
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'''<span lang="EN"> (3) Special rules for determining class life</span>'''<br />
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'''<span lang="EN"> (A) Tax-exempt use property subject to lease. In the case of any tax-exempt use property subject to a lease, the recovery period used for purposes of paragraph (2) shall (notwithstanding any other subparagraph of this paragraph) in no event be less than 125 percent of the lease term.</span>'''<br />
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'''<span lang="EN"> (B) Special rule for certain property assigned to classes. For purposes of paragraph (2), in the case of property described in any of the following subparagraphs of subsection (e)(3), the class life shall be determined as follows:If property is described in subparagraph _____, the class life is ____</span>'''<br />
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'''<span lang="EN">(A)(iii), 4 </span>'''<br />
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'''<span lang="EN">(B)(ii), 5 </span>'''<br />
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'''<span lang="EN">(B)(iii), 9.5</span>'''<br />
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'''<span lang="EN">(B)(vii), 10 </span>'''<br />
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'''<span lang="EN">(C)(i), 10 </span>'''<br />
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'''<span lang="EN">(C)(iii), 22 </span>'''<br />
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'''<span lang="EN">(C)(iv), 14 </span>'''<br />
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'''<span lang="EN">(D)(i), 15 </span>'''<br />
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'''<span lang="EN">(D)(ii), 20 </span>'''<br />
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'''<span lang="EN">(D)(v), 20 </span>'''<br />
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'''<span lang="EN">(E)(i), 24 </span>'''<br />
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'''<span lang="EN">(E)(ii), 24 </span>'''<br />
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'''<span lang="EN">(E)(iii), 20 </span>'''<br />
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'''<span lang="EN">(E)(iv), 20 </span>'''<br />
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'''<span lang="EN">(E)(v), 30 </span>'''<br />
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'''<span lang="EN">(E)(vi), 35 </span>'''<br />
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'''<span lang="EN">(F), 25 </span>'''<br />
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'''<span lang="EN"> (C) Qualified technological equipment. In the case of any qualified technological equipment, the recovery period used for purposes of paragraph (2) shall be 5 years.</span>'''<br />
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'''<span lang="EN"> (D) Automobiles, etc. In the case of any automobile or light general purpose truck, the recovery period used for purposes of paragraph (2) shall be 5 years.</span>'''<br />
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'''<span lang="EN"> (E) Certain real property. In the case of any section 1245 property which is real property with no class life, the recovery period used for purposes of paragraph (2) shall be 40 years.</span>'''<br />
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'''<span lang="EN"> (4) Exception for certain property used outside United States. Subparagraph (A) of paragraph (1) shall not apply to—</span>'''<br />
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'''<span lang="EN"> (A) any aircraft which is registered by the Administrator of the Federal Aviation Agency and which is operated to and from the United States or is operated under contract with the United States;</span>'''<br />
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'''<span lang="EN"> (B) rolling stock which is used within and without the United States and which is—</span>'''<br />
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'''<span lang="EN"> (i) of a rail carrier subject to part A of subtitle IV of title 49, or</span>'''<br />
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'''<span lang="EN"> (ii) of a United States person (other than a corporation described in clause (i)) but only if the rolling stock is not leased to one or more foreign persons for periods aggregating more than 12 months in any 24-month period;</span>'''<br />
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'''<span lang="EN"> (C) any vessel documented under the laws of the United States which is operated in the foreign or domestic commerce of the United States;</span>'''<br />
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'''<span lang="EN"> (D) any motor vehicle of a United States person (as defined in section 7701(a)(30)) which is operated to and from the United States;</span>'''<br />
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'''<span lang="EN"> (E) any container of a United States person which is used in the transportation of property to and from the United States;</span>'''<br />
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'''<span lang="EN"> (F) any property (other than a vessel or an aircraft) of a United States person which is used for the purpose of exploring for, developing, removing, or transporting resources from the outer Continental Shelf (within the meaning of section 2 of the Outer Continental Shelf Lands Act, as amended and supplemented; (43 U.S.C. 1331));</span>'''<br />
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'''<span lang="EN"> (G) any property which is owned by a domestic corporation (other than a corporation which has an election in effect under section 936) or by a United States citizen (other than a citizen entitled to the benefits of section 931 or 933) and which is used predominantly in a possession of the United States by such a corporation or such a citizen, or by a corporation created or organized in, or under the law of, a possession of the United States;</span>'''<br />
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'''<span lang="EN"> (H) any communications satellite (as defined in section 103(3) of the Communications Satellite Act of 1962, 47 U.S.C. 702(3)), or any interest therein, of a United States person;</span>'''<br />
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'''<span lang="EN"> (I) any cable, or any interest therein, of a domestic corporation engaged in furnishing telephone service to which section 168(i)(10)(C) applies (or of a wholly owned domestic subsidiary of such a corporation), if such cable is part of a submarine cable system which constitutes part of a communication link exclusively between the United States and one or more foreign countries;</span>'''<br />
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'''<span lang="EN"> (J) any property (other than a vessel or an aircraft) of a United States person which is used in international or territorial waters within the northern portion of the Western Hemisphere for the purpose of exploring for, developing, removing, or transporting resources from ocean waters or deposits under such waters;</span>'''<br />
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'''<span lang="EN"> (K) any property described in section 48(l)(3)(A)(ix) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) which is owned by a United States person and which is used in international or territorial waters to generate energy for use in the United States; and</span>'''<br />
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'''<span lang="EN"> (L) any satellite (not described in subparagraph (H)) or other spacecraft (or any interest therein) held by a United States person if such satellite or other spacecraft was launched from within the United States.</span>'''<br />
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'''<span lang="EN">For purposes of subparagraph (J), the term “northern portion of the Western Hemisphere” means the area lying west of the 30th meridian west of Greenwich, east of the international dateline, and north of the Equator, but not including any foreign country which is a country of South America.</span>'''<br />
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'''<span lang="EN"> (5) Tax-exempt bond financed property. For purposes of this subsection—</span>'''<br />
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'''<span lang="EN"> (A) In general. Except as otherwise provided in this paragraph, the term “tax-exempt bond financed property” means any property to the extent such property is financed (directly or indirectly) by an obligation the interest on which is exempt from tax under section 103(a).</span>'''<br />
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'''<span lang="EN"> (B) Allocation of bond proceeds. For purposes of subparagraph (A), the proceeds of any obligation shall be treated as used to finance property acquired in connection with the issuance of such obligation in the order in which such property is placed in service.</span>'''<br />
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'''<span lang="EN"> (C) Qualified residential rental projects. The term “tax-exempt bond financed property” shall not include any qualified residential rental project (within the meaning of section 142(a)(7)).</span>'''<br />
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'''<span lang="EN"> (6) Imported property</span>'''<br />
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'''<span lang="EN"> (A) Countries maintaining trade restrictions or engaging in discriminatory acts. If the President determines that a foreign country—</span>'''<br />
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'''<span lang="EN"> (i) maintains nontariff trade restrictions, including variable import fees, which substantially burden United States commerce in a manner inconsistent with provisions of trade agreements, or</span>'''<br />
<br />
'''<span lang="EN"> (ii) engages in discriminatory or other acts (including tolerance of international cartels) or policies unjustifiably restricting United States commerce, the President may by Executive order provide for the application of paragraph (1)(D) to any article or class of articles manufactured or produced in such foreign country for such period as may be provided by such Executive order. Any period specified in the preceding sentence shall not apply to any property ordered before (or the construction, reconstruction, or erection of which began before) the date of the Executive order unless the President determines an earlier date to be in the public interest and specifies such date in the Executive order.</span>'''<br />
<br />
'''<span lang="EN"> (B) Imported property. For purposes of this subsection, the term “imported property” means any property if—</span>'''<br />
<br />
'''<span lang="EN"> (i) such property was completed outside the United States, or</span>'''<br />
<br />
'''<span lang="EN"> (ii) less than 50 percent of the basis of such property is attributable to value added within the United States. For purposes of this subparagraph, the term “United States” includes the Commonwealth of Puerto Rico and the possessions of the United States.</span>'''<br />
<br />
'''<span lang="EN"> (7) Election to use alternative depreciation system</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. If the taxpayer makes an election under this paragraph with respect to any class of property for any taxable year, the alternative depreciation system under this subsection shall apply to all property in such class placed in service during such taxable year. Notwithstanding the preceding sentence, in the case of nonresidential real property or residential rental property, such election may be made separately with respect to each property.</span>'''<br />
<br />
'''<span lang="EN"> (B) Election irrevocable. An election under subparagraph (A), once made, shall be irrevocable.</span>'''<br />
<br />
'''<span lang="EN"> (8) Electing real property trade or business. The property described in this paragraph shall consist of any nonresidential real property, residential rental property, and qualified improvement property held by an electing real property trade or business (as defined in 163(j)(7)(B)).</span>'''<br />
<br />
'''<span lang="EN">(h) Tax-exempt use property [EXCLUDED]</span>'''<br />
<br />
'''<span lang="EN">(i) Definitions and special rules [EXCLUDED]</span>'''<br />
<br />
'''<span lang="EN">(j) Property on Indian reservations [EXCLUDED]</span>'''<br />
<br />
'''<span lang="EN">(k) Special allowance for certain property [EXCLUDED]</span>'''<br />
<br />
'''<span lang="EN">(l) Special allowance for second generation biofuel plant property [EXCLUDED]</span>'''<br />
<br />
'''<span lang="EN">(m) Special allowance for certain reuse and recycling property [EXCLUDED]</span>''' <br />
<br />
'''<span lang="EN">(n) Special allowance for qualified disaster assistance property [EXCLUDED]</span>'''<br />
|} <br />
<br />
{| class="wikitable"<br />
|<span lang="EN">Treas. Reg. § 1.167(a)-2 Tangible property.</span><br />
<br />
<span lang="EN">The depreciation allowance in the case of tangible property applies only to that part of the property which is subject to wear and tear, to decay or decline from natural causes, to exhaustion, and to obsolescence. The allowance '''does not apply to inventories or stock in trade, or to land apart from the improvements or physical development added to it'''. The allowance does not apply to natural resources which are subject to the allowance for depletion provided in section 611. No deduction for depreciation shall be allowed on automobiles or other vehicles used solely for pleasure, on a building used by the taxpayer solely as his residence, or on furniture or furnishings therein, personal effects, or clothing; but properties and costumes used exclusively in a business, such as a theatrical business, may be depreciated.</span><br />
|} <br />
'''<span lang="EN">Property Eligible for Deduction</span>'''<br />
<span lang="EN">§167(a) → permits a deduction for the “exhaustion, wear and tear” and for the “obsolescence” of property used in a trade or business or held for the production of income; two required features:</span><br />
<br />
<span lang="EN">(1) It has a useful life beyond the taxable year (the reason it was capitalized in the first place); and</span><br />
<br />
<span lang="EN">(2) It wears out, decays, declines in value due to natural causes, or is subject to exhaustion or obsolescence</span> <br />
<br />
<u><span lang="EN">Simon v. Commissioner (1994)</span></u> <span lang="EN">- Tax Court [violin bows depreciated for wear and tear]</span><br />
<br />
<span lang="EN">RULE: A federal taxpayer may take depreciation deductions for recovery property under the accelerated cost recovery system.</span> <br />
<br />
<span lang="EN">Case Notes:</span><br />
<br />
<span lang="EN">● Taxpayers may take depreciation deductions for recovery property under the ACRS.</span> <br />
<br />
<span lang="EN">● Recovery property must be:</span> <br />
<br />
<span lang="EN">○ (1) tangible,</span> <br />
<br />
<span lang="EN">○ (2) placed in service after 1980,</span> <br />
<br />
<span lang="EN">○ (3) used in a trade or business, and</span> <br />
<br />
<span lang="EN">○ (4) of a character subject to the allowance for depreciation.</span><br />
<br />
<span lang="EN">● A comparison between current and previous tax law indicates that Congress used the term “depreciation” to mean '''exhaustion, wear and tear, or obsolescence'''.</span> <br />
<br />
<u><span lang="EN">Simon v. Commissioner (1995)</span></u> <span lang="EN">- 2nd Cir. Ct. of Appeals [PART II]</span><br />
<br />
<span lang="EN">RULE: Demonstration of a business asset’s useful life is not required to take depreciation deductions under the Accelerated Recovery Tax Act (ARTA).</span> <br />
<br />
<span lang="EN">Case Notes:</span> <br />
<br />
<span lang="EN">● The ACRS, under § 168, allows taxpayers to take depreciation deductions for recovery property.</span> <br />
<br />
<span lang="EN">● Recovery property is “tangible property of a character subject to the allowance for depreciation,” used in the course of carrying on a trade or business.</span> <br />
<br />
<span lang="EN">● The requirement that the business asset also have a determinable useful life, was a determination required for depreciation deductions prior to the implementation of ACRS.</span> <br />
<br />
<span lang="EN">● Not all business assets are subject to wear and tear. For instance, paintings hung on the wall of a business office or violin bows kept as collector’s items in a for-profit museum are technically business assets that do not undergo wear and tear.</span> <br />
<br />
<span lang="EN">● Previously, a determination of a business asset’s determinable useful life was required in order to take a depreciation deduction.</span> <br />
<br />
<span lang="EN">● Depreciation deductions allow taxpayers to offset their taxable income by deducting the cost of a business asset over its useful life.</span> <br />
<br />
<span lang="EN">● The allowable depreciation allowance for each year could not be calculated without first establishing the asset’s useful life.</span> <br />
<br />
<span lang="EN">● The introduction of the ACRS, however, eliminated the need to determine the useful life of an asset.</span> <br />
<br />
<span lang="EN">● In an effort to stimulate economic growth, the ACRS provides for accelerated depreciation periods that are unrelated to the useful life of an asset.</span> <br />
<br />
<span lang="EN">● The determination of an asset’s useful life is no longer essential to calculate depreciation allowances.</span> <br />
<br />
<span lang="EN">● In fact, depreciation periods under the ACRS are usually shorter than the asset’s true useful life.</span> <br />
<br />
<span lang="EN">● Congress also sought to simplify depreciation deductions by de-emphasizing concepts such as useful life and salvage value.</span><br />
<br />
<span lang="EN">● §168 only requires that a business asset be subject to wear and tear to be eligible for depreciation deductions.</span> <br />
<br />
<span lang="EN">Some tangible assets, like works of art, are not depreciable even though they are used in a trade or business (i.e. painting on the wall of a law office to attract clients).</span> <br />
<br />
'''<span lang="EN">Legislative History</span>''' <br />
<br />
'''<span lang="EN">ADR → Asset depreciation range</span>''' <span lang="EN">-- Asset depreciation range was an accounting method established by the Internal Revenue Service in 1971 to determine the useful life of specific classes of depreciable assets. It was replaced with the accelerated cost recovery system ('''ACRS''') in 1981, which in turn was replaced by the modified accelerated cost recovery system ('''MACRS''') in 1986.</span> <br />
<br />
'''<span lang="EN">ERTA</span>''' <span lang="EN">→ The Economic Recovery Tax Act of 1981 (Pub.L. 97–34), also known as the ERTA or "Kemp–Roth Tax Cut", was a federal law enacted in the United States in 1981. [August 31, 2018]</span><br />
<br />
<span lang="EN">● It was an act "to amend the Internal Revenue Code of 1954 to encourage economic growth through reductions in individual income tax rates, the expensing of depreciable property, incentives for small businesses, and incentives for savings, and for other purposes".</span><br />
<br />
<span lang="EN">● Included in the act was an across-the-board decrease in the marginal income tax rates in the United States by 25% over three years, with the top rate falling from 70% to 50% and the bottom rate dropping from 14% to 11%.</span> <br />
<br />
<span lang="EN">● This act slashed estate taxes and trimmed taxes paid by business corporations by $150 billion over a five-year period.</span> <br />
<br />
<span lang="EN">● Additionally the tax rates were indexed for inflation, though the indexing was delayed until 1985.</span><br />
<br />
<span lang="EN">● In the year after enactment of ERTA, the deficit ballooned, which in turn, drove interest rates from around 12% to over 20%, which, in turn, drove the economy into the second dip of the 1978-82 "double dip recession".</span> <br />
<br />
'''<span lang="EN">ACRS</span>''' <span lang="EN">→ The Accelerated Cost Recovery System (ACRS) was a major component of the ERTA and was amended in 1986 to become the '''Modified Accelerated cost Recovery System''' ('''MACRS''').</span><br />
<br />
<span lang="EN">● The system changed the way that depreciation deductions are allowed for tax purposes.</span> <br />
<br />
<span lang="EN">● Instead of basing the depreciation deduction on an estimate of the expected useful life of assets, the assets were placed into categories: 3, 5, 10, or 15 years of life.</span> <br />
<br />
<span lang="EN">● For example, the agriculture industry saw a re-evaluation of their farming assets. Items such as automobiles and swine were given 3 year depreciation values, and things like buildings and land had a 15-year depreciation value.</span><br />
<br />
<span lang="EN">● The idea was that there would be a rise in tax cuts due to the optimistic consideration of depreciating values -- this would in turn put more cash into the pockets of business owners to promote investment and economic growth.</span><br />
<br />
<span lang="EN">'''Modified Accelerated Cost Recovery System (MACRS)''' → MACRS is a depreciation system which allows the capitalized cost basis of assets to be recovered over a specified life of the asset by annual deductions for value depreciation. MACRS is the depreciation system used in the United States, and was created after the release of the Tax Reform Act of 1986.</span> <br />
<br />
{| class="wikitable"<br />
| colspan="2" |'''<span lang="EN">Table of Property Types and Class Lives</span>'''<br />
|-<br />
|'''<span lang="EN">Description of Assets</span>'''<br />
|'''<span lang="EN">Useful Life (Years)</span>'''<br />
|-<br />
|<span lang="EN">Tractors, racehorses, rent-to-own property, etc.</span><br />
|<span lang="EN">3</span><br />
|-<br />
|<span lang="EN">Automobiles, buses, trucks, computers, office machinery, breeding cattle, furniture, etc.</span><br />
|<span lang="EN">5</span><br />
|-<br />
|<span lang="EN">Office furniture, fixtures, agricultural machinery, railroad track, etc.</span><br />
|<span lang="EN">7</span><br />
|-<br />
|<span lang="EN">Vessels, tugs, agricultural structure, tree or vine bearing fruits or nuts, etc.</span><br />
|<span lang="EN">10</span><br />
|-<br />
|<span lang="EN">Municipal wastewater treatment plant, restaurant property, natural gas distribution line, land improvements, such as shrubbery, fences, and sidewalks, etc.</span><br />
|<span lang="EN">15</span><br />
|-<br />
|<span lang="EN">Farm buildings, certain municipal sewers, etc.</span><br />
|<span lang="EN">20</span><br />
|-<br />
|<span lang="EN">Water utility property, certain municipal sewers, etc.</span><br />
|<span lang="EN">25</span><br />
|-<br />
|<span lang="EN">Any building or structure where 80% or more of its gross rental income is from dwelling units</span><br />
|<span lang="EN">27.5</span><br />
|-<br />
|<span lang="EN">An office building, store, or warehouse that is not residential property or has a class life of less than 27.5 years</span><br />
|<span lang="EN">39</span><br />
|} <br />
<br />
'''<span lang="EN">The Mechanics of Depreciation</span>''' <br />
<br />
<span lang="EN">Variables affecting depreciation deductions under §168(a):</span> <br />
<br />
<span lang="EN">(1) '''Depreciation base''' → the depreciation base for all assets is its cost basis; because the statute assumes that all depreciable assets have no salvage value under §168(b)(4), a taxpayer may recover his or her entire basis in the asset.</span> <br />
<br />
<span lang="EN">(2) '''Class life''' → the estimated life expectancy of the asset; established in Revenue Procedure 87-56.</span> <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">Rev. Proc. 87-56</span>''' <br />
<br />
'''<span lang="EN">SECTION 1. PURPOSE</span>''' <br />
<br />
'''<span lang="EN">The purpose of this revenue procedure is to set forth the class lives of property that are necessary to compute the depreciation allowances available under section 168 of the Internal Revenue Code, as amended by section 201(a) of the Tax Reform Act of 1986 (Act), 1986-3 (Vol. 1) C.B. 38. Rev. Proc. 87-57, page 17, this Bulletin, describes the applicable depreciation methods, applicable recovery periods, and applicable conventions that must be used in computing depreciation allowances under section 168.</span>''' <br />
<br />
'''<span lang="EN">SEC. 2. GENERAL RULES OF APPLICATION</span>'''<br />
<br />
'''<span lang="EN">01 IN GENERAL. This revenue procedure specifies class lives and recovery periods for property subject to depreciation under the general depreciation system provided in section 168(a) of the Code or the alternative depreciation system provided in section 168(g).</span>''' <br />
<br />
'''<span lang="EN">SEC. 5. TABLES OF CLASS LIVES AND RECOVERY PERIODS</span>''' <br />
<br />
'''<span lang="EN">.01 Except for property described in section 5.02, below, the class lives (if any) and recovery periods for property subject to depreciation under section 168 of the Code appear in the tables below. These tables are based on the definition of class life in section 2.02 of this revenue procedure and the assigned items described in section 3 of this revenue procedure.</span>''' <br />
<br />
'''<span lang="EN">.02 For purposes of depreciation under the general depreciation system, residential rental property has a recovery period of 27.5 years and nonresidential real property has a recovery period of 31.5 years. For purposes of the alternative depreciation system, residential rental and nonresidential real property each has a recovery period of 40 years.</span>''' <br />
<br />
'''<span lang="EN">[TABLE EXCLUDED]</span>'''<br />
|} <br />
<br />
<span lang="EN">(3) '''Applicable Recovery Period''' → under §168(a)(2)</span><br />
<br />
<span lang="EN">(a) The table in §168(e)(1) uses the asset’s class life to classify it as one of six different types of property</span><br />
<br />
<span lang="EN">(b) Then, the table in §168(c) lists the recovery period for each type of property (subject to the four exceptions noted at the end of the table)</span><br />
<br />
<span lang="EN">(c) The recovery period represents the number of taxable years over which the taxpayer may claim depreciation deductions</span><br />
<br />
<span lang="EN">(d) Taxpayers typically prefer shorter recovery periods, because that means bigger deductions and quicker recovery of the asset’s basis</span> <br />
<br />
<span lang="EN">(4) '''Applicable depreciation method''' →</span> <br />
<br />
<span lang="EN">(a) “Straight-line method” -- where the cost is recovered ratably, one divides the depreciation base by the applicable recovery period '''[FRAY WILL ONLY ASK US TO DO THIS]'''</span><br />
<br />
<span lang="EN">(b) Accelerated methods -- “Declining balance methods” -- §168(b) lists them; used more frequently than any other method.</span><br />
<br />
<span lang="EN"> (i) “Double declining balance method” -- a taxpayer may claim double the percentage of the declining balance in the depreciation base; taxpayer would never fully recover the cost of the asset, statute says to switch to the straight-line method in the first year when that method yields a larger result</span><br />
<br />
<span lang="EN"> (ii) “150 percent declining balance method”</span> <br />
<br />
<span lang="EN">EXAMPLE:</span> <br />
<br />
{| class="wikitable"<br />
|<span lang="EN">Year</span><br />
|<span lang="EN">Declining Balance</span><br />
|<span lang="EN">40% DDB</span><br />
|<span lang="EN">Straight-Line</span><br />
|<span lang="EN">Deduction</span><br />
|<span lang="EN">Adjusted Basis</span><br />
|-<br />
|<span lang="EN">1</span><br />
|<span lang="EN">$5,000</span><br />
|<span lang="EN">$2,000</span><br />
|<span lang="EN">$1,000</span><br />
| <br />
| <br />
|-<br />
|<span lang="EN">2</span><br />
|<span lang="EN">$3,000</span><br />
|<span lang="EN">$1,200</span><br />
|<span lang="EN">$750*</span><br />
| <br />
| <br />
|-<br />
|<span lang="EN">3</span><br />
|<span lang="EN">$1,800</span><br />
|<span lang="EN">$720</span><br />
| <br />
| <br />
| <br />
|-<br />
|<span lang="EN">4</span><br />
|<span lang="EN">$1,080</span><br />
|<span lang="EN">$432</span><br />
| <br />
| <br />
| <br />
|-<br />
|<span lang="EN">5</span><br />
|<span lang="EN">$540</span><br />
|<span lang="EN">$216</span><br />
| <br />
| <br />
| <br />
|} <br />
<br />
'''<span lang="EN">Losses</span>''' <br />
<br />
'''<span lang="EN">Business and Investment Losses</span>''' <br />
<br />
{| class="wikitable"<br />
|<span lang="EN">62(a)(3), 165(a)-(d)</span><br />
|} <br />
<br />
<span lang="EN">§1001(a) → defines a loss from the sale or exchange of property as the excess of TP’s adjusted basis over the amount realized</span><br />
<br />
<span lang="EN">§1001(c) → all realized losses are recognized (deductible) except as provided elsewhere in the Code</span><br />
<br />
<span lang="EN">● FOR INDIVIDUALS, §165(c) is the major limitation; only permits the deduction of three types of uncompensated losses:</span><br />
<br />
<span lang="EN">(1) Losses incurred in a trade or business;</span><br />
<br />
<span lang="EN">(2) Losses incurred in profit-motivated transactions; and</span><br />
<br />
<span lang="EN">(3) Casualty and theft losses with respect to personal-use property</span> <br />
<br />
<span lang="EN">If a realized loss is not described in §165(c), an individual taxpayer cannot deduct the loss.</span> <br />
<br />
<span lang="EN">§165(a) → two additional limitations</span><br />
<br />
<span lang="EN">(1) The loss must be “sustained” -- for example, a decline in the FMV of an asset cannot be claimed as a loss until the asset is sold or otherwise disposed of in a completed transaction</span><br />
<br />
<span lang="EN">(2) The taxpayer must not have been “compensated” for the loss -- if a TP receives insurance proceeds or other compensation for a loss (e.g. homeowners insurance), it would be a windfall to permit a loss deduction on top of recovery</span> <br />
<br />
<u><span lang="EN">Miller v. Commissioner (1984)</span></u> <span lang="EN">- 6th Cir. [boat damaged, did not file insurance claim, claimed loss]</span><br />
<br />
<span lang="EN">RULE: Taxpayers are allowed to claim deductions for economic detriments which are a loss and not compensated for by insurance or otherwise regardless whether the property was insured or not.</span> <br />
<br />
''<span lang="EN">Facts:</span>''<br />
<br />
<span lang="EN">● ''Plaintiff taxpayer had an undamaged boat and a friend who is a bad captain.''</span> <br />
<br />
<span lang="EN">● ''Unfortunately he lent his boat to this friend who then ran taxpayer's boat into the ground.''</span> <br />
<br />
<span lang="EN">● ''Taxpayer was able to collect $200.00 from his friend, reducing taxpayer's actual loss to $642.55.''</span> <br />
<br />
<span lang="EN">● ''After taking into account the $100.00 limitation under 26 U.S.C. § 165(c)(3), taxpayer claimed a $542.22 casualty loss deduction on his 1976 return.''</span> <br />
<br />
<span lang="EN">● ''While the taxpayer's boat was insured, he did not file an insurance claim for fear of having his insurance policy revoked.''</span> <br />
<br />
<span lang="EN">● ''26 U.S.C. § 165(c)allows a deduction for private parties for losses resulting from a shipwreck.''</span><br />
<br />
<span lang="EN">● ''The court considered whether a taxpayer's voluntary election not to file an insurance claim for a loss precludes the taxpayer from taking a casualty loss deduction according to 26 U.S.C. § 165.''</span> <br />
<br />
<span lang="EN">Case Notes:</span> <br />
<br />
<span lang="EN">● If you damage something that is insured or under warranty but don't make a claim and don't receive compensation, can you still deduct the loss according to 26 U.S.C. § 165.</span><br />
<br />
<span lang="EN">● Plain language example: Someone backs into your car while you are away and breaks a taillight. While you have insurance for the taillight, you don't make a claim because you might lose your insurance or don't want to deal with the paperwork. The loss in excess of the limit in 26 U.S.C. § 165(c)3 (currently $100) may be deducted.</span><br />
<br />
<span lang="EN">● Previously, <u>Kentucky Utilities</u> rule → In order to claim a deduction, the court required the taxpayer to a) exhaust all reasonable prospects for insurance indemnification before claiming a sustained loss or (b) that 26 U.S.C. § 165 equated "not compensated by" with "not covered by."</span><br />
<br />
<span lang="EN">● Avoiding the <u>Kentucky Utilities</u> rule</span><br />
<br />
<span lang="EN">○ First, it allows insured taxpayers to decline insurance indemnification without the penalty of not being able to deduct the loss as if they did not have insurance.</span> <br />
<br />
<span lang="EN">○ There are many valid reasons for not involving insurance companies and the tax law should not work against them.</span> <br />
<br />
<span lang="EN">○ Second, taxpayers who carry no insurance or are under-insured are not rewarded with an additional deduction not available to their colleagues who carry the proper amount of insurance coverage.</span><br />
<br />
<span lang="EN">● Kentucky Utilities was overruled by Hills, which recognized that "compensated" is distinct from "covered."</span> <br />
<br />
<span lang="EN">Individual Losses</span> <br />
<br />
<span lang="EN">● §165(b) → If a TP receives no consideration for a realized loss (whether as payment or compensation), the loss deduction is limited to the TP’s basis in the loss property</span><br />
<br />
<span lang="EN">● Thus if a TP is unable to collect on an account receivable (in which a TP has a zero basis except in very limited cases), there is no deduction under §165(a)</span><br />
<br />
<span lang="EN">● §165(d) → limits the deduction for gambling losses to the amount of the TP’s gambling winnings; it does not matter whether gambling is a business, investment, or personal activity of the TP</span> <br />
<br />
'''<span lang="EN">Net Operating Losses</span>''' <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code § 172 - Net operating loss deduction</span>'''<br />
<br />
'''<span lang="EN">(a) Deduction allowed. There shall be allowed as a deduction for the taxable year an amount equal to the lesser of—</span>'''<br />
<br />
'''<span lang="EN"> (1) the aggregate of the net operating loss carryovers to such year, plus the net operating loss carrybacks to such year, or</span>'''<br />
<br />
'''<span lang="EN"> (2) 80 percent of taxable income computed without regard to the deduction allowable under this section. For purposes of this subtitle, the term “net operating loss deduction” means the deduction allowed by this subsection.</span>''' <br />
<br />
'''<span lang="EN">(b) Net operating loss carrybacks and carryovers</span>'''<br />
<br />
'''<span lang="EN"> (1) Years to which loss may be carried</span>'''<br />
<br />
'''<span lang="EN"> (A) General rule. Except as otherwise provided in this paragraph, a net operating loss for any taxable year—</span>'''<br />
<br />
'''<span lang="EN"> (i) except as otherwise provided in this paragraph, shall not be a net operating loss carryback to any taxable year preceding the taxable year of such loss, and</span>'''<br />
<br />
'''<span lang="EN"> (ii) shall be a net operating loss carryover to each taxable year following the taxable year of the loss.</span>'''<br />
<br />
'''<span lang="EN"> (B) Farming losses</span>'''<br />
<br />
'''<span lang="EN"> (i) In general. In the case of any portion of a net operating loss for the taxable year which is a farming loss with respect to the taxpayer, such loss shall be a net operating loss carryback to each of the 2 taxable years preceding the taxable year of such loss.</span>'''<br />
<br />
'''<span lang="EN"> (ii) Farming loss. For purposes of this section, the term “farming loss” means the lesser of—</span>'''<br />
<br />
'''<span lang="EN"> (I) the amount which would be the net operating loss for the taxable year if only income and deductions attributable to farming businesses (as defined in section 263A(e)(4)) are taken into account, or</span>'''<br />
<br />
'''<span lang="EN"> (II) the amount of the net operating loss for such taxable year.</span>'''<br />
<br />
'''<span lang="EN"> (iii) Coordination with paragraph (2). For purposes of applying paragraph (2), a farming loss for any taxable year shall be treated as a separate net operating loss for such taxable year to be taken into account after the remaining portion of the net operating loss for such taxable year.</span>'''<br />
<br />
'''<span lang="EN"> (iv) Election. Any taxpayer entitled to a 2-year carryback under clause (i) from any loss year may elect not to have such clause apply to such loss year. Such election shall be made in such manner as prescribed by the Secretary and shall be made by the due date (including extensions of time) for filing the taxpayer’s return for the taxable year of the net operating loss. Such election, once made for any taxable year, shall be irrevocable for such taxable year.</span>'''<br />
<br />
'''<span lang="EN"> (C) Insurance companies. In the case of an insurance company (as defined in section 816(a)) other than a life insurance company, the net operating loss for any taxable year—</span>'''<br />
<br />
'''<span lang="EN"> (i) shall be a net operating loss carryback to each of the 2 taxable years preceding the taxable year of such loss, and</span>'''<br />
<br />
'''<span lang="EN"> (ii) shall be a net operating loss carryover to each of the 20 taxable years following the taxable year of the loss.</span>'''<br />
<br />
'''<span lang="EN"> (2) Amount of carrybacks and carryovers. The entire amount of the net operating loss for any taxable year (hereinafter in this section referred to as the “loss year”) shall be carried to the earliest of the taxable years to which (by reason of paragraph (1)) such loss may be carried. The portion of such loss which shall be carried to each of the other taxable years shall be the excess, if any, of the amount of such loss over the sum of the taxable income for each of the prior taxable years to which such loss may be carried. For purposes of the preceding sentence, the taxable income for any such prior taxable year shall—</span>'''<br />
<br />
'''<span lang="EN"> (A) be computed with the modifications specified in subsection (d) other than paragraphs (1), (4), and (5) thereof, and by determining the amount of the net operating loss deduction without regard to the net operating loss for the loss year or for any taxable year thereafter,</span>'''<br />
<br />
'''<span lang="EN"> (B) not be considered to be less than zero, and</span>'''<br />
<br />
'''<span lang="EN"> (C) not exceed the amount determined under subsection (a)(2) for such prior taxable year.</span>'''<br />
<br />
'''<span lang="EN"> (3) Election to waive carryback. Any taxpayer entitled to a carryback period under paragraph (1) may elect to relinquish the entire carryback period with respect to a net operating loss for any taxable year. Such election shall be made in such manner as may be prescribed by the Secretary, and shall be made by the due date (including extensions of time) for filing the taxpayer’s return for the taxable year of the net operating loss for which the election is to be in effect. Such election, once made for any taxable year, shall be irrevocable for such taxable year.</span>'''<br />
<br />
'''<span lang="EN">(c) Net operating loss defined. For purposes of this section, the term “net operating loss” means the excess of the deductions allowed by this chapter over the gross income. Such excess shall be computed with the modifications specified in subsection (d).</span>'''<br />
<br />
'''<span lang="EN">(d) Modifications. The modifications referred to in this section are as follows:</span>'''<br />
<br />
'''<span lang="EN"> (1) Net operating loss deduction. No net operating loss deduction shall be allowed.</span>'''<br />
<br />
'''<span lang="EN"> (2) Capital gains and losses of taxpayers other than corporations. In the case of a taxpayer other than a corporation—</span>'''<br />
<br />
'''<span lang="EN"> (A) the amount deductible on account of losses from sales or exchanges of capital assets shall not exceed the amount includable on account of gains from sales or exchanges of capital assets; and</span>'''<br />
<br />
'''<span lang="EN"> (B) the exclusion provided by section 1202 shall not be allowed.</span>'''<br />
<br />
'''<span lang="EN"> (3) Deduction for personal exemptions. No deduction shall be allowed under section 151 (relating to personal exemptions). No deduction in lieu of any such deduction shall be allowed.</span>'''<br />
<br />
'''<span lang="EN"> (4) Nonbusiness deductions of taxpayers other than corporations. In the case of a taxpayer other than a corporation, the deductions allowable by this chapter which are not attributable to a taxpayer’s trade or business shall be allowed only to the extent of the amount of the gross income not derived from such trade or business. For purposes of the preceding sentence—</span>'''<br />
<br />
'''<span lang="EN"> (A) any gain or loss from the sale or other disposition of—</span>'''<br />
<br />
'''<span lang="EN"> (i) property, used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 167, or</span>'''<br />
<br />
'''<span lang="EN"> (ii) real property used in the trade or business, shall be treated as attributable to the trade or business;</span>'''<br />
<br />
'''<span lang="EN"> (B) the modifications specified in paragraphs (1), (2)(B), and (3) shall be taken into account;</span>'''<br />
<br />
'''<span lang="EN"> (C) any deduction for casualty or theft losses allowable under paragraph (2) or (3) of section 165(c) shall be treated as attributable to the trade or business; and</span>'''<br />
<br />
'''<span lang="EN"> (D) any deduction allowed under section 404 to the extent attributable to contributions which are made on behalf of an individual who is an employee within the meaning of section 401(c)(1) shall not be treated as attributable to the trade or business of such individual.</span>'''<br />
<br />
'''<span lang="EN"> (5) Computation of deduction for dividends received. The deductions allowed by section [1] 243 (relating to dividends received by corporations) and 245 (relating to dividends received from certain foreign corporations) shall be computed without regard to section 246(b) (relating to limitation on aggregate amount of deductions).</span>'''<br />
<br />
'''<span lang="EN"> (6) Modifications related to real estate investment trusts. In the case of any taxable year for which part II of subchapter M (relating to real estate investment trusts) applies to the taxpayer—</span>'''<br />
<br />
'''<span lang="EN"> (A) the net operating loss for such taxable year shall be computed by taking into account the adjustments described in section 857(b)(2) (other than the deduction for dividends paid described in section 857(b)(2)(B));</span>'''<br />
<br />
'''<span lang="EN"> (B) where such taxable year is a “prior taxable year” referred to in paragraph (2) of subsection (b), the term “taxable income” in such paragraph shall mean “real estate investment trust taxable income” (as defined in section 857(b)(2)); and</span>'''<br />
<br />
'''<span lang="EN"> (C) subsection (a)(2) shall be applied by substituting “real estate investment trust taxable income (as defined in section 857(b)(2) but without regard to the deduction for dividends paid (as defined in section 561))” for “taxable income”.</span>'''<br />
<br />
'''<span lang="EN"> [(7) Repealed. Pub. L. 115–97, title I, § 13305(b)(3), Dec. 22, 2017, 131 Stat. 2126.]</span>'''<br />
<br />
'''<span lang="EN"> (8) Qualified business income deduction. The deduction under section 199A shall not be allowed.</span>'''<br />
<br />
'''<span lang="EN"> (9) Deduction for foreign-derived intangible income. The deduction under section 250 shall not be allowed.</span>'''<br />
<br />
'''<span lang="EN">(e) Law applicable to computations. In determining the amount of any net operating loss carryback or carryover to any taxable year, the necessary computations involving any other taxable year shall be made under the law applicable to such other taxable year.</span>'''<br />
<br />
'''<span lang="EN">(f) Special rule for insurance companies. In the case of an insurance company (as defined in section 816(a)) other than a life insurance company—</span>'''<br />
<br />
'''<span lang="EN"> (1) the amount of the deduction allowed under subsection (a) shall be the aggregate of the net operating loss carryovers to such year, plus the net operating loss carrybacks to such year, and</span>'''<br />
<br />
'''<span lang="EN"> (2) subparagraph (C) of subsection (b)(2) shall not apply.</span>''' <br />
<br />
'''<span lang="EN">(g) Cross references</span>'''<br />
<br />
'''<span lang="EN"> (1) For treatment of net operating loss carryovers in certain corporate acquisitions, see section 381.</span>'''<br />
<br />
'''<span lang="EN"> (2) For special limitation on net operating loss carryovers in case of a corporate change of ownership, see section 382.</span>'''<br />
|} <br />
<br />
<span lang="EN">EXAMPLE → A and B operate similar businesses</span><br />
<br />
<span lang="EN">● A’s business income is very steady; in year 1 and year 2, A has a net business income of $10k</span><br />
<br />
<span lang="EN">● B’s business income is more volatile; in year 1, B had a new business LOSS of $10K and in year 2, B had a net business income of $30K</span><br />
<br />
<span lang="EN">● During the combined two-year operating period, both A and B had a net income of $20K, but they will not be treated the same.</span> <br />
<br />
{| class="wikitable"<br />
| <br />
|<span lang="EN">A</span><br />
|<span lang="EN">B</span><br />
|-<br />
|<span lang="EN">Year 1</span><br />
|<span lang="EN">$10,000</span><br />
|<span lang="EN">($10,000)</span><br />
|-<br />
|<span lang="EN">Year 2</span><br />
|<span lang="EN">$10,000</span><br />
|<span lang="EN">$30,000</span><br />
|-<br />
|'''<span lang="EN">Total</span>'''<br />
|'''<span lang="EN">$20,000</span>'''<br />
|'''<span lang="EN">$20,000</span>'''<br />
|} <br />
<br />
<span lang="EN">Section 172 → designed to ameliorate the different tax treatments</span><br />
<br />
<span lang="EN">● A will pay tax on $10K in each of years 1 and 2</span><br />
<br />
<span lang="EN">● B will pay no tax in year 1 but will also not be entitled to a return</span><br />
<br />
<span lang="EN">● In year 2, B will pay tax on $30K</span><br />
<br />
<span lang="EN">● UNDER §172 → B could '''carry''' his $10K “net operating loss” from year 1 over to year 2; by doing so, B’s year 2 taxable income would be reduced by $10K; by allowing a deduction on B’s year 2 income, equitable treatment is closer to achievable</span> <br />
<br />
<span lang="EN">§172(b) → carryover</span><br />
<br />
<span lang="EN">● Taxpayers can carry forward net operating losses</span><br />
<br />
<span lang="EN">● Under §172(a), any net operating loss deduction cannot exceed 80% of a TP’s taxable income</span><br />
<br />
<span lang="EN">● TCJA removed carryback provisions</span> <br />
<br />
'''<span lang="EN">Loss Limitations</span>''' <br />
<br />
<span lang="EN">Other limitations on the deductibility of losses</span><br />
<br />
<span lang="EN">● §465 → a TP’s losses from business and investment activities are limited to the amount the TP is “at risk” in such activities</span><br />
<br />
<span lang="EN">○ If a TP invests $10K in an investment activity (like an ILP in a real estate LP), the TP can only claim up to $10K in losses from the activity</span><br />
<br />
<span lang="EN">● §469 → Losses from “passive” activities can only be deducted to the extent of income from passive activities</span><br />
<br />
<span lang="EN">● §1091 → with respect to sales of marketable securities, 1091 disallows losses from so called “wash sales”, where a TP sells shares of stock at a loss and then, within a short period following the sale, purchases shares in the same corporation in anticipation of an upturn in the stock price</span> <br />
<br />
'''<span lang="EN">Transactions with Related Persons</span>''' <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code § 267 - Losses, expenses, and interest with respect to transactions between related taxpayers</span>'''<br />
<br />
'''<span lang="EN">(a) In general</span>'''<br />
<br />
'''<span lang="EN"> (1) Deduction for losses disallowed. No deduction shall be allowed in respect of any loss from the sale or exchange of property, directly or indirectly, between persons specified in any of the paragraphs of subsection (b). The preceding sentence shall not apply to any loss of the distributing corporation (or the distributee) in the case of a distribution in complete liquidation.</span>'''<br />
<br />
'''<span lang="EN"> (2) Matching of deduction and payee income item in the case of expenses and interest. If—</span>'''<br />
<br />
'''<span lang="EN"> (A) by reason of the method of accounting of the person to whom the payment is to be made, the amount thereof is not (unless paid) includible in the gross income of such person, and</span>'''<br />
<br />
'''<span lang="EN"> (B) at the close of the taxable year of the taxpayer for which (but for this paragraph) the amount would be deductible under this chapter, both the taxpayer and the person to whom the payment is to be made are persons specified in any of the paragraphs of subsection (b), then any deduction allowable under this chapter in respect of such amount shall be allowable as of the day as of which such amount is includible in the gross income of the person to whom the payment is made (or, if later, as of the day on which it would be so allowable but for this paragraph). For purposes of this paragraph, in the case of a personal service corporation (within the meaning of section 441(i)(2)), such corporation and any employee-owner (within the meaning of section 269A(b)(2), as modified by section 441(i)(2)) shall be treated as persons specified in subsection (b).</span>'''<br />
<br />
'''<span lang="EN"> (3) Payments to foreign persons</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. The Secretary shall by regulations apply the matching principle of paragraph (2) in cases in which the person to whom the payment is to be made is not a United States person.</span>'''<br />
<br />
'''<span lang="EN"> (B) Special rule for certain foreign entities</span>'''<br />
<br />
'''<span lang="EN"> (i) In general. Notwithstanding subparagraph (A), in the case of any item payable to a controlled foreign corporation (as defined in section 957) or a passive foreign investment company (as defined in section 1297), a deduction shall be allowable to the payor with respect to such amount for any taxable year before the taxable year in which paid only to the extent that an amount attributable to such item is includible (determined without regard to properly allocable deductions and qualified deficits under section 952(c)(1)(B)) during such prior taxable year in the gross income of a United States person who owns (within the meaning of section 958(a)) stock in such corporation.</span>'''<br />
<br />
'''<span lang="EN"> (ii) Secretarial authority. The Secretary may by regulation exempt transactions from the application of clause (i), including any transaction which is entered into by a payor in the ordinary course of a trade or business in which the payor is predominantly engaged and in which the payment of the accrued amounts occurs within 8½ months after accrual or within such other period as the Secretary may prescribe.</span>'''<br />
<br />
'''<span lang="EN">(b) Relationships. The persons referred to in subsection (a) are:</span>'''<br />
<br />
'''<span lang="EN"> (1) Members of a family, as defined in subsection (c)(4);</span>'''<br />
<br />
'''<span lang="EN"> (2) An individual and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual;</span>'''<br />
<br />
'''<span lang="EN"> (3) Two corporations which are members of the same controlled group (as defined in subsection (f));</span>'''<br />
<br />
'''<span lang="EN"> (4) A grantor and a fiduciary of any trust;</span>'''<br />
<br />
'''<span lang="EN"> (5) A fiduciary of a trust and a fiduciary of another trust, if the same person is a grantor of both trusts;</span>'''<br />
<br />
'''<span lang="EN"> (6) A fiduciary of a trust and a beneficiary of such trust;</span>'''<br />
<br />
'''<span lang="EN"> (7) A fiduciary of a trust and a beneficiary of another trust, if the same person is a grantor of both trusts;</span>'''<br />
<br />
'''<span lang="EN"> (8) A fiduciary of a trust and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for the trust or by or for a person who is a grantor of the trust;</span>'''<br />
<br />
'''<span lang="EN"> (9) A person and an organization to which section 501 (relating to certain educational and charitable organizations which are exempt from tax) applies and which is controlled directly or indirectly by such person or (if such person is an individual) by members of the family of such individual;</span>'''<br />
<br />
'''<span lang="EN"> (10) A corporation and a partnership if the same persons own—</span>'''<br />
<br />
'''<span lang="EN"> (A) more than 50 percent in value of the outstanding stock of the corporation, and</span>'''<br />
<br />
'''<span lang="EN"> (B) more than 50 percent of the capital interest, or the profits interest, in the partnership;</span>'''<br />
<br />
'''<span lang="EN"> (11) An S corporation and another S corporation if the same persons own more than 50 percent in value of the outstanding stock of each corporation;</span>'''<br />
<br />
'''<span lang="EN"> (12) An S corporation and a C corporation, if the same persons own more than 50 percent in value of the outstanding stock of each corporation; or</span>'''<br />
<br />
'''<span lang="EN"> (13) Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of such estate.</span>''' <br />
<br />
'''<span lang="EN">(c) Constructive ownership of stock. For purposes of determining, in applying subsection (b), the ownership of stock—</span>'''<br />
<br />
'''<span lang="EN"> (1) Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries;</span>'''<br />
<br />
'''<span lang="EN"> (2) An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family;</span>'''<br />
<br />
'''<span lang="EN"> (3) An individual owning (otherwise than by the application of paragraph (2)) any stock in a corporation shall be considered as owning the stock owned, directly or indirectly, by or for his partner;</span>'''<br />
<br />
'''<span lang="EN"> (4) The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; and</span>'''<br />
<br />
'''<span lang="EN"> (5) Stock constructively owned by a person by reason of the application of paragraph (1) shall, for the purpose of applying paragraph (1), (2), or (3), be treated as actually owned by such person, but stock constructively owned by an individual by reason of the application of paragraph (2) or (3) shall not be treated as owned by him for the purpose of again applying either of such paragraphs in order to make another the constructive owner of such stock.</span>''' <br />
<br />
'''<span lang="EN">(d) Amount of gain where loss previously disallowed</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. If—</span>'''<br />
<br />
'''<span lang="EN"> (A) in the case of a sale or exchange of property to the taxpayer a loss sustained by the transferor is not allowable to the transferor as a deduction by reason of subsection (a)(1), and</span>'''<br />
<br />
'''<span lang="EN"> (B) the taxpayer sells or otherwise disposes of such property (or of other property the basis of which in the taxpayer’s hands is determined directly or indirectly by reference to such property) at a gain,</span>'''<br />
<br />
'''<span lang="EN">then such gain shall be recognized only to the extent that it exceeds so much of such loss as is properly allocable to the property sold or otherwise disposed of by the taxpayer.</span>'''<br />
<br />
'''<span lang="EN"> (2) Exception for wash sales. Paragraph (1) shall not apply if the loss sustained by the transferor is not allowable to the transferor as a deduction by reason of section 1091 (relating to wash sales).</span>'''<br />
<br />
'''<span lang="EN"> (3) Exception for transfers from tax indifferent parties. Paragraph (1) shall not apply to the extent any loss sustained by the transferor (if allowed) would not be taken into account in determining a tax imposed under section 1 or 11 or a tax computed as provided by either of such sections.</span>'''<br />
<br />
'''<span lang="EN">(e) Special rules for pass-thru entities</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. In the case of any amount paid or incurred by, to, or on behalf of, a pass-thru entity, for purposes of applying subsection (a)(2)—</span>'''<br />
<br />
'''<span lang="EN"> (A) such entity,</span>'''<br />
<br />
'''<span lang="EN"> (B) in the case of—</span>'''<br />
<br />
'''<span lang="EN"> (i) a partnership, any person who owns (directly or indirectly) any capital interest or profits interest of such partnership, or</span>'''<br />
<br />
'''<span lang="EN"> (ii) an S corporation, any person who owns (directly or indirectly) any of the stock of such corporation,</span>'''<br />
<br />
'''<span lang="EN"> (C) any person who owns (directly or indirectly) any capital interest or profits interest of a partnership in which such entity owns (directly or indirectly) any capital interest or profits interest, and</span>'''<br />
<br />
'''<span lang="EN"> (D) any person related (within the meaning of subsection (b) of this section or section 707(b)(1)) to a person described in subparagraph (B) or (C), shall be treated as persons specified in a paragraph of subsection (b). Subparagraph (C) shall apply to a transaction only if such transaction is related either to the operations of the partnership described in such subparagraph or to an interest in such partnership.</span>'''<br />
<br />
'''<span lang="EN"> (2) Pass-thru entity. For purposes of this section, the term “pass-thru entity” means—</span>'''<br />
<br />
'''<span lang="EN"> (A) a partnership, and</span>'''<br />
<br />
'''<span lang="EN"> (B) an S corporation.</span>'''<br />
<br />
'''<span lang="EN"> (3) Constructive ownership in the case of partnerships. For purposes of determining ownership of a capital interest or profits interest of a partnership, the principles of subsection (c) shall apply, except that—</span>'''<br />
<br />
'''<span lang="EN"> (A) paragraph (3) of subsection (c) shall not apply, and</span>'''<br />
<br />
'''<span lang="EN"> (B) interests owned (directly or indirectly) by or for a C corporation shall be considered as owned by or for any shareholder only if such shareholder owns (directly or indirectly) 5 percent or more in value of the stock of such corporation.</span>'''<br />
<br />
'''<span lang="EN"> (4) Subsection (a)(2) not to apply to certain guaranteed payments of partnerships. In the case of any amount paid or incurred by a partnership, subsection (a)(2) shall not apply to the extent that section 707(c) applies to such amount.</span>'''<br />
<br />
'''<span lang="EN"> (5) Exception for certain expenses and interest of partnerships owning low-income housing</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. This subsection shall not apply with respect to qualified expenses and interest paid or incurred by a partnership owning low-income housing to—</span>'''<br />
<br />
'''<span lang="EN"> (i) any qualified 5-percent or less partner of such partnership, or</span>'''<br />
<br />
'''<span lang="EN"> (ii) any person related (within the meaning of subsection (b) of this section or section 707(b)(1)) to any qualified 5-percent or less partner of such partnership.</span>'''<br />
<br />
'''<span lang="EN"> (B) Qualified 5-percent or less partner. For purposes of this paragraph, the term “qualified 5-percent or less partner” means any partner who has (directly or indirectly) an interest of 5 percent or less in the aggregate capital and profits interests of the partnership but only if—</span>'''<br />
<br />
'''<span lang="EN"> (i) such partner owned the low-income housing at all times during the 2-year period ending on the date such housing was transferred to the partnership, or</span>'''<br />
<br />
'''<span lang="EN"> (ii) such partnership acquired the low-income housing pursuant to a purchase, assignment, or other transfer from the Department of Housing and Urban Development or any State or local housing authority. For purposes of the preceding sentence, a partner shall be treated as holding any interest in the partnership which is held (directly or indirectly) by any person related (within the meaning of subsection (b) of this section or section 707(b)(1)) to such partner.</span>'''<br />
<br />
'''<span lang="EN"> (C) Qualified expenses and interest. For purpose of this paragraph, the term “qualified expenses and interest” means any expense or interest incurred by the partnership with respect to low-income housing held by the partnership but—</span>'''<br />
<br />
'''<span lang="EN"> (i) only if the amount of such expense or interest (as the case may be) is unconditionally required to be paid by the partnership not later than 10 years after the date such amount was incurred, and</span>'''<br />
<br />
'''<span lang="EN"> (ii) in the case of such interest, only if such interest is incurred at an annual rate not in excess of 12 percent.</span>'''<br />
<br />
'''<span lang="EN"> (D) Low-income housing. For purposes of this paragraph, the term “low-income housing” means—</span>'''<br />
<br />
'''<span lang="EN"> (i) any interest in property described in clause (i), (ii), (iii), or (iv) of section 1250(a)(1)(B), and</span>'''<br />
<br />
'''<span lang="EN"> (ii) any interest in a partnership owning such property.</span>'''<br />
<br />
'''<span lang="EN"> (6) Cross reference. For additional rules relating to partnerships, see section 707(b).</span>'''<br />
<br />
'''<span lang="EN">(f) Controlled group defined; special rules applicable to controlled groups</span>'''<br />
<br />
'''<span lang="EN"> (1) Controlled group defined. For purposes of this section, the term “controlled group” has the meaning given to such term by section 1563(a), except that—</span>'''<br />
<br />
'''<span lang="EN"> (A) “more than 50 percent” shall be substituted for “at least 80 percent” each place it appears in section 1563(a), and</span>'''<br />
<br />
'''<span lang="EN"> (B) the determination shall be made without regard to subsections (a)(4) and (e)(3)(C) of section 1563.</span>'''<br />
<br />
'''<span lang="EN"> (2) Deferral (rather than denial) of loss from sale or exchange between membersIn the case of any loss from the sale or exchange of property which is between members of the same controlled group and to which subsection (a)(1) applies (determined without regard to this paragraph but with regard to paragraph (3))—</span>'''<br />
<br />
'''<span lang="EN"> (A) subsections (a)(1) and (d) shall not apply to such loss, but</span>'''<br />
<br />
'''<span lang="EN"> (B) such loss shall be deferred until the property is transferred outside such controlled group and there would be recognition of loss under consolidated return principles or until such other time as may be prescribed in regulations.</span>'''<br />
<br />
'''<span lang="EN"> (3) Loss deferral rules not to apply in certain cases</span>'''<br />
<br />
'''<span lang="EN"> (A) Transfer to DISC. For purposes of applying subsection (a)(1), the term “controlled group” shall not include a DISC.</span>'''<br />
<br />
'''<span lang="EN"> (B) Certain sales of inventory, Except to the extent provided in regulations prescribed by the Secretary, subsection (a)(1) shall not apply to the sale or exchange of property between members of the same controlled group (or persons described in subsection (b)(10)) if—</span>'''<br />
<br />
'''<span lang="EN"> (i) such property in the hands of the transferor is property described in section 1221(a)(1),</span>'''<br />
<br />
'''<span lang="EN"> (ii) such sale or exchange is in the ordinary course of the transferor’s trade or business,</span>'''<br />
<br />
'''<span lang="EN"> (iii) such property in the hands of the transferee is property described in section 1221(a)(1), and</span>'''<br />
<br />
'''<span lang="EN"> (iv) the transferee or the transferor is a foreigncorporation.</span>'''<br />
<br />
'''<span lang="EN"> (C) Certain foreign currency losses. To the extent provided in regulations, subsection (a)(1) shall not apply to any loss sustained by a member of a controlled group on the repayment of a loan made to another member of such group if such loan is payable in a foreign currency or is denominated in such a currency and such loss is attributable to a reduction in value of such foreign currency.</span>'''<br />
<br />
'''<span lang="EN"> (D) Redemptions by fund-of-funds regulated investment companies. Except to the extent provided in regulations prescribed by the Secretary, subsection (a)(1) shall not apply to any distribution in redemption of stock of a regulated investment company if—</span>'''<br />
<br />
'''<span lang="EN"> (i) such company issues only stock which is redeemable upon the demand of the stockholder, and</span>'''<br />
<br />
'''<span lang="EN"> (ii) such redemption is upon the demand of another regulated investment company.</span>'''<br />
<br />
'''<span lang="EN"> (4) Determination of relationship resulting in disallowance of loss, for purposes of other provisions. For purposes of any other section of this title which refers to a relationship which would result in a disallowance of losses under this section, deferral under paragraph (2) shall be treated as disallowance.</span>'''<br />
<br />
'''<span lang="EN">(g) Coordination with section 1041. Subsection (a)(1) shall not apply to any transfer described in section 1041(a) (relating to transfers of property between spouses or incident to divorce).</span>'''<br />
|} <br />
<br />
<span lang="EN">Related party sales</span> <br />
<br />
<span lang="EN">● 267(a) prevents manipulation by disallowing any otherwise deductible loss if the loss results from the sale or exchange of property to a related person</span><br />
<br />
<span lang="EN">● 267(b) spells out specific relationships that will trigger disallowance (in-laws are not related)</span> <br />
<br />
'''<span lang="EN">Limitation on the Deductibility of Capital Losses</span>''' <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code § 1211 - Limitation on capital losses</span>'''<br />
<br />
'''<span lang="EN">(a) Corporations. In the case of a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of gains from such sales or exchanges.</span>'''<br />
<br />
'''<span lang="EN">(b) Other taxpayers. In the case of a taxpayer other than a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges, plus (if such losses exceed such gains) the lower of—</span>'''<br />
<br />
'''<span lang="EN"> (1) $3,000 ($1,500 in the case of a married individual filing a separate return), or</span>'''<br />
<br />
'''<span lang="EN"> (2) the excess of such losses over such gains.</span>'''<br />
|} <br />
<br />
<span lang="EN">Deducting Capital Losses: The $3,000 Bonus</span><br />
<br />
<span lang="EN">● Capital loss → a loss arising from the sale or exchange of a capital asset</span><br />
<br />
<span lang="EN">● If the capital asset was held by the TP for more than one year prior to the sale or exchange, the TP has a '''long-term capital loss'''.</span><br />
<br />
<span lang="EN">● If the TP held the asset for one year or less, the TP has a '''short-term capital loss'''.</span> <br />
<br />
<span lang="EN">1211(b) → generally limits the deductibility of capital losses to the extent of capital gains; also contains a TP-friendly bonus, if capital losses '''exceed''' capital gains (statute: “net capital loss”), up to $3,000 of the excess can be deducted (i.e., up to $3,000 of net capital loss can be used to offset a TP’s ordinary income).</span> <br />
<br />
'''<span lang="EN">Carryover of Excess Capital Losses</span>''' <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code § 1212 - Capital loss carrybacks and carryovers</span>'''<br />
<br />
'''<span lang="EN">(a) Corporations</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. If a corporation has a net capital loss for any taxable year (hereinafter in this paragraph referred to as the “loss year”), the amount thereof shall be—</span>'''<br />
<br />
'''<span lang="EN"> (A) a capital loss carryback to each of the 3 taxable years preceding the loss year, but only to the extent—</span>'''<br />
<br />
'''<span lang="EN"> (i) such loss is not attributable to a foreign expropriation capital loss, and</span>'''<br />
<br />
'''<span lang="EN"> (ii) the carryback of such loss does not increase or produce a net operating loss (as defined in section 172(c)) for the taxable year to which it is being carried back;</span>'''<br />
<br />
'''<span lang="EN"> (B) except as provided in subparagraph (C), a capital loss carryover to each of the 5 taxable years succeeding the loss year; and</span>'''<br />
<br />
'''<span lang="EN"> (C) a capital loss carryover to each of the 10 taxable years succeeding the loss year, but only to the extent such loss is attributable to a foreign expropriation loss, and shall be treated as a short-term capital loss in each such taxable year. The entire amount of the net capital loss for any taxable year shall be carried to the earliest of the taxable years to which such loss may be carried, and the portion of such loss which shall be carried to each of the other taxable years to which such loss may be carried shall be the excess, if any, of such loss over the total of the capital gain net income for each of the prior taxable years to which such loss may be carried. For purposes of the preceding sentence, the capital gain net income for any such prior taxable year shall be computed without regard to the net capital loss for the loss year or for any taxable year thereafter. In the case of any net capital loss which cannot be carried back in full to a preceding taxable year by reason of clause (ii) of subparagraph (A), the capital gain net income for such prior taxable year shall in no case be treated as greater than the amount of such loss which can be carried back to such preceding taxable year upon the application of such clause (ii).</span>'''<br />
<br />
'''<span lang="EN"> </span>'''<br />
<br />
'''<span lang="EN"> (2) Definitions and special rules</span>'''<br />
<br />
'''<span lang="EN"> (A) Foreign expropriation capital loss defined. For purposes of this subsection, the term “foreign expropriation capital loss” means, for any taxable year, the sum of the losses taken into account in computing the net capital loss for such year which are—</span>'''<br />
<br />
'''<span lang="EN"> (i) losses sustained directly by reason of the expropriation, intervention, seizure, or similar taking of property by the government of any foreign country, any political subdivision thereof, or any agency or instrumentality of the foregoing, or</span>'''<br />
<br />
'''<span lang="EN"> (ii) losses (treated under section 165(g)(1) as losses from the sale or exchange of capital assets) from securities which become worthless by reason of the expropriation, intervention, seizure, or similar taking of property by the government of any foreign country, any political subdivision thereof, or any agency or instrumentality of the foregoing.</span>'''<br />
<br />
'''<span lang="EN"> (B) Portion of loss attributable to foreign expropriation capital loss. For purposes of paragraph (1), the portion of any net capital loss for any taxable year attributable to a foreign expropriation capital loss is the amount of the foreign expropriation capital loss for such year (but not in excess of the net capital loss for such year).</span>'''<br />
<br />
'''<span lang="EN"> (C) Priority of application. For purposes of paragraph (1), if a portion of a net capital loss for any taxable year is attributable to a foreign expropriation capital loss, such portion shall be considered to be a separate net capital loss for such year to be applied after the other portion of such net capital loss.</span>'''<br />
<br />
'''<span lang="EN"> (3) Regulated investment companies</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. If a regulated investment company has a net capital loss for any taxable year—</span>'''<br />
<br />
'''<span lang="EN"> (i) paragraph (1) shall not apply to such loss,</span>'''<br />
<br />
'''<span lang="EN"> (ii) the excess of the net short-term capital loss over the net long-term capital gain for such year shall be a short-term capital loss arising on the first day of the next taxable year, and</span>'''<br />
<br />
'''<span lang="EN"> (iii) the excess of the net long-term capital loss over the net short-term capital gain for such year shall be a long-term capital loss arising on the first day of the next taxable year.</span>'''<br />
<br />
'''<span lang="EN"> (B) Coordination with general rule. If a net capital loss to which paragraph (1) applies is carried over to a taxable year of a regulated investment company—</span>'''<br />
<br />
'''<span lang="EN"> (i) Losses to which this paragraph applies. Clauses (ii) and (iii) of subparagraph (A) shall be applied without regard to any amount treated as a short-term capital loss under paragraph (1).</span>'''<br />
<br />
'''<span lang="EN"> </span>'''<br />
<br />
'''<span lang="EN"> (ii) Losses to which general rule applies. Paragraph (1) shall be applied by substituting “net capital loss for the loss year or any taxable year thereafter (other than a net capital loss to which paragraph (3)(A) applies)” for “net capital loss for the loss year or any taxable year thereafter”.</span>'''<br />
<br />
'''<span lang="EN"> (4) Special rules on carrybacks. A net capital loss of a corporation shall not be carried back under paragraph (1)(A) to a taxable year—</span>'''<br />
<br />
'''<span lang="EN"> (A) for which it is a regulated investment company (as defined in section 851), or</span>'''<br />
<br />
'''<span lang="EN"> (B) for which it is a real estate investment trust (as defined in section 856).</span>''' <br />
<br />
'''<span lang="EN">(b) Other taxpayers</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. If a taxpayer other than a corporation has a net capital loss for any taxable year—</span>'''<br />
<br />
'''<span lang="EN"> (A) the excess of the net short-term capital loss over the net long-term capital gain for such year shall be a short-term capital loss in the succeeding taxable year, and</span>'''<br />
<br />
'''<span lang="EN"> (B) the excess of the net long-term capital loss over the net short-term capital gain for such year shall be a long-term capital loss in the succeeding taxable year.</span>'''<br />
<br />
'''<span lang="EN"> (2) Treatment of amounts allowed under section 1211(b)(1) or (2)</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. For purposes of determining the excess referred to in subparagraph (A) or (B) of paragraph (1), there shall be treated as a short-term capital gain in the taxable year an amount equal to the lesser of—</span>'''<br />
<br />
'''<span lang="EN"> (i) the amount allowed for the taxable year under paragraph (1) or (2) of section 1211(b), or</span>'''<br />
<br />
'''<span lang="EN"> (ii) the adjusted taxable income for such taxable year.</span>'''<br />
<br />
'''<span lang="EN"> (B) Adjusted taxable income. For purposes of subparagraph (A), the term “adjusted taxable income” means taxable income increased by the sum of—</span>'''<br />
<br />
'''<span lang="EN"> (i) the amount allowed for the taxable year under paragraph (1) or (2) of section 1211(b), and</span>'''<br />
<br />
'''<span lang="EN"> (ii) the deduction allowed for such year under section 151 or any deduction in lieu thereof.</span>'''<br />
<br />
'''<span lang="EN">For purposes of the preceding sentence, any excess of the deductions allowed for the taxable year over the gross income for such year shall be taken into account as negative taxable income.</span>''' <br />
<br />
'''<span lang="EN">(c) Carryback of losses from section 1256 contracts to offset prior gains from such contracts</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. If a taxpayer (other than a corporation) has a net section 1256 contracts loss for the taxable year and elects to have this subsection apply to such taxable year, the amount of such net section 1256 contracts loss—</span>'''<br />
<br />
'''<span lang="EN"> (A) shall be a carryback to each of the 3 taxable years preceding the loss year, and</span>'''<br />
<br />
'''<span lang="EN"> (B) to the extent that, after the application of paragraphs (2) and (3), such loss is allowed as a carryback to any such preceding taxable year—</span>'''<br />
<br />
'''<span lang="EN"> (i) 40 percent of the amount so allowed shall be treated as a short-term capital loss from section 1256 contracts, and</span>'''<br />
<br />
'''<span lang="EN"> (ii) 60 percent of the amount so allowed shall be treated as a long-term capital loss from section 1256 contracts.</span>'''<br />
<br />
'''<span lang="EN"> (2) Amount carried to each taxable year. The entire amount of the net section 1256 contracts loss for any taxable year shall be carried to the earliest of the taxable years to which such loss may be carried back under paragraph (1). The portion of such loss which shall be carried to each of the 2 other taxable years to which such loss may be carried back shall be the excess (if any) of such loss over the portion of such loss which, after the application of paragraph (3), was allowed as a carryback for any prior taxable year.</span>'''<br />
<br />
'''<span lang="EN"> (3) Amount which may be used in any prior taxable year. An amount shall be allowed as a carryback under paragraph (1) to any prior taxable year only to the extent—</span>'''<br />
<br />
'''<span lang="EN"> (A) such amount does not exceed the net section 1256 contract gain for such year, and</span>'''<br />
<br />
'''<span lang="EN"> (B) the allowance of such carryback does not increase or produce a net operating loss (as defined in section 172(c)) for such year.</span>'''<br />
<br />
'''<span lang="EN"> (4) Net section 1256 contracts loss. For purposes of paragraph (1), the term “net section 1256 contracts loss” means the lesser of—</span>'''<br />
<br />
'''<span lang="EN"> (A) the net capital loss for the taxable year determined by taking into account only gains and losses from section 1256 contracts, or</span>'''<br />
<br />
'''<span lang="EN"> (B) the sum of the amounts which, but for paragraph (6)(A), would be treated as capital losses in the succeeding taxable year under subparagraphs (A) and (B) of subsection (b)(1).</span>'''<br />
<br />
'''<span lang="EN"> (5) Net section 1256 contract gain. For purposes of paragraph (1)—</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. The term “net section 1256 contract gain” means the lesser of—</span>'''<br />
<br />
'''<span lang="EN"> (i) the capital gain net income for the taxable year determined by taking into account only gains and losses from section 1256 contracts, or</span>'''<br />
<br />
'''<span lang="EN"> (ii) the capital gain net income for the taxable year.</span>'''<br />
<br />
'''<span lang="EN"> (B) Special rule. The net section 1256 contract gain for any taxable year before the loss year shall be computed without regard to the net section 1256 contracts loss for the loss year or for any taxable year thereafter.</span>'''<br />
<br />
'''<span lang="EN"> (6) Coordination with carryforward provisions of subsection (b)(1)</span>'''<br />
<br />
'''<span lang="EN"> (A) Carryforward amount reduced by amount used as carryback. For purposes of applying subsection (b)(1), if any portion of the net section 1256 contracts loss for any taxable year is allowed as a carryback under paragraph (1) to any preceding taxable year—</span>'''<br />
<br />
'''<span lang="EN"> (i) 40 percent of the amount allowed as a carryback shall be treated as a short-term capital gain for the loss year, and</span>'''<br />
<br />
'''<span lang="EN"> (ii) 60 percent of the amount allowed as a carryback shall be treated as a long-term capital gain for the loss year.</span>'''<br />
<br />
'''<span lang="EN"> (B) Carryover loss retains character as attributable to section 1256 contract. Any amount carried forward as a short-term or long-term capital loss to any taxable year under subsection (b)(1) (after the application of subparagraph (A)) shall, to the extent attributable to losses from section 1256 contracts, be treated as loss from section 1256 contracts for such taxable year.</span>'''<br />
<br />
'''<span lang="EN"> (7) Other definitions and special rules. For purposes of this subsection—</span>'''<br />
<br />
'''<span lang="EN"> (A)Section 1256 contract. The term “section 1256 contract” means any section 1256 contract (as defined in section 1256(b)) to which section 1256 applies.</span>'''<br />
<br />
'''<span lang="EN"> (B) Exclusion for estates and trusts. This subsection shall not apply to any estate or trust.</span>'''<br />
|} <br />
<br />
<span lang="EN">Carryover of Excess Capital Losses → under 1212(b)(1), if the TP’s net capital loss exceeds the $3,000 bonus amount, then the non-deductible portion carries over to the next taxable year.</span> <br />
<br />
<span lang="EN">EXAMPLE → For Year One, TP, an individual, recognized $5,000 in long-term capital gains and $3,000 in long-term capital losses; TP has no other capital gains or losses; the long-term capital losses are fully deductible and offset the long-term capital gains; TP has a “net capital gain” of $2,000 (which will be taxed at a preferential rate under 1(h).</span> <br />
<br />
<span lang="EN">TP also recognized $4,000 in short-term capital gains and $9,000 in short-term capital losses in Year One; the total capital losses in Year One ($12,000) exceed the total capital gains ($9,000) by $3,000. Under 1211(b), however, TP may deduct all of the capital losses in Year One because this excess does not exceed $3,000; the $12,000 deduction will offset all of TP’s capital gains ($9,000) and even $3,000 of ordinary income from Year One.</span> <br />
<br />
{| class="wikitable"<br />
| <br />
|<span lang="EN">Long-Term</span><br />
|<span lang="EN">Short-Term</span><br />
|<span lang="EN">TOTALS</span><br />
|-<br />
|<span lang="EN">Gains</span><br />
|<span lang="EN">$5,000</span><br />
|<span lang="EN">$4,000</span><br />
|<span lang="EN">$9,000</span><br />
|-<br />
|<span lang="EN">Losses</span><br />
|<span lang="EN">($3,000)</span><br />
|<span lang="EN">($9,000)</span><br />
|<span lang="EN">$12,000</span><br />
|-<br />
|<span lang="EN">Net</span><br />
|<span lang="EN">$2,000</span><br />
|<span lang="EN">($5,000)</span><br />
|<span lang="EN">($3,000)</span><br />
|} <br />
<br />
<span lang="EN">If total capital losses exceeds total capital gains by more than $3,000, under 1211(b), TP can deduct $3,000 of this excess in Year One; the remaining $$ comproses TP’s “net capital loss” → under 1212(b), that net capital loss will carry over to Year Two; to determine the flavor of the carryover amount 1212(b)(2)(A) tells us to treat the $3,000 bonus as a short-term capital gain.</span><br />
<br />
<span lang="EN">● In Year Two, the entire $$ carryover will be flavored as a short-term capital loss and TP can use that carryover amount to offset capital gains (and maybe up to $3,000 of ordinary income) recognized in Year Two.</span><br />
<br />
'''<span lang="EN">Transactions in Property</span>''' <br />
<br />
{| class="wikitable"<br />
|<span lang="EN">Amount Realized (AR)</span><br />
<br />
<span lang="EN">- Adjusted Basis (AB)</span><br />
<br />
<span lang="EN">------------------------------</span><br />
<br />
<span lang="EN">Realized Gain (RG)</span><br />
|} <br />
{| class="wikitable"<br />
| <span lang="EN">Adjusted Basis (AB)</span><br />
<br />
<span lang="EN">- Amount Realized (AR)</span><br />
<br />
<span lang="EN">------------------------------</span><br />
<br />
<span lang="EN">Realized Loss (RL)</span><br />
|}<br />
<br />
<br />
'''<span lang="EN">The Impact of Debt Relief on Amount Realized</span>'''<br />
<br />
''<span lang="EN">1001; 1012; 1014(a); 1016(a)</span>''<br />
<br />
<span lang="EN">Recourse debt → one in which the lender has recourse against more than just property securing the loan; the borrower is personally on the hook for the money</span> <br />
<br />
<span lang="EN">Nonrecourse debt → debt where the lender can go after the collateral on the loan (usually property) but not the borrower individually.</span> <br />
<br />
'''''<span lang="EN">Debt incurred is included in basis and any relief from that debt is included in amount realized.</span>''''' <br />
<br />
'''<span lang="EN">For recourse debt…</span>''' <br />
<br />
<span lang="EN">EXAMPLE → A borrows $200 from the bank and uses $300 of her own funds to purchase a capital asset for $500 (agreed to recourse debt)</span><br />
<br />
# <span lang="EN">Borrowing $200 from the bank does not give rise to gross income for A, because A’s repayment obligation offsets any “accession to wealth” from receipt of the loan proceeds</span><br />
# <span lang="EN">Because A’s repayment obligation to Bank is part of her “cost” in acquiring the purchased asset, A’s basis in the asset is now $500.</span><br />
# <span lang="EN">IF A sells the purchased asset 13 months later to an unrelated buyer and the FMV is $900 →</span><br />
# <span lang="EN">STEP<br />
ONE: GROSS INCOME</span><br />
## '''''<span lang="EN">How much will the buyer pay for the asset?</span>''''' <span lang="EN">Since the asset still secures A’s repayment obligation, the buyer will not pay the full $900 to A; if A defaults, the Bank would foreclose on the asset and the buyer could lose $200 of the asset’s value to the bank; buyer will either '''assume the debt''' and pay the seller an amount of cash equal to the excess of the asset’s value over the amount of the debt, or the buyer will take the property '''subject to the seller’s liability''' and pay the seller an amount of cash equal to the seller’s equity</span><br />
### <span lang="EN">Buyer here would pay $700 to A and either assume the liability to the Bank or take the property subject to the risk of A’s default</span><br />
## '''''<span lang="EN">What is the amount realized by A?</span>''''' <span lang="EN">The amount of a recourse liability secured by transferred property is included in the seller’s amount realized; the liability has shifted to the buyer and is no longer the seller’s problem.</span><br />
### <span lang="EN">A’s amount realized is $900 ($700 cash and $200 debt relief) no matter whether the buyer assumes the debt or takes the asset subject to the debt</span><br />
## '''''<span lang="EN">What is the flavor of A’s gain?</span>''''' <span lang="EN">By disposing of the debt in the same transaction as the underlying capital asset, the gain allocable to the debt relief piggybacks onto the flavor of the transferred asset.</span><br />
### <span lang="EN">With an amount realized of $900, A realizes a gain of $400 on the sale (amount realized of $900 less adjusted basis of $500); treated as a long-term capital gain since it was held for 13 months and will get preferential tax treatment under 1(h)</span><br />
### <span lang="EN">The entire gain is eligible for the preferential tax treatment even though a portion is allocable to A’s debt relief, this is different than if the Bank forgave or cancelled the debt (treated as COD income and ordinary income under 1).</span> <br />
<br />
<span lang="EN">IF the amount of the debt is higher than the value of the asset → if the lender agrees not to pursue a claim against the seller for the difference, the lender effectively relieves the seller of the excess debt which would then be treated as COD income.</span> <br />
<br />
'''<span lang="EN">BUT for nonrecourse debt...</span>''' <br />
<br />
<u><span lang="EN">Crane v. Commissioner (1947)</span></u> <span lang="EN">- SCOTUS</span><br />
<br />
<span lang="EN">RULE: The amount realized in the disposition of property subject to an unassumed mortgage includes the amount of the mortgage.</span><br />
<br />
<span lang="EN">Case Notes:</span> <br />
<br />
<span lang="EN">● A taxpayer’s gain from the disposition of property is calculated by subtracting the adjusted basis from the amount realized.</span> <br />
<br />
<span lang="EN">● The adjusted basis is found by adjusting the original basis for certain factors, such as depreciation; the amount realized is calculated by adding any money and property received.</span> <br />
<br />
<span lang="EN">● Where the taxpayer receives the property from a decedent’s estate, the original basis is the fair market value at the time of receipt.</span> <br />
<br />
<span lang="EN">● In order to ascertain the adjusted basis and amount realized for the property, it is first necessary to determine what the term “property” refers to.</span> <br />
<br />
<span lang="EN">○ First, the plain meaning of the term suggests that “property” refers to the physical thing that is owned.</span> <br />
<br />
<span lang="EN">○ Second, administrative regulations have used the term to refer to physical property.</span> <br />
<br />
<span lang="EN">○ Third, in other provisions of the Revenue Code, Congress clearly distinguishes between property and equity and there is no indication that Congress interchanges the two terms.</span> <br />
<br />
<span lang="EN">○ Finally, if property referred to equity, depreciation deductions based on equity would be miniscule; or, if depreciation deductions were based on the actual value of the property and deducted from an equity basis, negative deductions would result.</span> <br />
<br />
<span lang="EN">● Interpreting the term to mean equity would negate the purpose of allowing depreciation deductions in the first place.</span> <br />
<br />
<span lang="EN">● If property is based on equity, the taxpayer’s basis would change every time a mortgage payment is made, causing a great administrative burden on both the Commissioner and taxpayers.</span> <br />
<br />
<span lang="EN">● It makes no difference whether the taxpayer is personally liable for the mortgage or not. A taxpayer who sells property subject to a mortgage receives a benefit equal to the value of the mortgage.</span> <br />
<br />
<span lang="EN">● It is not unconstitutional to adjust TP’s cost basis by the amount of the depreciation deductions TP took on the property, in order to determine how much TP has gained from the sale.</span> <br />
<br />
<u><span lang="EN">Commissioner v. Tufts (1983)</span></u> <span lang="EN">- SCOTUS</span><br />
<br />
<span lang="EN">RULE: The amount realized in the disposition of property subject to a nonrecourse mortgage includes the entire amount of the mortgage regardless of whether the mortgage exceeds the fair market value of the property.</span> <br />
<br />
<span lang="EN">Case Notes:</span><br />
<br />
<span lang="EN">● In <u>Crane</u>, this Court held that a taxpayer who sells property subject to a nonrecourse mortgage must include the unpaid balance of the mortgage in the amount realized.</span> <br />
<br />
<span lang="EN">● Generally, with a nonrecourse mortgage, the mortgager is not personally liable for the loan. The mortgage is secured by property, so that the mortgager is only liable up to the fair market value of the property.</span> <br />
<br />
<span lang="EN">● Upon sale of the property subject to a nonrecourse loan, the mortgager must calculate the amount realized.</span> <br />
<br />
<span lang="EN">● The amount realized includes the sum of money and property received, as well as any debts the mortgager is relieved of through the transaction.</span> <br />
<br />
<span lang="EN">● Though a taxpayer could technically only be relieved of liability equal in value to the fair market value of the property, the mortgager must include the entire amount of the unpaid mortgage in the amount realized. This is because the taxpayer receives certain benefits based on the assumption that the taxpayer is obligated to repay the entire nonrecourse mortgage.</span> <br />
<br />
<span lang="EN">● For instance, the taxpayer receives a nonrecourse mortgage tax-free, since it is money the taxpayer must eventually pay back. If, after receiving the mortgage tax-free, the taxpayer does not include the entire unpaid loan in the amount realized upon disposition of the property, he receives the amount in excess of the fair market value of the property tax-free.</span> <br />
<br />
<span lang="EN">● A taxpayer is allowed to include the entire amount of a nonrecourse loan in his cost basis of the property because he is expected to repay the entire loan. If he is not correspondingly required to include the entire unpaid loan in the amount realized, the taxpayer would receive an untaxed increase in basis.</span> <br />
<br />
<span lang="EN">● To prevent such incongruities, a taxpayer must include the entire unpaid amount of a nonrecourse mortgage in his amount realized, regardless of whether the mortgage exceeds the fair market value of the property.</span> <br />
<br />
'''<span lang="EN">Flavor</span>''' <br />
<br />
'''<span lang="EN">Capital Assets</span>''' <br />
<br />
''<span lang="EN">1221(a); 1222; 1223</span>'' <br />
<br />
<span lang="EN">Capital Assets --</span><br />
<br />
<span lang="EN">● Defined in 1221(a); “negative definition” - if not included in list, it '''<u>IS</u>''' a capital asset</span><br />
<br />
<span lang="EN">● Overarching themes:</span><br />
<br />
<span lang="EN">○ Assets that are held to '''produce ordinary income''' are generally not capital assets (this includes inventory and other property held for sale to customers, buildings and equipment used in a business activity, certain IP rights that generate royalties, and supplies consumed in the ordinary course of business)</span><br />
<br />
<span lang="EN">○ Assets where '''gain results from the efforts of the TP''' and not from the mere passage of time are likely not capital assets (such as works of art, etc.)</span> <br />
<br />
<span lang="EN">Section 1221(a)(1) lists three assets that do not qualify as capital assets:</span><br />
<br />
<span lang="EN">(1) Stock in trade; ''(raw materials used to manufacture or produce inventory property)''</span><br />
<br />
<span lang="EN">(2) Inventory property; and</span><br />
<br />
<span lang="EN">(3) Property held primarily for sale to customers in the ordinary course of business</span> <br />
<br />
<u><span lang="EN">Byram v. United States (1983)</span></u> <span lang="EN">- 5th Cir.</span><br />
<br />
<span lang="EN">RULE: For federal tax purposes, property held primarily for sale to customers in the ordinary course of business is ordinary income rather than a capital asset.</span><br />
<br />
<span lang="EN">Case Notes:</span> <br />
<br />
<span lang="EN">● Property held primarily for sale to customers in the ordinary course of a taxpayer’s business is not a capital asset, thus subjecting it to a higher rate of taxation as ordinary income.</span> <br />
<br />
<span lang="EN">● The issue of whether a taxpayer is holding property for sale to customers in the ordinary course of business is a factual issue of intent.</span> <br />
<br />
<span lang="EN">● Seven-factor test to determine that TP’s purpose for holding the realty was not primarily for sale to customers in the ordinary course of his business; “seven pillars of capital gains treatment”</span><br />
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<span lang="EN">(1) The nature and purpose of the acquisition of the property and the duration of the ownership;</span><br />
<br />
<span lang="EN">(2) The extent and nature of the TP’s efforts to sell the property;</span><br />
<br />
<span lang="EN">(3) The number, extent, continuity and substantiality of the sales; (IMPORTANT)</span><br />
<br />
<span lang="EN">(4) The extent of subdividing, developing, and advertising to increase sales;</span><br />
<br />
<span lang="EN">(5) The use of a business office for the sale of the property;</span><br />
<br />
<span lang="EN">(6) The character and degree of supervision or control exercised by the TP over any representative selling the property; and</span><br />
<br />
<span lang="EN">(7) The time and effort the TP habitually devoted to the sales.</span> <br />
<br />
<span lang="EN">● These factors are known as the <u>Winthrop</u> factors and are not all weighed the same</span><br />
<br />
<span lang="EN">● </span> <br />
<br />
{| class="wikitable"<br />
|'''<u><span lang="EN">Winthrop</span></u> <span lang="EN">Factors</span>'''<br />
<br />
<span lang="EN">(1) The nature and purpose of the acquisition of the property and the duration of the ownership;</span><br />
<br />
<span lang="EN">(2) The extent and nature of the TP’s efforts to sell the property;</span><br />
<br />
<span lang="EN">(3) The number, extent, continuity and substantiality of the sales; (IMPORTANT)</span><br />
<br />
<span lang="EN">(4) The extent of subdividing, developing, and advertising to increase sales;</span><br />
<br />
<span lang="EN">(5) The use of a business office for the sale of the property;</span><br />
<br />
<span lang="EN">(6) The character and degree of supervision or control exercised by the TP over any representative selling the property; and</span><br />
<br />
<span lang="EN">(7) The time and effort the TP habitually devoted to the sales.</span> <br />
|} <br />
'''<span lang="EN">Futures contract→ a contract to buy a fixed amount of a commodity at a set price at some specific date in the future (e.g. a buyer promises to buy a seller’s corn at $10 per bushel in three months); the seller benefits because the seller knows the prices at which the product can be sold, and the buyer benefits because there is a fixed price for the manufacturing inputs and the buyer can plan accordingly.</span>'''<br />
<span lang="EN">Many investors buy futures, not for the product, but for the bet on whether the price of the underlying commodity will rise or fall</span><br />
<br />
<span lang="EN">● if the price of a commodity goes up, the long future is worth more because a person could purchase the product for less than the sales price agreed to in the contract</span><br />
<br />
<span lang="EN">● if the price goes down, below the future price, the future is worthless because you can buy the product on the open market</span> <br />
<br />
<u><span lang="EN">Corn Products Refining Co. v. Commissioner (1955)</span></u> <span lang="EN">- SCOTUS</span><br />
<br />
<span lang="EN">RULE: For federal tax purposes, assets held by a business to hedge operating risks are not capital assets.</span> <br />
<br />
<span lang="EN">Case Notes:</span><br />
<br />
<span lang="EN">● Assets bought and sold to hedge risks associated with an operating business are not capital assets under 26 U.S.C. § 1221.</span> <br />
<br />
<span lang="EN">● If a taxpayer’s ordinary business activities involve hedging what might otherwise be considered capital assets, such as real estate or securities, the taxpayer’s gains or losses from the sale of those assets constitute ordinary income or losses, not capital gains or losses.</span> <br />
<br />
<span lang="EN">● Investments, including investments in futures-commodity contracts, are capital assets.</span><br />
<br />
<span lang="EN">● <u>Corn Products</u> does not create a common-law exception to the definition of capital asset but instead found that the futures were surrogates for inventory</span><br />
<br />
<span lang="EN">● Definition of “capital asset” must be construed narrowly and its exceptions defined broadly</span> <br />
<br />
<u><span lang="EN">Arkansas Best</span></u> <span lang="EN">→ motivation of the customer is irrelevant; if it falls within the definition, the gain or sale will be capital</span> <br />
<br />
'''<span lang="EN">Section 1221(a)(7)</span>''' <span lang="EN">→ now specifically excludes from the definition of capital asset “hedging transactions” identified by the TP</span> <br />
<br />
'''<span lang="EN">Section 1221(a)(8)</span>''' <span lang="EN">→ excludes supplies regularly used by the TP in a trade or business.</span> <br />
<br />
'''<span lang="EN">Section 1237</span>''' <span lang="EN">→ Safe harbor for those who own real property to retain investment status rather than being treated like a broker.</span> <br />
<br />
'''<span lang="EN">Holding Periods</span>''' <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code § 1222 - Other terms relating to capital gains and losses</span>'''<br />
<br />
'''<span lang="EN">For purposes of this subtitle—</span>''' <br />
<br />
'''<span lang="EN">(1) Short-term capital gain. The term “short-term capital gain” means gain from the sale or exchange of a capital asset held for not more than 1 year, if and to the extent such gain is taken into account in computing gross income.</span>'''<br />
<br />
'''<span lang="EN">(2) Short-term capital loss. The term “short-term capital loss” means loss from the sale or exchange of a capital asset held for not more than 1 year, if and to the extent that such loss is taken into account in computing taxable income.</span>'''<br />
<br />
'''<span lang="EN">(3) Long-term capital gain. The term “long-term capital gain” means gain from the sale or exchange of a capital asset held for more than 1 year, if and to the extent such gain is taken into account in computing gross income.</span>'''<br />
<br />
'''<span lang="EN">(4) Long-term capital loss. The term “long-term capital loss” means loss from the sale or exchange of a capital asset held for more than 1 year, if and to the extent that such loss is taken into account in computing taxable income.</span>'''<br />
<br />
'''<span lang="EN">(5) Net short-term capital gain. The term “net short-term capital gain” means the excess of short-term capital gains for the taxable year over the short-term capital losses for such year.</span>'''<br />
<br />
'''<span lang="EN">(6) Net short-term capital loss. The term “net short-term capital loss” means the excess of short-term capital losses for the taxable year over the short-term capital gains for such year.</span>'''<br />
<br />
'''<span lang="EN">(7) Net long-term capital gain. The term “net long-term capital gain” means the excess of long-term capital gains for the taxable year over the long-term capital losses for such year.</span>'''<br />
<br />
'''<span lang="EN">(8) Net long-term capital loss. The term “net long-term capital loss” means the excess of long-term capital losses for the taxable year over the long-term capital gains for such year.</span>'''<br />
<br />
'''<span lang="EN">(9) Capital gain net income. The term “capital gain net income” means the excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges.</span>'''<br />
<br />
'''<span lang="EN">(10) Net capital loss. The term “net capital loss” means the excess of the losses from sales or exchanges of capital assets over the sum allowed under section 1211. In the case of a corporation, for the purpose of determining losses under this paragraph, amounts which are short-term capital losses under section 1212(a)(1) shall be excluded.</span>'''<br />
<br />
'''<span lang="EN">(11) Net capital gain. The term “net capital gain” means the excess of the net long-term capital gain for the taxable year over the net short-term capital loss for such year.</span>'''<br />
|} <br />
<br />
<span lang="EN">Section 1222 → requires netting of “long-term” and “short-term” capital gains and losses; in certain situations, a TP may add the holding period of another owner or add the holding period from another asset. (TACKING RELEVANT FOR DETERMINING WHETHER THE 13 MONTH MINIMUM FOR LONG TERM HAS BEEN MET)</span> <br />
<br />
<span lang="EN">Section 1223 → lists various situations where “tacking” of holding periods is allowed; unless one of these situations is present, a TP’s holding period begins upon acquisition.</span><br />
<br />
<span lang="EN">● For example, if a TP exchanges one capital asset for another in a transaction in which the taxpayer does not recognize gain or loss (a so-called “nonrecognition transaction” → NRT), the TP usually takes the new asset with a basis equal to the TP’s basis in the property surrendered (i.e. the gain or loss from the surrendered asset is preserved in the acquired asset”</span><br />
<br />
<span lang="EN">● 1223(1) → the TP’s holding period in the surrendered asset also carries over to the acquired asset; if a TP exchanges an asset held for five years for another capital asset in a NRT, the newly acquired asset is deemed to have been held for five years (and immediate sale would produce long-term cap gain or loss).</span> <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code § 1223 - Holding period of property</span>'''<br />
<br />
'''<span lang="EN">For purposes of this subtitle—</span>''' <br />
<br />
'''<span lang="EN">(1) In determining the period for which the taxpayer has held property received in an exchange, there shall be included the period for which he held the property exchanged if, under this chapter, the property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as the property exchanged, and, in the case of such exchanges the property exchanged at the time of such exchange was a capital asset as defined in section 1221 or property described in section 1231. For purposes of this paragraph—</span>'''<br />
<br />
'''<span lang="EN"> (A) an involuntary conversion described in section 1033 shall be considered an exchange of the property converted for the property acquired, and</span>'''<br />
<br />
'''<span lang="EN"> (B) a distribution to which section 355 (or so much of section 356 as relates to section 355) applies shall be treated as an exchange.</span>''' <br />
<br />
'''<span lang="EN">(2) In determining the period for which the taxpayer has held property however acquired there shall be included the period for which such property was held by any other person, if under this chapter such property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as it would have in the hands of such other person.</span>''' <br />
<br />
'''<span lang="EN">(3) In determining the period for which the taxpayer has held stock or securities the acquisition of which (or the contract or option to acquire which) resulted in the nondeductibility (under section 1091 relating to wash sales) of the loss from the sale or other disposition of substantially identical stock or securities, there shall be included the period for which he held the stock or securities the loss from the sale or other disposition of which was not deductible.</span>''' <br />
<br />
'''<span lang="EN">(4) In determining the period for which the taxpayer has held stock or rights to acquire stock received on a distribution, if the basis of such stock or rights is determined under section 307, there shall (under regulations prescribed by the Secretary) be included the period for which he held the stock in the distributing corporation before the receipt of such stock or rights upon such distribution.</span>''' <br />
<br />
'''<span lang="EN">(5) In determining the period for which the taxpayer has held stock or securities acquired from a corporation by the exercise of rights to acquire such stock or securities, there shall be included only the period beginning with the date on which the right to acquire was exercised.</span>''' <br />
<br />
'''<span lang="EN">[(6) Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(80)(C), Dec. 19, 2014, 128 Stat. 4049.]</span>''' <br />
<br />
'''<span lang="EN">(7) In determining the period for which the taxpayer has held a commodity acquired in satisfaction of a commodity futures contract (other than a commodity futures contract to which section 1256 applies) there shall be included the period for which he held the commodity futures contract if such commodity futures contract was a capital asset in his hands.</span>''' <br />
<br />
'''<span lang="EN">[(8) Repealed. Pub. L. 113–295, div. A, title II, § 221(a)(80)(C), Dec. 19, 2014, 128 Stat. 4049.]</span>''' <br />
<br />
'''<span lang="EN">(9) In the case of a person acquiring property from a decedent or to whom property passed from a decedent (within the meaning of section 1014(b)), if—</span>'''<br />
<br />
'''<span lang="EN"> (A) the basis of such property in the hands of such person is determined under section 1014, and</span>'''<br />
<br />
'''<span lang="EN"> (B) such property is sold or otherwise disposed of by such person within 1 year after the decedent’s death,</span>'''<br />
<br />
'''<span lang="EN">then such person shall be considered to have held such property for more than 1 year.</span>''' <br />
<br />
'''<span lang="EN">(10) If—</span>'''<br />
<br />
'''<span lang="EN"> (A) property is acquired by any person in a transfer to which section 1040 applies,</span>'''<br />
<br />
'''<span lang="EN"> (B) such property is sold or otherwise disposed of by such person within 1 year after the decedent’s death, and</span>'''<br />
<br />
'''<span lang="EN"> (C) such sale or disposition is to a person who is a qualified heir (as defined in section 2032A(e)(1)) with respect to the decedent,</span>'''<br />
<br />
'''<span lang="EN">then the person making such sale or other disposition shall be considered to have held such property for more than 1 year.</span>''' <br />
<br />
'''<span lang="EN">(11) In determining the period for which the taxpayer has held qualified replacement property (within the meaning of section 1042(b)) the acquisition of which resulted under section 1042 in the nonrecognition of any part of the gain realized on the sale of qualified securities (within the meaning of section 1042(b)), there shall be included the period for which such qualified securities had been held by the taxpayer.</span>''' <br />
<br />
'''<span lang="EN">(12) In determining the period for which the taxpayer has held property the acquisition of which resulted under section 1043 in the nonrecognition of any part of the gain realized on the sale of other property, there shall be included the period for which such other property had been held as of the date of such sale.</span>''' <br />
<br />
'''<span lang="EN">(13) Except for purposes of sections 1202(a)(2), 1202(c)(2)(A), 1400B(b), and 1400F(b), in determining the period for which the taxpayer has held property the acquisition of which resulted under section 1045 or 1397B in the nonrecognition of any part of the gain realized on the sale of other property, there shall be included the period for which such other property has been held as of the date of such sale.</span>''' <br />
<br />
'''<span lang="EN">(14) If the security to which a securities futures contract (as defined in section 1234B) relates (other than a contract to which section 1256 applies) is acquired in satisfaction of such contract, in determining the period for which the taxpayer has held such security, there shall be included the period for which the taxpayer held such contract if such contract was a capital asset in the hands of the taxpayer.</span>''' <br />
<br />
'''<span lang="EN">(15) Cross reference.— For special holding period provision relating to certain partnership distributions, see section 735(b).</span>'''<br />
|} <br />
<br />
'''<span lang="EN">The Sale or Exchange Requirement</span>'''<br />
<br />
''<span lang="EN">1222</span>'' <br />
<br />
<span lang="EN">Section 1222 → states that a capital gain or capital loss arises only upon the “sale or exchange” of a capital asset</span><br />
<br />
<span lang="EN">● If a TP disposes of a capital asset in a transaction not properly characterized as a sale or exchange, any resulting fain would be ordinary income (BAD) any any realized loss would be ordinary loss (OK, GOOD).</span><br />
<br />
<span lang="EN">● The requirement '''must be narrower''' than the requirement of a “sale or disposition of property” under 1001(a) (the provision providing the basic formula for computing realized gains and losses)</span><br />
<br />
<span lang="EN">● There are ways to dispose of property other than by sale or exchange (abandonment, forfeiture, etc.)</span><br />
<br />
<span lang="EN">● There are no overt rationale for limiting capital gain or loss characterization only to property dispositions that constitute a sale or exchange.</span> <br />
<br />
'''<span lang="EN">Depreciation Recapture</span>''' <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code § 1245 - Gain from dispositions of certain depreciable property</span>'''<br />
<br />
'''<span lang="EN">(a) General rule</span>'''<br />
<br />
'''<span lang="EN"> (1) Ordinary income. Except as otherwise provided in this section, if section 1245 property is disposed of the amount by which the lower of—</span>'''<br />
<br />
'''<span lang="EN"> (A) the recomputed basis of the property, or</span>'''<br />
<br />
'''<span lang="EN"> (B)</span>'''<br />
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'''<span lang="EN"> (i) in the case of a sale, exchange, or involuntary conversion, the amount realized, or</span>'''<br />
<br />
'''<span lang="EN"> (ii) in the case of any other disposition, the fair market value of such property,</span>'''<br />
<br />
'''<span lang="EN">exceeds the adjusted basis of such property shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.</span>'''<br />
<br />
'''<span lang="EN"> (2) Recomputed basis. For purposes of this section—</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. The term “recomputed basis” means, with respect to any property, its adjusted basis recomputed by adding thereto all adjustments reflected in such adjusted basis on account of deductions (whether in respect of the same or other property) allowed or allowable to the taxpayer or to any other person for depreciation or amortization.</span>'''<br />
<br />
'''<span lang="EN"> (B) Taxpayer may establish amount allowed. For purposes of subparagraph (A), if the taxpayer can establish by adequate records or other sufficient evidence that the amount allowed for depreciation or amortization for any period was less than the amount allowable, the amount added for such period shall be the amount allowed.</span>'''<br />
<br />
'''<span lang="EN"> (C) Certain deductions treated as amortization. Any deduction allowable under section 179, 179B, 179C, 179D, 179E, 181, 190, 193, or 194 shall be treated as if it were a deduction allowable for amortization.</span>'''<br />
<br />
'''<span lang="EN"> (3) Section 1245 property. For purposes of this section, the term “section 1245 property” means any property which is or has been property of a character subject to the allowance for depreciation provided in section 167 and is either—</span>'''<br />
<br />
'''<span lang="EN"> (A) personal property,</span>'''<br />
<br />
'''<span lang="EN"> (B) other property (not including a building or its structural components) but only if such other property is tangible and has an adjusted basis in which there are reflected adjustments described in paragraph (2) for a period in which such property (or other property)—</span>'''<br />
<br />
'''<span lang="EN"> (i) was used as an integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electrical energy, gas, water, or sewage disposal services,</span>'''<br />
<br />
'''<span lang="EN"> (ii) constituted a research facility used in connection with any of the activities referred to in clause (i), or</span>'''<br />
<br />
'''<span lang="EN"> (iii) constituted a facility used in connection with any of the activities referred to in clause (i) for the bulk storage of fungible commodities (including commodities in a liquid or gaseous state),</span>'''<br />
<br />
'''<span lang="EN"> (C) so much of any real property (other than any property described in subparagraph (B)) which has an adjusted basis in which there are reflected adjustments for amortization under section 169, 179, 179B, 179C, 179D, 179E, 185,[1] 188 (as in effect before its repeal by the Revenue Reconciliation Act of 1990), 190, 193, or 194,[2]</span>'''<br />
<br />
'''<span lang="EN"> (D) a single purpose agricultural or horticultural structure (as defined in section 168(i)(13)),</span>'''<br />
<br />
'''<span lang="EN"> (E) a storage facility (not including a building or its structural components) used in connection with the distribution of petroleum or any primary product of petroleum, or</span>'''<br />
<br />
'''<span lang="EN"> (F) any railroad grading or tunnel bore (as defined in section 168(e)(4)).</span>''' <br />
<br />
'''<span lang="EN">(b) Exceptions and limitations</span>'''<br />
<br />
'''<span lang="EN"> (1) Gifts. Subsection (a) shall not apply to a disposition by gift.</span>'''<br />
<br />
'''<span lang="EN"> (2) Transfers at death. Except as provided in section 691 (relating to income in respect of a decedent), subsection (a) shall not apply to a transfer at death.</span>'''<br />
<br />
'''<span lang="EN"> (3) Certain tax-free transactions. If the basis of property in the hands of a transferee is determined by reference to its basis in the hands of the transferor by reason of the application of section 332, 351, 361, 721, or 731, then the amount of gain taken into account by the transferor under subsection (a)(1) shall not exceed the amount of gain recognized to the transferor on the transfer of such property (determined without regard to this section). Except as provided in paragraph (6), this paragraph shall not apply to a disposition to an organization (other than a cooperative described in section 521) which is exempt from the tax imposed by this chapter.</span>'''<br />
<br />
'''<span lang="EN"> (4) Like kind exchanges; involuntary conversions, etc.If property is disposed of and gain (determined without regard to this section) is not recognized in whole or in part under section 1031 or 1033, then the amount of gain taken into account by the transferor under subsection (a)(1) shall not exceed the sum of—</span>'''<br />
<br />
'''<span lang="EN"> (A) the amount of gain recognized on such disposition (determined without regard to this section), plus</span>'''<br />
<br />
'''<span lang="EN"> (B) the fair market value of property acquired which is not section 1245 property and which is not taken into account under subparagraph (A).</span>'''<br />
<br />
'''<span lang="EN"> (5) Property distributed by a partnership to a partner</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. For purposes of this section, the basis of section 1245 property distributed by a partnership to a partner shall be deemed to be determined by reference to the adjusted basis of such property to the partnership.</span>'''<br />
<br />
'''<span lang="EN"> (B) Adjustments added back. In the case of any property described in subparagraph (A), for purposes of computing the recomputed basis of such property the amount of the adjustments added back for periods before the distribution by the partnership shall be—</span>'''<br />
<br />
'''<span lang="EN"> (i) the amount of the gain to which subsection (a) would have applied if such property had been sold by the partnership immediately before the distribution at its fair market value at such time, reduced by</span>'''<br />
<br />
'''<span lang="EN"> (ii) the amount of such gain to which section 751(b) applied.</span>'''<br />
<br />
'''<span lang="EN"> (6) Transfers to tax-exempt organization where property will be used in unrelated business</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. The second sentence of paragraph (3) shall not apply to a disposition of section 1245 property to an organization described in section 511(a)(2) or 511(b)(2) if, immediately after such disposition, such organization uses such property in an unrelated trade or business (as defined in section 513).</span>'''<br />
<br />
'''<span lang="EN"> (B) Later change in use. If any property with respect to the disposition of which gain is not recognized by reason of subparagraph (A) ceases to be used in an unrelated trade or business of the organization acquiring such property, such organization shall be treated for purposes of this section as having disposed of such property on the date of such cessation.</span>'''<br />
<br />
'''<span lang="EN"> (7) Timber property. In determining, under subsection (a)(2), the recomputed basis of property with respect to which a deduction under section 194 was allowed for any taxable year, the taxpayer shall not take into account adjustments under section 194 to the extent such adjustments are attributable to the amortizable basis of the taxpayer acquired before the 10th taxable year preceding the taxable year in which gain with respect to the property is recognized.</span>'''<br />
<br />
'''<span lang="EN"> (8) Disposition of amortizable section 197 intangibles</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. If a taxpayer disposes of more than 1 amortizable section 197 intangible (as defined in section 197(c)) in a transaction or a series of related transactions, all such amortizable 197 intangibles shall be treated as 1 section 1245 property for purposes of this section.</span>'''<br />
<br />
'''<span lang="EN"> (B) Exception. Subparagraph (A) shall not apply to any amortizable section 197 intangible (as so defined) with respect to which the adjusted basis exceeds the fair market value.</span>'''<br />
<br />
'''<span lang="EN">(c) Adjustments to basis. The Secretary shall prescribe such regulations as he may deem necessary to provide for adjustments to the basis of property to reflect gain recognized under subsection (a).</span>'''<br />
<br />
'''<span lang="EN">(d) Application of section. This section shall apply notwithstanding any other provision of this subtitle.</span>'''<br />
|} <br />
<br />
<span lang="EN">Section 1245 → error-correcting device</span><br />
<br />
<span lang="EN">● When a TP takes a depreciation on property, the TP’s basis is reduced by the amount of the depreciation</span><br />
<br />
<span lang="EN">● If the TP later sells that asset for more than the basis, at least some of that gain is, by definition, due to the previously taken depreciation</span><br />
<br />
<span lang="EN">● The TP took more depreciation than economic depreciation would have allowed so now they must pay tax on the difference</span><br />
<br />
<span lang="EN">● Applies to machines, equipment, and vehicles</span> <br />
<br />
<span lang="EN">FIRST calculate your realized gain</span><br />
<br />
<span lang="EN">THEN calculate your recapture amount (amount realized - recomputed basis)</span><br />
<br />
<span lang="EN">RESULTING NUMBER tells you how much is allowed to be treated as capital gain (rather than ordinary income)</span> <br />
<br />
<span lang="EN">Recomputed basis amount → take current actual basis and add it to any depreciation deductions you have received.</span> <br />
<br />
<span lang="EN">If RESULTING NUMBER is a negative/loss (below zero) → all of your gain will be ordinary income</span> <br />
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<span lang="EN">Recapture only comes into play when you have a gain, it does not apply where there is a loss (if the realized gain/first calculation comes up as a loss, don’t even move on to recapture amount)</span> <br />
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<span lang="EN">EXAMPLE → A acquires depreciable equipment for use in their business at a cost of $100,000, makes no 179 election, and properly plans to claim straight-line depreciation deductions of $10,000 each year for 10 years; after 3 years of depreciation deductions, and ignoring the half-year convention, the TP’s basis in the equipment is $70,000.</span> <br />
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<span lang="EN">If TP sells the equipment to an unrelated buyer for $80,000 cash, TP realizes and recognizes $10,000 of gain (but what is the flavor?)</span> <br />
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<span lang="EN">● Under 1221(a)(2) → not a capital asset</span> <br />
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<span lang="EN">● BUT because TP held the equipment for more than a year, the gain is properly treated as a 1231 gain</span><br />
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<span lang="EN">● That means '''there is a chance''' the gain could be treated as long-term capital gain under 1231(a)(1)</span> <br />
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<span lang="EN">BUT the $10,000 gain is entirely due to the fact that TP received a $10,000 deduction that offset '''ordinary income'''; to the extent the depreciation deduction was used to offset ordinary income, fairness dictates that gain attributable solely to depreciation should be treated as ordinary income and not long-term capital gain.</span> <br />
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<span lang="EN">In this example, 1245 would recharacterize the flavor of the gain as ordinary income</span><br />
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<span lang="EN">● Under 1245(a)(1) → gain attributable to depreciation deductions (and not economic appreciation) '''must be''' taxed as ordinary income</span><br />
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<span lang="EN">● This recharacterization of the gain is known as “'''depreciation recapture'''” → it is triggered by the need to account for the fact that prior depreciation deductions offset ordinary income</span> <br />
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<span lang="EN">Depreciation recapture and 1245</span><br />
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<span lang="EN">● Under 1245 is limited to “section 1245” property (defined in 1245(a)(3)).</span><br />
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<span lang="EN">● 1245(a)(3)(A) encompasses all depreciable personal property</span><br />
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<span lang="EN">● In order to determine the portion of a realized gain that is attributable to prior depreciation deductions, the statute creates a device called '''recomputed basis'''.</span> <br />
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'''<span lang="EN">Recomputed Basis</span>''' <span lang="EN">→ calculated by adding to the adjusted basis all deductions allowed or allowable to the taxpayer or to any other person for depreciation or amortization</span><br />
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<span lang="EN">→ the recomputed basis is then compared to the '''amount realized''' (in the event of a sale, exchange, or involuntary conversion of the property) or the '''fair market value''' of the property (in the case of any other disposition)</span> <br />
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'''''<span lang="EN">The smaller number is then applied against the taxpayer’s adjusted basis to determine the recapture amount, the portion of the gain that must be treated as ordinary income</span>'''''<span lang="EN">.</span> <br />
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<span lang="EN">More 1245 rules →</span><br />
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<span lang="EN">● 1245 does not apply where the taxpayer has a realized loss</span><br />
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<span lang="EN">● 1245 requires the recognition of ordinary income even where the transaction would not otherwise be taxable</span> <br />
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'''<span lang="EN">Depreciation Recapture for Real Property: Section 1250</span>''' <br />
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<span lang="EN">Review:</span><br />
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<span lang="EN">● TPs can depreciate the cost of real property used in a trade or business activity or held for investment</span><br />
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<span lang="EN">● While the underlying land is not depreciable, structures on the land are subject to “exhaustion” or “wear and tear” and thus qualify for depreciation deductions</span><br />
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<span lang="EN">● The depreciation deductions offset ordinary income and reduce the taxpayer’s basis in the subject property</span><br />
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<span lang="EN">● When the taxpayer sells the real property, at least some portion of any resulting gain will be attributable to the prior depreciation deductions</span><br />
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<span lang="EN">● FAIRNESS dictates that the portion of the realized gain attributable to prior depreciation deductions should be treated as ordinary income</span><br />
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<span lang="EN">● Although real property used in a trade or business activity is not a capital asset under 1221(a)(2), gain from the sale of such property qualifies as 1231 gain if the taxpayer has held the property for more than one year under 1231(b)</span><br />
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<span lang="EN">● If the taxpayer’s section 1231 gains exceed the taxpayer’s 1231 losses for the taxable year, the gains and losses are treated as long-term capital gains and losses, meaning any net gain will qualify for preferential tax treatment pursuant to 1231(a)(1).</span> <br />
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<span lang="EN">If the subject real property is held as '''investment property''', it is a capital asset to begin with and the resulting gain is automatically eligible for preferential tax rates if the subject property was held for more than a year, even though the property was depreciable in the hands of the taxpayer.</span> <br />
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<span lang="EN">To permit preferential tax treatment to a gain caused only by the taxpayer’s taking depreciation deductions to offset ordinary income is an unjustified double benefit → 1245 recapture does not apply to most depreciable real property like buildings and their permanent fixtures, SO…</span> <br />
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<span lang="EN">1250</span> <br />
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{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code § 1250 - Gain from dispositions of certain depreciable realty</span>'''<br />
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'''<span lang="EN">(a) General rule. Except as otherwise provided in this section—</span>'''<br />
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'''<span lang="EN"> (1) Additional depreciation after December 31, 1975</span>'''<br />
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'''<span lang="EN"> (A) In general. If section 1250 property is disposed of after December 31, 1975, then the applicable percentage of the lower of—</span>'''<br />
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'''<span lang="EN"> (i) that portion of the additional depreciation (as defined in subsection (b)(1) or (4)) attributable to periods after December 31, 1975, in respect of the property, or</span>'''<br />
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'''<span lang="EN"> (ii) the excess of the amount realized (in the case of a sale, exchange, or involuntary conversion), or the fair market value of such property (in the case of any other disposition), over the adjusted basis of such property,</span>'''<br />
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'''<span lang="EN">shall be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.</span>'''<br />
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'''<span lang="EN"> (B) Applicable percentage. For purposes of subparagraph (A), the term “applicable percentage” means—</span>'''<br />
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'''<span lang="EN"> (i) in the case of section 1250 property with respect to which a mortgage is insured under section 221(d)(3) or 236 of the National Housing Act, or housing financed or assisted by direct loan or tax abatement under similar provisions of State or local laws and with respect to which the owner is subject to the restrictions described in section 1039(b)(1)(B) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990), 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full months;</span>'''<br />
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'''<span lang="EN"> (ii) in the case of dwelling units which, on the average, were held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under the provisions of State or local law authorizing similar levels of subsidy for lower-income families, 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full months;</span>'''<br />
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'''<span lang="EN"> (iii) in the case of section 1250 property with respect to which a depreciation deduction for rehabilitation expenditures was allowed under section 167(k), 100 percent minus 1 percentage point for each full month in excess of 100 full months after the date on which such property was placed in service;</span>'''<br />
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'''<span lang="EN"> (iv) in the case of section 1250 property with respect to which a loan is made or insured under title V of the Housing Act of 1949, 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full months; and</span>'''<br />
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'''<span lang="EN"> (v) in the case of all other section 1250 property, 100 percent. In the case of a building (or a portion of a building devoted to dwelling units), if, on the average, 85 percent or more of the dwelling units contained in such building (or portion thereof) are units described in clause (ii), such building (or portion thereof) shall be treated as property described in clause (ii). Clauses (i), (ii), and (iv) shall not apply with respect to the additional depreciation described in subsection (b)(4) which was allowed under section 167(k).</span>'''<br />
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'''<span lang="EN"> (2) Additional depreciation after December 31, 1969, and before January 1, 1976</span>'''<br />
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'''<span lang="EN"> (A) In general. If section 1250 property is disposed of after December 31, 1969, and the amount determined under paragraph (1)(A)(ii) exceeds the amount determined under paragraph (1)(A)(i), then the applicable percentage of the lower of—</span>'''<br />
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'''<span lang="EN"> (i) that portion of the additional depreciation attributable to periods after December 31, 1969, and before January 1, 1976, in respect of the property, or</span>'''<br />
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'''<span lang="EN"> (ii) the excess of the amount determined under paragraph (1)(A)(ii) over the amount determined under paragraph (1)(A)(i), shall also be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.</span>''' <br />
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'''<span lang="EN"> (B) Applicable percentage. For purposes of subparagraph (A), the term “applicable percentage” means—</span>'''<br />
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'''<span lang="EN"> (i) in the case of section 1250 property disposed of pursuant to a written contract which was, on July 24, 1969, and at all times thereafter, binding on the owner of the property, 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 20 full months;</span>'''<br />
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'''<span lang="EN"> (ii) in the case of section 1250 property with respect to which a mortgage is insured under section 221(d)(3) or 236 of the National Housing Act, or housing financed or assisted by direct loan or tax abatement under similar provisions of State or local laws, and with respect to which the owner is subject to the restrictions described in section 1039(b)(1)(B) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990), 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 20 full months;</span>'''<br />
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'''<span lang="EN"> (iii) in the case of residential rental property (as defined in section 167(j)(2)(B)) other than that covered by clauses (i) and (ii), 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full months;</span>'''<br />
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'''<span lang="EN"> (iv) in the case of section 1250 property with respect to which a depreciation deduction for rehabilitation expenditures was allowed under section 167(k), 100 percent minus 1 percentage point for each full month in excess of 100 full months after the date on which such property was placed in service; and</span>'''<br />
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'''<span lang="EN"> (v) in the case of all other section 1250 property, 100 percent. Clauses (i), (ii), and (iii) shall not apply with respect to the additional depreciation described in subsection (b)(4).</span>'''<br />
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'''<span lang="EN"> (3) Additional depreciation before January 1, 1970</span>'''<br />
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'''<span lang="EN"> (A) In general. If section 1250 property is disposed of after December 31, 1963, and the amount determined under paragraph (1)(A)(ii) exceeds the sum of the amounts determined under paragraphs (1)(A)(i) and (2)(A)(i), then the applicable percentage of the lower of—</span>'''<br />
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'''<span lang="EN"> (i) that portion of the additional depreciation attributable to periods before January 1, 1970, in respect of the property, or</span>'''<br />
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'''<span lang="EN"> (ii) the excess of the amount determined under paragraph (1)(A)(ii) over the sum of the amounts determined under paragraphs (1)(A)(i) and (2)(A)(i), shall also be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.</span>'''<br />
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'''<span lang="EN"> (B) Applicable percentage. For purposes of subparagraph (A), the term “applicable percentage” means 100 percent minus 1 percentage point for each full month the property was held after the date on which the property was held for 20 full months.</span>'''<br />
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'''<span lang="EN"> (4) Special rule. For purposes of this subsection, any reference to section 167(k) or 167(j)(2)(B) shall be treated as a reference to such section as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990.</span>'''<br />
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'''<span lang="EN"> (5) Cross reference. For reduction in the case of corporations on capital gain treatment under this section, see section 291(a)(1).</span>'''<br />
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'''<span lang="EN">(b) Additional depreciation defined. For purposes of this section—</span>'''<br />
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'''<span lang="EN"> (1) In general. The term “additional depreciation” means, in the case of any property, the depreciation adjustments in respect of such property; except that, in the case of property held more than one year, it means such adjustments only to the extent that they exceed the amount of the depreciation adjustments which would have resulted if such adjustments had been determined for each taxable year under the straight line method of adjustment.</span>'''<br />
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'''<span lang="EN"> (2) Property held by lessee. In the case of a lessee, in determining the depreciation adjustments which would have resulted in respect of any building erected (or other improvement made) on the leased property, or in respect of any cost of acquiring the lease, the lease period shall be treated as including all renewal periods. For purposes of the preceding sentence—</span>'''<br />
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'''<span lang="EN"> (A) the term “renewal period” means any period for which the lease may be renewed, extended, or continued pursuant to an option exercisable by the lessee, but</span>'''<br />
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'''<span lang="EN"> (B) the inclusion of renewal periods shall not extend the period taken into account by more than ⅔ of the period on the basis of which the depreciation adjustments were allowed.</span>'''<br />
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'''<span lang="EN"> (3) Depreciation adjustments. The term “depreciation adjustments” means, in respect of any property, all adjustments attributable to periods after December 31, 1963, reflected in the adjusted basis of such property on account of deductions (whether in respect of the same or other property) allowed or allowable to the taxpayer or to any other person for exhaustion, wear and tear, obsolescence, or amortization (other than amortization under section 168 (as in effect before its repeal by the Tax Reform Act of 1976), 169, 185 (as in effect before its repeal by the Tax Reform Act of 1986), 188 (as in effect before its repeal by the Revenue Reconciliation Act of 1990), 190, or 193). For purposes of the preceding sentence, if the taxpayer can establish by adequate records or other sufficient evidence that the amount allowed as a deduction for any period was less than the amount allowable, the amount taken into account for such period shall be the amount allowed.</span>'''<br />
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'''<span lang="EN"> (4) Additional depreciation attributable to rehabilitation expenditures. The term “additional depreciation” also means, in the case of section 1250 property with respect to which a depreciation or amortization deduction for rehabilitation expenditures was allowed under section 167(k) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) or 191 (as in effect before its repeal by the Economic Recovery Tax Act of 1981), the depreciation or amortization adjustments allowed under such section to the extent attributable to such property, except that, in the case of such property held for more than one year after the rehabilitation expenditures so allowed were incurred, it means such adjustments only to the extent that they exceed the amount of the depreciation adjustments which would have resulted if such adjustments had been determined under the straight line method of adjustment without regard to the useful life permitted under section 167(k) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) or 191 (as in effect before its repeal by the Economic Recovery Tax Act of 1981).</span>'''<br />
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'''<span lang="EN"> (5) Method of computing straight line adjustments. For purposes of paragraph (1), the depreciation adjustments which would have resulted for any taxable year under the straight line method shall be determined—</span>'''<br />
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'''<span lang="EN"> (A) in the case of property to which section 168 applies, by determining the adjustments which would have resulted for such year if the taxpayer had elected the straight line method for such year using the recovery period applicable to such property, and</span>'''<br />
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'''<span lang="EN"> (B) in the case any property to which section 168 does not apply, if a useful life (or salvage value) was used in determining the amount allowable as a deduction for any taxable year, by using such life (or value).</span>''' <br />
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'''<span lang="EN">(c) Section 1250 property. For purposes of this section, the term “section 1250 property” means any real property (other than section 1245 property, as defined in section 1245(a)(3)) which is or has been property of a character subject to the allowance for depreciation provided in section 167.</span>'''<br />
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'''<span lang="EN">(d) Exceptions and limitations</span>'''<br />
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'''<span lang="EN"> </span>'''<br />
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'''<span lang="EN"> (1) Gifts. Subsection (a) shall not apply to a disposition by gift.</span>'''<br />
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'''<span lang="EN"> (2) Transfers at death. Except as provided in section 691 (relating to income in respect of a decedent), subsection (a) shall not apply to a transfer at death.</span>'''<br />
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'''<span lang="EN"> (3) Certain tax-free transactions. If the basis of property in the hands of a transferee is determined by reference to its basis in the hands of the transferor by reason of the application of section 332, 351, 361, 721, or 731, then the amount of gain taken into account by the transferor under subsection (a) shall not exceed the amount of gain recognized to the transferor on the transfer of such property (determined without regard to this section). Except as provided in paragraph (9), this paragraph shall not apply to a disposition to an organization (other than a cooperative described in section 521) which is exempt from the tax imposed by this chapter.</span>'''<br />
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'''<span lang="EN"> (4) Like kind exchanges; involuntary conversions, etc.</span>'''<br />
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'''<span lang="EN"> (A) Recognition limit. If property is disposed of and gain (determined without regard to this section) is not recognized in whole or in part under section 1031 or 1033, then the amount of gain taken into account by the transferor under subsection (a) shall not exceed the greater of the following:</span>'''<br />
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'''<span lang="EN"> (i) the amount of gain recognized on the disposition (determined without regard to this section), increased as provided in subparagraph (B), or</span>'''<br />
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'''<span lang="EN"> (ii) the amount determined under subparagraph (C).</span>'''<br />
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'''<span lang="EN"> (B) Increase for certain stock. With respect to any transaction, the increase provided by this subparagraph is the amount equal to the fair market value of any stock purchased in a corporation which (but for this paragraph) would result in nonrecognition of gain under section 1033(a)(2)(A).</span>'''<br />
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'''<span lang="EN"> (C) Adjustment where insufficient section 1250 property is acquired. With respect to any transaction, the amount determined under this subparagraph shall be the excess of—</span>'''<br />
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'''<span lang="EN"> (i) the amount of gain which would (but for this paragraph) be taken into account under subsection (a), over</span>'''<br />
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'''<span lang="EN"> (ii) the fair market value (or cost in the case of a transaction described in section 1033(a)(2)) of the section 1250 property acquired in the transaction.</span>'''<br />
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'''<span lang="EN"> (D) Basis of property acquired. In the case of property purchased by the taxpayer in a transaction described in section 1033(a)(2), in applying section 1033(b)(2), such sentence [1] shall be applied—</span>'''<br />
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'''<span lang="EN"> (i) first solely to section 1250 properties and to the amount of gain not taken into account under subsection (a) by reason of this paragraph, and</span>'''<br />
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'''<span lang="EN"> (ii) then to all purchased properties to which such sentence applies and to the remaining gain not recognized on the transaction as if the cost of the section 1250 properties were the basis of such properties computed under clause (i). In the case of property acquired in any other transaction to which this paragraph applies, rules consistent with the preceding sentence shall be applied under regulations prescribed by the Secretary.</span>'''<br />
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'''<span lang="EN"> (E) Additional depreciation with respect to property disposed of. In the case of any transaction described in section 1031 or 1033, the additional depreciation in respect of the section 1250 property acquired which is attributable to the section 1250 property disposed of shall be an amount equal to the amount of the gain which was not taken into account under subsection (a) by reason of the application of this paragraph.</span>'''<br />
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'''<span lang="EN"> (5) Property distributed by a partnership to a partner</span>'''<br />
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'''<span lang="EN"> (A) In general. For purposes of this section, the basis of section 1250 property distributed by a partnership to a partner shall be deemed to be determined by reference to the adjusted basis of such property to the partnership.</span>'''<br />
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'''<span lang="EN"> (B) Additional depreciation. In respect of any property described in subparagraph (A), the additional depreciation attributable to periods before the distribution by the partnership shall be—</span>'''<br />
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'''<span lang="EN"> (i) the amount of the gain to which subsection (a) would have applied if such property had been sold by the partnership immediately before the distribution at its fair market value at such time and the applicable percentage for the property had been 100 percent, reduced by</span>'''<br />
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'''<span lang="EN"> (ii) if section 751(b) applied to any part of such gain, the amount of such gain to which section 751(b) would have applied if the applicable percentage for the property had been 100 percent.</span>'''<br />
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'''<span lang="EN"> (6) Transfers to tax-exempt organization where property will be used in unrelated business</span>'''<br />
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'''<span lang="EN"> (A) In general. The second sentence of paragraph (3) shall not apply to a disposition of section 1250 property to an organization described in section 511(a)(2) or 511(b)(2) if, immediately after such disposition, such organization uses such property in an unrelated trade or business (as defined in section 513).</span>'''<br />
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'''<span lang="EN"> (B) Later change in use. If any property with respect to the disposition of which gain is not recognized by reason of subparagraph (A) ceases to be used in an unrelated trade or business of the organization acquiring such property, such organization shall be treated for purposes of this section as having disposed of such property on the date of such cessation.</span>'''<br />
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'''<span lang="EN"> (7) Foreclosure dispositions. If any section 1250 property is disposed of by the taxpayer pursuant to a bid for such property at foreclosure or by operation of an agreement or of process of law after there was a default on indebtedness which such property secured, the applicable percentage referred to in paragraph (1)(B), (2)(B), or (3)(B) of subsection (a), as the case may be, shall be determined as if the taxpayer ceased to hold such property on the date of the beginning of the proceedings pursuant to which the disposition occurred, or, in the event there are no proceedings, such percentage shall be determined as if the taxpayer ceased to hold such property on the date, determined under regulations prescribed by the Secretary, on which such operation of an agreement or process of law, pursuant to which the disposition occurred, began.</span>'''<br />
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'''<span lang="EN">(e) Holding period. For purposes of determining the applicable percentage under this section, the provisions of section 1223 shall not apply, and the holding period of section 1250 property shall be determined under the following rules:</span>'''<br />
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'''<span lang="EN"> (1) Beginning of holding period. The holding period of section 1250 property shall be deemed to begin—</span>'''<br />
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'''<span lang="EN"> (A) in the case of property acquired by the taxpayer, on the day after the date of acquisition, or</span>'''<br />
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'''<span lang="EN"> (B) in the case of property constructed, reconstructed, or erected by the taxpayer, on the first day of the month during which the property is placed in service.</span>'''<br />
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'''<span lang="EN"> (2) Property with transferred basis. If the basis of property acquired in a transaction described in paragraph (1), (2), or (3) of subsection (d) is determined by reference to its basis in the hands of the transferor, then the holding period of the property in the hands of the transferee shall include the holding period of the property in the hands of the transferor.</span>'''<br />
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'''<span lang="EN">(f) Special rules for property which is substantially improved</span>'''<br />
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'''<span lang="EN"> (1) Amount treated as ordinary income. If, in the case of a disposition of section 1250 property, the property is treated as consisting of more than one element by reason of paragraph (3), then the amount taken into account under subsection (a) in respect of such section 1250 property as ordinary income shall be the sum of the amounts determined under paragraph (2).</span>'''<br />
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'''<span lang="EN"> (2) Ordinary income attributable to an element. For purposes of paragraph (1), the amount taken into account for any element shall be the sum of a series of amounts determined for the periods set forth in subsection (a), with the amount for any such period being determined by multiplying—</span>'''<br />
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'''<span lang="EN"> (A) the amount which bears the same ratio to the lower of the amounts specified in clause (i) or (ii) of subsection (a)(1)(A), in clause (i) or (ii) of subsection (a)(2)(A), or in clause (i) or (ii) of subsection (a)(3)(A), as the case may be, for the section 1250 property as the additional depreciation for such element attributable to such period bears to the sum of the additional depreciation for all elements attributable to such period, by</span>'''<br />
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'''<span lang="EN"> (B) the applicable percentage for such element for such period.</span>'''<br />
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'''<span lang="EN">For purposes of this paragraph, determinations with respect to any element shall be made as if it were a separate property.</span>'''<br />
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'''<span lang="EN"> (3) Property consisting of more than one element. In applying this subsection in the case of any section 1250 property, there shall be treated as a separate element—</span>'''<br />
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'''<span lang="EN"> (A) each separate improvement,</span>'''<br />
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'''<span lang="EN"> (B) if, before completion of section 1250 property, units thereof (as distinguished from improvements) were placed in service, each such unit of section 1250 property, and</span>'''<br />
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'''<span lang="EN"> (C) the remaining property which is not taken into account under subparagraphs (A) and (B).</span>'''<br />
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'''<span lang="EN"> (4) Property which is substantially improved. For purposes of this subsection—</span>'''<br />
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'''<span lang="EN"> (A) In general. The term “separate improvement” means each improvement added during the 36–month period ending on the last day of any taxable year to the capital account for the property, but only if the sum of the amounts added to such account during such period exceeds the greatest of—</span>'''<br />
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'''<span lang="EN"> (i) 25 percent of the adjusted basis of the property,</span>'''<br />
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'''<span lang="EN"> (ii) 10 percent of the adjusted basis of the property, determined without regard to the adjustments provided in paragraphs (2) and (3) of section 1016(a), or</span>'''<br />
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'''<span lang="EN"> (iii) $5,000. For purposes of clauses (i) and (ii), the adjusted basis of the property shall be determined as of the beginning of the first day of such 36–month period, or of the holding period of the property (within the meaning of subsection (e)), whichever is the later.</span>'''<br />
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'''<span lang="EN"> (B) Exception. Improvements in any taxable year shall be taken into account for purposes of subparagraph (A) only if the sum of the amounts added to the capital account for the property for such taxable year exceeds the greater of—</span>'''<br />
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'''<span lang="EN"> (i) $2,000, or</span>'''<br />
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'''<span lang="EN"> (ii) one percent of the adjusted basis referred to in subparagraph (A)(ii), determined, however, as of the beginning of such taxable year. For purposes of this section, if the amount added to the capital account for any separate improvement does not exceed the greater of clause (i) or (ii), such improvement shall be treated as placed in service on the first day, of a calendar month, which is closest to the middle of the taxable year.</span>'''<br />
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'''<span lang="EN"> (C) Improvement. The term “improvement” means, in the case of any section 1250 property, any addition to capital account for such property after the initial acquisition or after completion of the property.</span>'''<br />
<br />
'''<span lang="EN">(g) Adjustments to basis. The Secretary shall prescribe such regulations as he may deem necessary to provide for adjustments to the basis of property to reflect gain recognized under subsection (a).</span>'''<br />
<br />
'''<span lang="EN">(h) Application of section. This section shall apply notwithstanding any other provision of this subtitle.</span>'''<br />
|} <br />
<br />
<span lang="EN">Section 1250 → appears to provide a recapture mechanism (but it does not)</span><br />
<br />
<span lang="EN">● '''1250(a)(1)(A)''' → In order to trigger a 1250 recapture, TP must have taken “additional depreciation” on depreciable real property</span><br />
<br />
<span lang="EN">● '''1250(b)(1) → Additional depreciation''' → generally defined as the excess of the amount of accelerated depreciation deductions allowed to the taxpayer over the amount that would have been allowed had the property been depreciated using the straight-line method</span><br />
<br />
<span lang="EN">● BUT pursuant to 168(b)(3), TPs with depreciable real property are required to use the straight-line method</span> <br />
<br />
<span lang="EN">1250 is no longer effective to provide recapture for depreciable real property sold at a gain, but an indirect form of recapture sits in 1(h)(1)(D):</span> <br />
<br />
{| class="wikitable"<br />
|'''<span lang="EN">26 U.S. Code § 1 - Tax imposed</span>''' <br />
<br />
'''<span lang="EN">(h) Maximum capital gains rate</span>'''<br />
<br />
'''<span lang="EN"> (1) In general. If a taxpayer has a net capital gain for any taxable year, the tax imposed by this section for such taxable year shall not exceed the sum of—</span>'''<br />
<br />
'''<span lang="EN"> (A) a tax computed at the rates and in the same manner as if this subsection had not been enacted on the greater of—</span>'''<br />
<br />
'''<span lang="EN"> (i) taxable income reduced by the net capital gain; or</span>'''<br />
<br />
'''<span lang="EN"> (ii) the lesser of—</span>'''<br />
<br />
'''<span lang="EN"> (I) the amount of taxable income taxed at a rate below 25 percent; or</span>'''<br />
<br />
'''<span lang="EN"> (II) taxable income reduced by the adjusted net capital gain;</span>'''<br />
<br />
'''<span lang="EN"> (B) 0 percent of so much of the adjusted net capital gain (or, if less, taxable income) as does not exceed the excess (if any) of—</span>'''<br />
<br />
'''<span lang="EN"> (i) the amount of taxable income which would (without regard to this paragraph) be taxed at a rate below 25 percent, over</span>'''<br />
<br />
'''<span lang="EN"> (ii) the taxable income reduced by the adjusted net capital gain;</span>'''<br />
<br />
'''<span lang="EN"> (C) 15 percent of the lesser of—</span>'''<br />
<br />
'''<span lang="EN"> (i) so much of the adjusted net capital gain (or, if less, taxable income) as exceeds the amount on which a tax is determined under subparagraph (B), or</span>'''<br />
<br />
'''<span lang="EN"> (ii) the excess of—</span>'''<br />
<br />
'''<span lang="EN"> (I) the amount of taxable income which would (without regard to this paragraph) be taxed at a rate below 39.6 percent, over</span>'''<br />
<br />
'''<span lang="EN"> (II) the sum of the amounts on which a tax is determined under subparagraphs (A) and (B),</span>'''<br />
<br />
'''<span lang="EN"> (D) 20 percent of the adjusted net capital gain (or, if less, taxable income) in excess of the sum of the amounts on which tax is determined under subparagraphs (B) and (C),</span>'''<br />
<br />
'''<span lang="EN"> (E) 25 percent of the excess (if any) of—</span>'''<br />
<br />
'''<span lang="EN"> (i) the unrecaptured section 1250 gain (or, if less, the net capital gain (determined without regard to paragraph (11))), over</span>'''<br />
<br />
'''<span lang="EN"> (ii) the excess (if any) of—</span>'''<br />
<br />
'''<span lang="EN"> (I) the sum of the amount on which tax is determined under subparagraph (A) plus the net capital gain, over</span>'''<br />
<br />
'''<span lang="EN"> (II) taxable income; and</span>'''<br />
<br />
'''<span lang="EN"> (F) 28 percent of the amount of taxable income in excess of the sum of the amounts on which tax is determined under the preceding subparagraphs of this paragraph.</span>'''<br />
<br />
'''<span lang="EN"> (2) Net capital gain taken into account as investment income</span>'''<br />
<br />
'''<span lang="EN">For purposes of this subsection, the net capital gain for any taxable year shall be reduced (but not below zero) by the amount which the taxpayer takes into account as investment income under section 163(d)(4)(B)(iii).</span>'''<br />
<br />
'''<span lang="EN"> (3) Adjusted net capital gain. For purposes of this subsection, the term “adjusted net capital gain” means the sum of—</span>'''<br />
<br />
'''<span lang="EN"> (A) net capital gain (determined without regard to paragraph (11)) reduced (but not below zero) by the sum of—</span>'''<br />
<br />
'''<span lang="EN"> (i) unrecaptured section 1250 gain, and</span>'''<br />
<br />
'''<span lang="EN"> (ii) 28-percent rate gain, plus</span>'''<br />
<br />
'''<span lang="EN"> (B) qualified dividend income (as defined in paragraph (11)).</span>'''<br />
<br />
'''<span lang="EN"> (4) 28-percent rate gain. For purposes of this subsection, the term “28-percent rate gain” means the excess (if any) of—</span>'''<br />
<br />
'''<span lang="EN"> (A) the sum of—</span>'''<br />
<br />
'''<span lang="EN"> (i) collectibles gain; and</span>'''<br />
<br />
'''<span lang="EN"> (ii) section 1202 gain, over</span>'''<br />
<br />
'''<span lang="EN"> (B) the sum of—</span>'''<br />
<br />
'''<span lang="EN"> (i) collectibles loss;</span>'''<br />
<br />
'''<span lang="EN"> (ii) the net short-term capital loss; and</span>'''<br />
<br />
'''<span lang="EN"> (iii) the amount of long-term capital loss carried under section 1212(b)(1)(B) to the taxable year.</span>'''<br />
<br />
'''<span lang="EN"> (5) Collectibles gain and loss. For purposes of this subsection—</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. The terms “collectibles gain” and “collectibles loss” mean gain or loss (respectively) from the sale or exchange of a collectible (as defined in section 408(m) without regard to paragraph (3) thereof) which is a capital asset held for more than 1 year but only to the extent such gain is taken into account in computing gross income and such loss is taken into account in computing taxable income.</span>'''<br />
<br />
'''<span lang="EN"> (B) Partnerships, etc. For purposes of subparagraph (A), any gain from the sale of an interest in a partnership, S corporation, or trust which is attributable to unrealized appreciation in the value of collectibles shall be treated as gain from the sale or exchange of a collectible. Rules similar to the rules of section 751 shall apply for purposes of the preceding sentence.</span>'''<br />
<br />
'''<span lang="EN"> (6) Unrecaptured section 1250 gain. For purposes of this subsection—</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. The term “unrecaptured section 1250 gain” means the excess (if any) of—</span>'''<br />
<br />
'''<span lang="EN"> (i) the amount of long-term capital gain (not otherwise treated as ordinary income) which would be treated as ordinary income if section 1250(b)(1) included all depreciation and the applicable percentage under section 1250(a) were 100 percent, over</span>'''<br />
<br />
'''<span lang="EN"> (ii) the excess (if any) of—</span>'''<br />
<br />
'''<span lang="EN"> (I) the amount described in paragraph (4)(B); over</span>'''<br />
<br />
'''<span lang="EN"> (II) the amount described in paragraph (4)(A).</span>'''<br />
<br />
'''<span lang="EN"> (B) Limitation with respect to section 1231 property. The amount described in subparagraph (A)(i) from sales, exchanges, and conversions described in section 1231(a)(3)(A) for any taxable year shall not exceed the net section 1231 gain (as defined in section 1231(c)(3)) for such year.</span>'''<br />
<br />
'''<span lang="EN"> (7)Section 1202 gain. For purposes of this subsection, the term “section 1202 gain” means the excess of—</span>'''<br />
<br />
'''<span lang="EN"> (A) the gain which would be excluded from gross income under section 1202 but for the percentage limitation in section 1202(a), over</span>'''<br />
<br />
'''<span lang="EN"> (B) the gain excluded from gross income under section 1202.</span>'''<br />
<br />
'''<span lang="EN"> (8) Coordination with recapture of net ordinary losses under section 1231. If any amount is treated as ordinary income under section 1231(c), such amount shall be allocated among the separate categories of net section 1231 gain (as defined in section 1231(c)(3)) in such manner as the Secretary may by forms or regulations prescribe.</span>'''<br />
<br />
'''<span lang="EN"> (9) Regulations. The Secretary may prescribe such regulations as are appropriate (including regulations requiring reporting) to apply this subsection in the case of sales and exchanges by pass-thru entities and of interests in such entities.</span>'''<br />
<br />
'''<span lang="EN"> (10) Pass-thru entity defined. For purposes of this subsection, the term “pass-thru entity” means—</span>'''<br />
<br />
'''<span lang="EN"> (A) a regulated investment company;</span>'''<br />
<br />
'''<span lang="EN"> (B) a real estate investment trust;</span>'''<br />
<br />
'''<span lang="EN"> (C) an S corporation;</span>'''<br />
<br />
'''<span lang="EN"> (D) a partnership;</span>'''<br />
<br />
'''<span lang="EN"> (E) an estate or trust;</span>'''<br />
<br />
'''<span lang="EN"> (F) a common trust fund; and</span>'''<br />
<br />
'''<span lang="EN"> (G) a qualified electing fund (as defined in section 1295).</span>'''<br />
<br />
'''<span lang="EN"> (11) Dividends taxed as net capital gain</span>'''<br />
<br />
'''<span lang="EN"> (A) In general. For purposes of this subsection, the term “net capital gain” means net capital gain (determined without regard to this paragraph) increased by qualified dividend income.</span>'''<br />
<br />
'''<span lang="EN"> (B) Qualified dividend income. For purposes of this paragraph—</span>'''<br />
<br />
'''<span lang="EN"> (i) In general. The term “qualified dividend income” means dividends received during the taxable year from—</span>'''<br />
<br />
'''<span lang="EN"> (I) domestic corporations, and</span>'''<br />
<br />
'''<span lang="EN"> (II) qualified foreign corporations.</span>'''<br />
<br />
'''<span lang="EN"> (ii) Certain dividends excluded. Such term shall not include—</span>'''<br />
<br />
'''<span lang="EN"> (I) any dividend from a corporation which for the taxable year of the corporation in which the distribution is made, or the preceding taxable year, is a corporation exempt from tax under section 501 or 521,</span>'''<br />
<br />
'''<span lang="EN"> (II) any amount allowed as a deduction under section 591 (relating to deduction for dividends paid by mutual savings banks, etc.), and</span>'''<br />
<br />
'''<span lang="EN"> (III) any dividend described in section 404(k).</span>'''<br />
<br />
'''<span lang="EN"> (iii) Coordination with section 246(c)Such term shall not include any dividend on any share of stock—</span>'''<br />
<br />
'''<span lang="EN"> (I) with respect to which the holding period requirements of section 246(c) are not met (determined by substituting in section 246(c) “60 days” for “45 days” each place it appears and by substituting “121-day period” for “91-day period”), or</span>'''<br />
<br />
'''<span lang="EN"> (II) to the extent that the taxpayer is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property.</span>'''<br />
<br />
'''<span lang="EN"> (C) Qualified foreign corporations</span>'''<br />
<br />
'''<span lang="EN"> (i) In general. Except as otherwise provided in this paragraph, the term “qualified foreign corporation” means any foreign corporation if—</span>'''<br />
<br />
'''<span lang="EN"> (I) such corporation is incorporated in a possession of the United States, or</span>'''<br />
<br />
'''<span lang="EN"> (II) such corporation is eligible for benefits of a comprehensive income tax treaty with the United States which the Secretary determines is satisfactory for purposes of this paragraph and which includes an exchange of information program.</span>'''<br />
<br />
'''<span lang="EN"> (ii) Dividends on stock readily tradable on United States securities market. A foreign corporation not otherwise treated as a qualified foreign corporation under clause (i) shall be so treated with respect to any dividend paid by such corporation if the stock with respect to which such dividend is paid is readily tradable on an established securities market in the United States.</span>'''<br />
<br />
'''<span lang="EN"> (iii) Exclusion of dividends of certain foreign corporations. Such term shall not include—</span>'''<br />
<br />
'''<span lang="EN"> (I) any foreign corporation which for the taxable year of the corporation in which the dividend was paid, or the preceding taxable year, is a passive foreign investment company (as defined in section 1297), and</span>'''<br />
<br />
'''<span lang="EN"> (II) any corporation which first becomes a surrogate foreign corporation (as defined in section 7874(a)(2)(B)) after the date of the enactment of this subclause, other than a foreign corporation which is treated as a domestic corporation under section 7874(b).</span>'''<br />
<br />
'''<span lang="EN"> (iv) Coordination with foreign tax credit limitation. Rules similar to the rules of section 904(b)(2)(B) shall apply with respect to the dividend rate differential under this paragraph.</span>'''<br />
<br />
'''<span lang="EN"> (D) Special rules</span>'''<br />
<br />
'''<span lang="EN"> (i) Amounts taken into account as investment income. Qualified dividend income shall not include any amount which the taxpayer takes into account as investment income under section 163(d)(4)(B).</span>'''<br />
<br />
'''<span lang="EN"> (ii) Extraordinary dividends. If a taxpayer to whom this section applies receives, with respect to any share of stock, qualified dividend income from 1 or more dividends which are extraordinary dividends (within the meaning of section 1059(c)), any loss on the sale or exchange of such share shall, to the extent of such dividends, be treated as long-term capital loss.</span>'''<br />
<br />
'''<span lang="EN"> (iii) Treatment of dividends from regulated investment companies and real estate investment trusts. A dividend received from a regulated investment company or a real estate investment trust shall be subject to the limitations prescribed in sections 854 and 857</span>'''<br />
|} <br />
<br />
<span lang="EN">199A → Qualified Business Income</span><br />
<br />
<span lang="EN">● Reduction offered in 11 for C Corporations</span><br />
<br />
<span lang="EN">● No reduction for businesses operated as sole proprietorships, noncorporate entities like partnerships and LLCs, or S Corporations</span><br />
<br />
● Deduction will terminate at the end of 2025 and unavailable on 2026 tax returns unless Congress extends it -- 199A(i)</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=Mas_v._Perry&diff=42464Mas v. Perry2022-05-31T22:21:22Z<p>Rezsue: </p>
<hr />
<div>{{Infobox Case Brief<br />
|court=U.S. Court of Appeals, 5th Circuit<br />
|citation=489 F.2d 1396<br />
|date=April 3, 1974<br />
|subject=Civil Procedure<br />
|case_treatment=No<br />
|facts=Judy Mas, a citizen of Mississippi, was married to Jean Paul Mas, a citizen of France. They lived in Louisiana while attending LSU and then moved to Illinois for two years. Upon their arrival in Louisiana again, they rented an apartment from Oliver Perry, a citizen of Louisiana. The Mas couple had no intention of permanently settling in Louisiana. They discovered later that Mr. Perry had installed two-way mirrors in the bathroom and bedroom of their apartment and Mr. Perry had been watching them through the mirrors.<br />
|procedural_history=Plaintiffs filed for damages of $100,000 in the District Court. At the end of the trial, defendant made oral motion to dismiss for lack of jurisdiction. Denied.<br />
|issues=Did diversity of citizenship exist so as to uphold jurisdiction?<br />
|arguments=Defendant argued that Judy Mas was a citizen of Louisiana so diversity doesn't exist. D also argued that because Mr. Mas was finally adjudged to be entitled to less than $10,000 (the required amount at the time), jurisdiction over his claim wasn't upheld.<br />
|holding=Jurisdiction is upheld<br />
|judgment=Affirmed.<br />
|reasons=Mrs. Mas was a citizen of Mississippi. Living in Louisiana has no affect on her citizenship because the Mas family had no intention of permanently staying there. Even though Mr. Mas only was adjudged to receive $5,000, his good-faith claim of $100,000 satisfies the requirement.<br />
|rule=*For purposes of federal diversity jurisdiction, a party changes domicile only by taking up residence in another state with the intention to remain there, and a wife’s domicile is not necessarily deemed to be that of her husband<br />
*Domicile requires the intention to remain in a certain state and does not necessarily change based on marriage to an alien<br />
|case_text_links={{Infobox Case Brief/Case Text Link<br />
|link=https://h2o.law.harvard.edu/cases/3591<br />
|case_text_source=H2O<br />
}}<br />
|decision_by=Ainsworth<br />
}}</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=Contracts/Mistake&diff=41948Contracts/Mistake2022-03-16T19:07:38Z<p>Rezsue: </p>
<hr />
<div>{{:Contracts/TOC}}<br />
In [[contract law]], a '''mistake''' is an erroneous belief, ''at contracting'', that certain facts are true. It can be argued as a defense, and if raised successfully can lead to the agreement in question being found [[Contacts/Void|void ''ab initio'']] or [[Contracts/Voidable|voidable]], or alternatively an equitable remedy may be provided by the courts. Common law has identified three different types of mistake in contract: the 'unilateral mistake', the 'mutual mistake' and the 'common mistake'. The distinction between the 'common mistake' and the 'mutual mistake' is important.<br />
<br />
Another breakdown in contract law divides mistakes into four traditional categories: unilateral mistake, mutual mistake, mistranscription, and misunderstanding.<ref>{{Cite web|title = "Mistake in Contract Law" by Melvin A. Eisenberg|url = http://scholarship.law.berkeley.edu/californialawreview/vol91/iss6/3/|website = scholarship.law.berkeley.edu|access-date = 2016-01-18}}</ref><br />
<br />
== Examples ==<br />
'''Mistake''' can be:<br />
* Mistake of law, or<br />
* Mistake of fact<br />
<br />
'''Mistake of law''': when a party enters into a contract, without the knowledge of the law in the country, the contract is affected by such mistakes but it is not void. The reason here is that ignorance of law is not an excuse. However, if a party is ''induced'' to enter into a contract by the mistake of law then such a contract is not valid.<ref>Kleinwort Benson Ltd v Lincoln City Council</ref><br />
<br />
'''Illustration''': Harjoth and Danny make a contract grounded on the erroneous belief that a particular debt is barred by the Indian law of Limitation; the contract is not voidable.{{citation needed|date=October 2014}}<br />
<br />
'''Mistake of fact''': Where both the parties enter into an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is voidable.<br />
<br />
'''Explanation''': An erroneous opinion as to the value of the thing which forms the subject-matter of the agreement is not to be deemed a mistake as to a matter of fact.{{R|"McRae v Commonwealth"}}<br />
<br />
'''Illustration''': Lady found a stone and sold it as a Topaz for $1 ($25 today). It was a raw uncut diamond worth $700 (today $17,000). The contract is not voidable. There was no mistake because neither party knew what the stone was.<ref>Wood v. Boynton (WI)</ref><br />
<br />
'''Anti-illustration''': A sells a cow to B for $80 because it is an infertile cow. The cow is actually pregnant and worth $1000. The contract is void.<ref>Sherwood v. Walker (MI).</ref><br />
<br />
==Unilateral mistakes==<br />
{{Contract law}}<br />
A unilateral mistake is where only one party to a contract is mistaken as to the terms or subject-matter contained in a contract.<ref name="Taylor v Johnson"/> This kind of mistake is more common than other types of mistake. {{citation needed|date=March 2017}} One must first distinguish between mechanical calculations and business error when looking at unilateral mistake. {{citation needed|date=March 2017}}<br />
<br />
Ordinarily, unilateral mistake does not make a contract void.<ref name="Kubasek">{{cite book|last1=Kubasek|first1=Nancy|last2=Browne|first2=M. Neil|last3=Heron|first3=Daniel|last4=Dhooge|first4=Lucien|last5=Barkacs|first5=Linda|title=Dynamic Business Law: The Essentials|date=2016|page=227|publisher=McGraw-Hill|isbn=9781259415654|edition=3d|url=http://highered.mheducation.com/sites/0073524972/information_center_view0/table_of_contents.html}}</ref> Traditionally this is [[caveat emptor]] (let the buyer beware), and under common law [[Caveat emptor#Caveat venditor|caveat venditor]] (let the seller beware).<br />
<br />
===Exceptions===<br />
<br />
A contract might be voidable from unilateral mistake for any of the following:<br />
<br />
:(1) One party relied on a statement of the other about a material fact that the second party knew or should have known was mistaken by the first party.<ref name="Kubasek">{{cite book|last1=Kubasek|first1=Nancy|last2=Browne|first2=M. Neil|last3=Heron|first3=Daniel|last4=Dhooge|first4=Lucien|last5=Barkacs|first5=Linda|title=Dynamic Business Law: The Essentials|date=2016|page=227|publisher=McGraw-Hill|isbn=9781259415654|edition=3d|url=http://highered.mheducation.com/sites/0073524972/information_center_view0/table_of_contents.html}}</ref><br />
<br />
:(2) “clerical error that did not result in [[gross negligence]]”<ref name="Kubasek"/><br />
<br />
::For mechanical calculations, a party may be able to set aside the contract on these grounds provided that the other party does not try to take advantage of the mistake, or 'snatch up' the offer (involving a bargain that one did not intend to make, betrayed by an error in arithmetic etc.). This will be seen by an objective standard, or if a reasonable person would be able to know that the mistake would not make sense to one of the parties. Unless one of the parties 'snatched up' the one-sided offer, courts will otherwise uphold the contract.{{citation needed|date=March 2017}}<br />
<br />
:(3) The mistake was “[[Unconscionability|unconscionable]]”, i.e. so serious and unreasonable to be outrageous.<ref name="Kubasek"/><br />
<br />
==Mutual mistake versus failure of mutual assent==<br />
A mutual mistake occurs when the parties to a contract are both mistaken about the same ''material'' fact within their contract. They are at cross-purposes. There is a meeting of the minds, but the parties are mistaken. Hence the contract is voidable. ''Collateral'' mistakes will not afford the right of rescission. A collateral mistake is one that 'does not go to the heart' of the contract. For a mutual mistake to be void, then the item the parties are mistaken about must be ''material'' (emphasis added). When there is a material mistake about a material aspect of the contract, the essential purpose of the contract, there is the question of the assumption of the risk. Who has the risk contractually? Who bears the risk by custom? Restatement (Second) Contracts Sec. 154 deals with this scenario.<br />
<br />
This is easily confused with [[mutual assent]] cases such as ''Raffles v Wichelhaus''.{{R|"Raffles v Wichelhaus"}}<br />
<br />
In ''Raffles'', there was an agreement to ship goods on a vessel named ''Peerless'', but each party was referring to a different vessel. Therefore, each party had a different understanding that they did not communicate about when the goods would be shipped.<br />
<br />
In this case, both parties believed there was a "meeting of the minds," but discovered that they were each mistaken about the other party's different meaning. This represents not a mutual mistake but a failure of mutual assent. In this situation, no contract has been formed, since mutual assent is required in the formation stage of contract. Restatement (Second) Contracts Sec. 20 deals with this scenario.<br />
<br />
==Common mistake==<br />
A common mistake is where both parties hold the same mistaken belief of the facts.<br />
<br />
The [[House of Lords]] case of ''[[Bell v Lever Brothers Ltd.]]''{{R|"Bell v Lever Brothers Ltd"}} established that common mistake can void a contract only if the mistake of the subject-matter was sufficiently fundamental to render its identity different from what was contracted, making the performance of the contract impossible.<br />
<br />
Later in ''Solle v Butcher'',{{R|"Solle v Butcher"}} [[Lord Denning]] added requirements for common mistake in equity, which loosened the requirements to show common mistake. However, since that time, the case has been heavily criticized in cases such as ''[[Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd]]''.{{R|"Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd"}}. For Australian application of Great Peace Shipping (other than in [[Queensland]]), see ''Svanosio v McNamara''.{{R|"Svanosio v McNamara"}} For Queensland, see ''Australian Estates v Cairns City Council''.{{R|"Australian Estates v Cairns City Council"}}<br />
<br />
Those categories of mistake in the United States exist as well, but it is often necessary to identify whether the error was a "decisional mistake," which is a mistake as a matter of law (faced with two known choices, making the wrong one), or an "ignorant mistake," unaware of the true state of affairs.<br />
<br />
The difference is in the extent to which an innocent in the information chain, passing along or using or processing incorrect information, becomes liable. There is a principle that an entity or person cannot be made more liable merely by being in the information chain and passing along information taken in good faith in the belief that it was true, or at least without knowledge of the likelihood of falsity or inaccuracy.<br />
<br />
===''Roswell State Bank v. Lawrence Walker Cotton Co.''===<br />
Under [[New Mexico]] law a bank, title company, document processing firm, or the like is not liable for false information provided to it, any more than a bank was liable for false information from a trusted customer turned embezzler who drew an unauthorized cashier’s check. ''Roswell State Bank v. Lawrence Walker Cotton Co.'', 56 N.M. 107, 240 P.2d 143 (1952):<br />
<br />
‘A thing is done “in good faith” within the meaning of this act, when it is in fact done honestly, whether it be done negligently or not.<br />
‘…<br />
‘…[a] transferee is not bound to inquire whether the fiduciary is committing a breach of his obligation as fiduciary in transferring the instrument, and is not chargeable with notice that the fiduciary is committing a breach of his obligation as fiduciary unless he takes the instrument with actual knowledge of such breach or with knowledge of such facts that his action in taking the instrument amounts to bad faith.’<br />
<br />
56 N.M. at 112-113 (quoting from the Uniform Fiduciaries Act{{R|"Uniform Fiduciaries Act"}}).<br />
<br />
===''Davis v. Pennsylvania Co. 337 Pa. 456''===<br />
Roswell was the case of first impression on this issue in the [[U.S. state|state]] of [[New Mexico]], and drew on cases in other jurisdictions interpreting the same language, most notably ''Davis v. Pennsylvania Co. 337 Pa. 456'', 12 A.2d 66 (1940), which on similar facts to Roswell came to the same conclusion and exonerated the innocent actor in favor of shifting any responsibility for the loss to tortfeasors and those who enabled them to act by giving them unjustified authority. 56 N.M. at 114.<br />
<br />
The Davis case leads into another good analysis, in a case relied upon by Davis:<br />
<br />
:‘At what point does negligence cease and bad faith begin? The distinction between them is that bad faith, or dishonesty, is, unlike negligence, wilful. The mere failure to make inquiry, even though there be suspicious circumstances, does not constitute bad faith, unless said failure is due to the deliberate desire to evade knowledge because of a belief or fear that inquiry would disclose a vice or defect in the transaction, – that is to say, where there is an intentional closing of the eyes or stopping of the ears.’<br />
<br />
=== ''French Bank of California v. First National Bank of Louisville'' ===<br />
In [[Kentucky]], it was held that in ''French Bank of California v. First National Bank of Louisville'', money received by mistake does not have to be returned if there is an irrevocable change in position. It held that mistakes do not need to be rectified except by court order or indemnities being issued.<br />
<br />
===''Union Bank & Trust Co.v. Girard Trust Co.''===<br />
''Union Bank & Trust Co.v. [[Girard Trust Co.]]'', 307 Pa. 468, 500-501, 161 A.2d 865 (1932).<br />
<br />
:A firm processing information in order to transfer title using information provided by customers lacked the intent to commit illegal or improper acts when the information furnished to it was wrong. It was not part of its job description to know better, and it did not know better, and charged only a nominal fee for the clerical work, clearly not including any investigation. Further, it could not be in a conspiracy with another party or several parties who knew the information was wrong but failed to inform the title firm. The title firm could not unknowingly become part of a conspiracy of which it was never informed, and from which it could derive no benefit. The attempt to enhance liability or shift blame by filtering data through an innocent party has been tried before, but where the conduit providing document preparation does not know more than its informants, and was not hired or paid to investigate, it is not liable in their place for using their bad facts without guilty knowledge.<br />
<br />
===''Hynix Semiconductor America, Inc. v. United States''===<br />
The law governing record-keeping mistakes and how they are corrected has been gathered by the U.S. Court of International Trade in ''Hynix Semiconductor America, Inc. v. United States'', 414 F. Supp. 2d 1317 (C.I.T. 2006), in which the Court was faced with application of a tariff which had been calculated at the wrong rate by a customs clerk. To enforce "anti-dumping" legislation against foreign-made goods (in this case, Korean electronic components) made using cheap labor and undercutting American industry, a regulatory scheme was implemented under which such imports were charged a “liquidation duty” at a rate to be found on a schedule. The schedule had been made up by a panel of experts using standards for adjusting the price differential in the overseas goods. The custom clerk used the wrong category of goods and overcharged the duty, and by the time Hynix figured out what had happened, part of a very short statute of limitations on protest had expired. Hynix nevertheless prevailed and received the correction in its tariff rate by showing that such an error “…was correctable under 19 U.S.C. § 1520(c) as a mistake of fact or clerical error not amounting to an error in the construction of a law, and because the failure to file a protest within ninety days of the liquidation of the entries is without legal consequence in this context …” Id. at 1319.<br />
<br />
The ''Hynix'' court explains the difference between a mistake of law “…where the facts are known but the legal consequences are not, or are believed to be different than they really are…,” ''Century Importers, Inc. v. United States'', 205 F.3d 1308, 1313 (Fed. Cir. 2000), and a mistake of fact, “…where either (1) the facts exist, but are unknown, or (2) the facts do not exist as they are believed to [exist],” quoting ''Hambro Auto. Corp. v. United States'', 66 C.C.P.A. 113, 118, C.A.D. 1231, 603 F.2d 850, 853 (1979) (“A mistake of fact is any mistake except a mistake of law.” Id. at 855) Hynix, 414 F. Supp. 2d. at 1325.<br />
<br />
''Hynix'', in reviewing the tariff application to the facts, also provided a guided tour of the different kinds of mistake and how they are treated in the federal court system. The key distinction is between “decisional mistakes” and “ignorant mistakes.” Id. at 1326; ''G & R Produce Co, v. U.S.'', 281 F. Supp. 2d 1323, 1331 (2003); ''Prosegur, Inc. v. U.S.'', 140 F. Supp. 2d 1370, 1378 (2001); ''Universal Cooperatives, Inc. v. United States'', 715 F. Supp. 1113, 1114 (1989).<br />
<br />
‘Decisional mistakes are mistakes of law and occur when “…a party [makes] the wrong choice between two known, alternative sets of facts.” ''Universal Cooperatives'', (citation partly omitted), 715 F. Supp. at 1114. On the other hand, an ignorant mistake occurs where “…a party is unaware of the existence of the correct alternative set of facts.” Id. “In order for the goods to be reliquidated under 1520 (c) (1), the alleged mistake of fact must be an ignorant mistake.” Prosegur, (citation partly omitted), 140 F. Supp. 2d at 1378.’ ''Hynix'' at 1326.<br />
<br />
''Hynix'' provided one more criterion, and that is “materiality,” citing to extensive development of that requirement in ''Degussa Canada Ltd. v. United States'', 87 F.3d 1301, 1304 (Fed. Cir. 1996), and ''Xerox Corp. v. United States'', 2004 C.I.T. (Sept. 8, 2004) (“[A] mistake of fact … is a factual error that, if the correct fact had been known, would have resulted in a different classification.”) The error must be “material” in order to be corrected without consequence.<br />
<br />
==Notes==<br />
{{reflist|refs=<br />
<ref name="Uniform Fiduciaries Act">''Uniform Fiduciaries Act'' (1923, as amended), then §§ 36-101 and 106 (1941), now §§ 46-1-1 (B) and 46-1-5 NMSA (1978).</ref><br />
<ref name="Raffles v Wichelhaus">''Raffles v Wichelhaus'' [http://www.worldlii.org/int/cases/EngR/1864/150.pdf (1864) 2 Hurl & C 906] Court of Exchequer.</ref><br />
<ref name="Bell v Lever Brothers Ltd">{{cite BAILII |litigants=Bell v Lever Brothers Ltd |court=UKHL |year=1931 |num=2 |parallelcite=[1932] [[Appeal Cases Law Reports|AC]] 161 |courtname=auto}}.</ref><br />
<ref name="Solle v Butcher">''Solle v Butcher'' 1950 1 [[Kings Bench Law Reports|KB]] 671.</ref><br />
<ref name="McRae v Commonwealth">{{cite AustLII|HCA|79|1951|litigants=[[McRae v Commonwealth Disposals Commission]] |parallelcite=[http://www.austlii.edu.au/au/cases/cth/HCA/1951/79.pdf (1951) 84 {{abbr|CLR|Commonwealth Law Reports}} 377] |courtname=auto |date=}}.</ref><br />
<ref name="Taylor v Johnson">{{cite AustLII|HCA|5|1983|litigants=Taylor v Johnson |parallelcite=(1983) 151 [[Commonwealth Law Reports|CLR]] 422 |courtname=auto |date=}}.</ref><br />
<ref name="Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd">{{cite BAILII |litigants=Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd |court=EWCA |division=Civ |year=2002 |num=1407 |parallelcite=[2003] [[Queens Bench Law Reports|QB]] 679 |courtname=auto}}.</ref><br />
<ref name="Svanosio v McNamara">{{cite AustLII|HCA|55|1956|litigants=Svanosio v McNamara |parallelcite=(1956) 96 [[Commonwealth Law Reports|CLR]] 186 |courtname=auto |date=}}.</ref><br />
<ref name="Australian Estates v Cairns City Council">{{cite AustLII|QCA|328|2005|litigants=Australian Estates P/L v Cairns City Council |courtname=auto |date=}}.</ref><br />
}}<br />
<!--not used<br />
<ref name="Shogun Finance Ltd v Hudson">''Shogun Finance Ltd v Hudson'' [2003] UKHL 62.</ref><br />
<ref name="Lewis v Avery">''Lewis v Avery'' [1971] 3 All ER 907.</ref><br />
<ref name="Speckel v. Perkins">''Speckel v. Perkins'', 364 N.W.2d 890 (Minn. Ct. App. 1985).</ref><br />
<ref name="Donovan v. RRL Corp.">''Donovan v. RRL Corp.'', 27 P.2d 702 (Cal. 2001).</ref><br />
<ref name="Hartog v Colin & Shields">''Hartog v Colin & Shields'' [1939] 3 All ER 566.</ref><br />
<ref name="Smith v Hughes">''[[Smith v Hughes]]'' (1871) LR 6 QB 597.</ref><br />
--><br />
<br />
==External links==<br />
* {{Cite NIE|wstitle=Mistake|short=x}}</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=Contracts/Novation&diff=41947Contracts/Novation2022-03-16T19:03:29Z<p>Rezsue: </p>
<hr />
<div>{{:Contracts/TOC}}<br />
'''Novation''', in [[contract law]] and [[business law]],<ref>{{cite web | url=http://www.chicagofed.org/digital_assets/publications/understanding_derivatives/understanding_derivatives_chapter_1_derivatives_overview.pdf |title=Derivatives Overview|publisher=Chicago Fed|author=Richard Heckinger and David Mengle}}</ref> is the act of –<br />
<br />
# replacing an obligation to perform with another obligation; or<br />
# adding an obligation to perform; or<br />
# replacing a party to an agreement with a new party.<br />
<br />
==Origins in Roman law ==<br />
<br />
Novati, as a legal term is derived from the Roman law, in which ''novatio'' was of three kinds—substitution of a new debtor (''expromissio'', or ''delegatio''), of a new creditor (''cessio nominum vel actionum''), or of a new contract.<ref name="Chisholm 1911, p. 832">{{EB1911 |inline=y |wstitle=Novation |volume=19 |page=832}}</ref><br />
<br />
In [[English law]] the term (though it occurs as early as [[Bracton]]) is scarcely naturalized, the substitution of a new debtor or creditor being generally called an assignment, and of a new contract a merger. It is doubtful, however, whether merger applies except where the substituted contract is one of a higher nature, as where a contract under seal supersedes a simple contract. Where one contract is replaced by another, it is of course necessary that the new contract should be a valid contract, founded upon sufficient consideration (see [[Contract]]). The extinction of the previous contract is sufficient consideration. The question whether there is a novation most frequently arises in the course of dealing between a customer and a new partnership, and on the assignment of the business of a life assurance company with reference to the assent of the policyholders to the transfer of their policies. The points on which novation turns are whether the new firm or company has assumed the liability of the old, and whether, the creditor has consented to accept the liability of the new debtors and discharge the old. The question is one of fact in each case. See especially the [[Life Assurance Companies Act 1872]], s. 7, where the word "novations" occurs in the marginal note to the section, and so has quasi-statutory sanction.<ref name="Chisholm 1911, p. 832"/><br />
<br />
In American law, as in English, the term is something of a novelty, except in [[Louisiana]], where much of the civil law is retain.<ref name="Chisholm 1911, p. 832"/><br />
<br />
==Novation vs. assignment==<br />
In contrast to an [[Contracts/Assignment|assignment]], which is generally valid as long as the other party is given notice (except where the obligation is specific to the obligor, as in a personal service contract with a specific ballet dancer, or where assignment would place a new and special burden on the counterparty), a novation is valid only with the consent of all parties to the original agreement.<ref name=duha1>{{cite web|last=Duhaime|first=Lloyd|title=Part 6: Restraint of Trade, Assignment, Novation & Frustration|url=http://www.duhaime.org/LegalResources/Contracts/LawArticle-91/Part-6-Restraint-of-Trade-Assignment-Novation-Frustration.aspx|work=duhaime.org|publisher=Duhaime's Contract Law|accessdate=30 July 2013|date=25 May 2012}}</ref> A contract transferred by the novation process transfers all duties and obligations from the original obligor to the new obligor.<br />
<br />
==Examples of novation==<br />
For example, if there exists a contract whereby Dan will give a TV to Alex, and another contract whereby Alex will give a TV to Becky, then, it is possible to novate both contracts and replace them with a single contract wherein Dan agrees to give a TV to Becky. In contrast to assignment, novation requires the consent of all parties. [[Consideration]] is still required for the new contract, but it is usually assumed to be the discharge of the former contract.<br />
<br />
Another classic example is when Company A enters a contract with Company B and a novation is included to ensure that if Company B sells, merges or transfers the core of their business to another company, the new company assumes the obligations and liabilities that Company B has with Company A under the contract. So in terms of the contract, a purchaser, merging party or transferee of Company B steps into the shoes of Company B with respect to its obligations to Company A. Alternatively, a "novation agreement" may be signed after the original contract<ref name=duha2>{{cite web|last=Duhaime|first=Lloyd|title=Novation Definition|url=http://www.duhaime.org/LegalDictionary/N/Novation.aspx|work=duhaime.org|publisher=Duhaime's Legal Dictionary|accessdate=30 July 2013|year=2009}}</ref> in the event of such a change. This is common in contracts with governmental entities; an example being under the United States [[Anti-Assignment Act]], the governmental entity that originally issued the contract must agree to such a transfer or it is automatically invalid by law.<br />
<br />
The criteria for novation comprise the obligee's acceptance of the new obligor, the new obligor's acceptance of the liability, and the old obligor's acceptance of the new contract as full performance of the old contract. Novation is not a unilateral contract mechanism, hence allows room for negotiation on the new T&Cs under the new circumstances. Thus, 'acceptance of the new contract as full performance of the old contract' may be read in conjunction to the phenomenon of 'mutual agreement of the T&Cs'.<ref name=duha1 /><br />
<br />
==Application in financial markets==<br />
[https://www.chicagofed.org/~/media/publications/understanding-derivatives/understanding-derivatives-chapter-1-derivatives-overview-pdf.pdf Novation] is also used in [[Futures contract|futures]] and [[Option (finance)|options]] trading to describe a special situation where the [[Clearing house (finance)|central clearing house]] interposes itself between buyers and sellers as a legal counter party, i.e., the clearing house becomes buyer to every seller and vice versa. This obviates the need for ascertaining credit-worthiness of each counter party and the only [[credit risk]] that the participants face is the risk of the clearing house defaulting. In this context, novation is considered a form of [[financial risk management|risk management]].<br />
<br />
The term is also used in markets that lack a centralized clearing system, such as [[Swap (finance)|swap]] trading and certain [[Over-the-counter (finance)|over-the-counter (OTC)]] [[Derivative (finance)|derivatives]], where "novation" refers to the process where one party to a contract may assign its role to another, who is described as "stepping into" the contract. This is analogous to selling a future contract.<br />
<br />
==References==<br />
<references/><br />
<br />
==Further reading==<br />
* [http://www.chicagofed.org/webpages/publications/understanding_derivatives/index.cfm Understanding Derivatives; Markets and Infrastructure] Federal Reserve Bank of Chicago, Financial Markets Group</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=Contracts/Undue_influence&diff=41946Contracts/Undue influence2022-03-16T19:01:36Z<p>Rezsue: </p>
<hr />
<div>{{:Contracts/TOC}}<br />
In jurisprudence, '''undue influence''' is an [[Equity (law)|equitable doctrine]] that involves one person taking advantage of a position of [[Power (social and political)|power]] over another person. This inequity in power between the parties can vitiate one party's consent as they are unable to freely exercise their independent will.<ref name="56 CLR 113">{{cite AustLII|HCA|41|1936|litigants=[[Johnson v Buttress]] |parallelcite=[http://www.austlii.edu.au/au/cases/cth/HCA/1936/41.pdf (1936) 56 {{abbr|CLR|Commonwealth Law Reports}} 113] |courtname=auto |date=17 August 1936}}.</ref><br />
<br />
==In contract law==<br />
Where it is established that a plaintiff was induced to enter into a contract or transaction by the undue influence of the defendant, the contract may be rendered voidable. If undue influence is proved in a contract, the innocent party is entitled to set aside the contract against the defendant, and the remedy is rescission.{{sfn|Paterson Robertson & Duke 2016|page=729}}<br />
<br />
As the law of undue influence was applied and developed by the Court of Chancery, it developed into two distinct classes: ‘actual’ undue influence and ‘presumed’ undue influence. <ref>{{cite journal |first=R |last=Bigwood |title=Undue Influence in the House of Lords: Principles and Proof|journal=Modern Law Review |volume=65 |issue=3 |pages=435–450 |doi=10.1111/1468-2230.00388 |year=2002 }} (2002) 65 Modern Law Journal 435.</ref><br />
<br />
===In Australia===<br />
<br />
In Australia, the leading case on undue influence is ''[[Johnson v Buttress]]'' (1936),<ref name="56 CLR 113"/> in which the approach to 'actual' and 'presumed' undue influence was at issue. <br />
* Actual undue influence,<ref name="Farmers Co-op">{{cite AustLII|SASC|1932|1989|litigants=Farmers Co-operative Executors & Trustees Ltd v Perks |parallelcite=(1989) 52 [[South Australian State Reports|SASR]] 399}}.</ref> where it is proven that the defendant exerted influence over the complainant to have them enter into a contract.{{sfn|Paterson Robertson & Duke 2016|page=701}}<br />
* Presumed undue influence, made up of:<br />
# ''deemed relationship of influence'', relationships that raise the premise, as a matter of law, that influence has been utilised;{{sfn|Paterson Robertson & Duke 2016|page=701}}<br />
# ''relationship of influence in fact'', where the complainant ensconces that trust and confidence was bestowed in the wrongdoer and therefore a presumption of influence should be recognised{{sfn|Paterson Robertson & Duke 2016|page=702}}<br />
<br />
====Presumed undue influence====<br />
<br />
=====First subgroup=====<br />
In the first subgroup, the relationship falls in a class of relationships that as a matter of law will raise a presumption of undue influence. Such classes include:<br />
<br />
* Government/citizen (note this is not confirmed);<br />
* Parent/child;<ref>''Bainbrigge v Bowne'' (1881) 18 Ch D 188 at 196.</ref><ref>''London and Westminster Loan and Discount Co Ltd v Bilton'' (1911) 27 TLR 184.</ref><ref>{{cite AustLII|SAStRp|34|1942|litigants=West v Public Trustee |parallelcite=[1942] [[South Australian State Reports|SASR]] 109 |courtname=auto}}.</ref><br />
* Guardian/ward;<ref name="56 CLR 113"/><ref>Powell v Powell [1900] 1 Ch 243</ref><br />
* Religious adviser/member of the flock;<ref>''Allcard v Skinner'' (1887) 36 Ch D 145.</ref><ref>{{cite AustLII|NSWSC|406|2001|litigants=McCulloch v Fern |courtname=auto}}.</ref><ref>{{cite AustLII|NSWSC|810|2002|litigants=Hartigan v International Society for Krishna Consciousness Incorporated |courtname=auto}}.</ref><br />
* Solicitor (attorney)/client;<ref>''Re P's Bill of Costs'' (1982) 45 ALR 513 at 521-5.</ref><ref name="Westmelton">{{cite AustLII|VicRp|29|1983|litigants=Westmelton (Vic) Pty Ltd v Archer and Shulman |parallelcite=[1983] [[Victorian Reports|VR]] 305 |courtname=auto}}.</ref><ref>{{cite AustLII|VicLawRp|74|1927|litigants=Haywood v Roadknight |parallelcite=[1927] [[Victorian Law Reports|VLR]] 512 |courtname=auto}}.</ref><br />
* [[Doctor-patient relationship|Doctor/patient]];<ref>''Dent v Bennett'' (1839) 4 My & Cr 269; 41 [[English Reports|ER]] 105; ''Williams v Johnson'' [1937] 4 All ER 34.</ref> (note this excludes dentist and patient.<ref>''Brooks v Alca'' (1976) 60 DLR (3d) 577</ref>)<br />
<br />
In such cases, the [[legal burden of proof|burden of proof]] lies on the first of said parties (e.g. the government, parent, or doctor) to disprove undue influence on the second party. This requires the dominant party to establish that the second party "knew and understood what he or she was doing, and that he or she was acting independently of the influence of the dominant party".<ref>{{cite AustLII|NSWSC|650|2010|litigants=Tulloch (deceased ) v Braybon (No 2) |pinpoint=[40] |courtname=auto}}.</ref><ref>{{cite AustLII|HCA|3|1922|litigants=Watkins v Combes |parallelcite=[http://www.austlii.edu.au/au/cases/cth/HCA/1922/3.pdf (1922) 30 {{abbr|CLR|Commonwealth Law Reports}} 180] |courtname=auto}}.</ref> One influential factor in deciding whether the second party was acting independently is whether he or she was given an independent advice, while such an advice is not indispensable for rebutting the presumption.<ref>{{cite BAILII|litigants=Inche Noriah v Shaik Allie Bin Omar |court=UKPC |year=1928 |num=76 |format=1 |parallelcite=[1929] [[Appeal Cases Law Reports|AC]] 127 |courtname=auto |juris=Singapore}}.</ref><br />
<br />
=====Second subgroup=====<br />
The second subgroup covers relationships that do not fall into the first subgroup, but on the facts of case, there was an antecedent relationship between the parties that led to undue influence. The test is one of whether "one party occupies or assumes towards another a position naturally involving an ascendancy or influence over that other, or a dependence or trust on his part".<ref name="56 CLR 113"/><ref>{{cite AustLII|NSWSC|1159|2014|litigants=Thorn v Boyd |courtname=auto}}</ref><ref>{{cite AustLII|QCA|85|2011|litigants=Agripay Pty Limited v Byrne |courtname=auto}}.</ref> If the plaintiff satisfies this a presumption of undue influence will arise, to which the onus of proof transfers to the defendant, who thereon, must rebut that "in all the circumstances", the relationship between the parties involved "dealings were at arm's length and that the other’s will was in no way overborne by the relationship of confidence" that existed.<ref name="Westmelton"/><br />
<br />
====Actual undue influence====<br />
An innocent party may also seek to have a contract set aside for actual undue influence, where there is no presumption of undue influence, but there is evidence that the power was unbalanced at the time of the signing of the contract.<ref name="151 CLR 447">{{cite AustLII|HCA|14|1983|litigants=[[Commercial Bank of Australia Ltd v Amadio]] |parallelcite=(1983) 151 [[Commonwealth Law Reports|CLR]] 447 |date=12 May 1983 |courtname=auto}}.</ref><ref name="Westmelton"/> Factors such as age, mental capacity and literacy of the donee, among other considerations such as the nature of the transaction (fair or unfair) will help determine actual undue influence.<ref>{{cite AustLII|HCA|41|1936|litigants=[[Johnson v Buttress]] |parallelcite=[http://www.austlii.edu.au/au/cases/cth/HCA/1936/41.pdf (1936) 56 CLR 113] |courtname=auto}} at [3] per Starke J.</ref><br />
There is no requirement of manifest disadvantage.<ref>{{cite AustLII|HCA|81|1956|litigants=Blomley v Ryan |parallelcite=(1956) 99 [[Commonwealth Law Reports|CLR]] 362 |date=28 March 1956 |courtname=auto}}.</ref><br />
<br />
In ''Farmers' Co-Op Executors & Trustees v Perks'',<ref name="Farmers Co-op"/> a wife transferred her interest as tenant in common on a farming property to her husband; the property was owned jointly by the husband and herself. There was evidential proof that there was a long history of brutal domestic violence inflicted by the husband on the wife, whereby he ended up murdering her. There was a presumption that the wife only transferred her interest to the husband because of undue influence and evidence proved that the transfer resulted from actual undue influence. It was because of the history of violence that resulted in the judge setting aside the transfer.{{sfn|Paterson Robertson & Duke 2016|page=703}}<br />
<br />
A contrasting case is ''Lee v Chai'', in which Mr Lee purchased an apartment and a Porsche for Ms Chai, with whom he was having an affair.{{sfn|Paterson Robertson & Duke 2016|page=729}} Mr Lee argued that the gifts were given as a result of undue influence, and as such should be set aside. It was held that Mr Lee and Ms Chai were not in a relationship of influence that would attract the operation of the equitable doctrine. Mr Lee was a well-educated man with substantial experience in business affairs, while Ms Chai had a 'less forceful personality' and less business experience. This case highlights an approach taken in Australia, which is to focus on the impaired consent of the plaintiff.<ref>{{cite AustLII|QSC|136|2013|litigants=Lee v Chai |courtname=auto}}.</ref> Deane J in ''[[Commercial Bank of Australia Ltd v Amadio]]'' said 'Undue influence, like common law duress, looks to the quality of the consent or assent of the weaker party'.<ref>{{cite AustLII|HCA|14|1983|litigants=[[Commercial Bank of Australia Ltd v Amadio]] |parallelcite=(1983) 151 [[Commonwealth Law Reports|CLR]] 447 at p. 474 |courtname=auto}}</ref><ref>{{cite AustLII|WASC|19|2012|litigants=Anderson v McPherson (No 2) |courtname=auto}}.</ref><br />
<br />
====A special principle====<br />
<br />
In ''[[Garcia v National Australia Bank]]'' (1998),<ref name="194 CLR 395">{{cite AustLII|HCA|48|1998|litigants=[[Garcia v National Australia Bank]] |parallelcite=(1998) 194 [[Commonwealth Law Reports|CLR]] 395 |courtname=auto}}.</ref> the High Court of Australia approved the principle in ''Yerkey v Jones'',<ref>{{cite AustLII|HCA|3|1939|litigants=Yerkey v Jones |parallelcite=(1939) 63 [[Commonwealth Law Reports|CLR]] 649 |date=6 March 1939 |courtname=auto}}.</ref> by distinguishing between cases of actual undue influence and situations where the transaction is set aside because the guarantor does not understand the nature of the transaction.<ref name="194 CLR 395"/> Although there is no presumption of undue influence, a "lender is to be taken to have understood that, as a wife, the surety may repose trust and confidence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explain the purport and effect of the transaction to his wife; and yet ... did not itself take steps to explain the transaction to the wife or find out that a stranger had explained it to her."<ref>{{cite AustLII|HCA|48|1998|litigants=[[Garcia v National Australia Bank]] |parallelcite=(1998) 194 [[Commonwealth Law Reports|CLR]] 395 |pinpoint=[32] |courtname=auto}}.</ref><br />
<br />
===In England and Wales===<br />
{{main|Undue influence in English law}}<br />
<br />
==In probate law==<br />
"Undue influence" is the most common ground for [[will contest]]s and are often accompanied by a capacity challenge. That is, someone in possession of full mental capacity is not likely to be swayed by undue influence, manipulation, or coercion. In litigation most jurisdictions place the burden of proving undue influence on the party challenging the will. Undue influence can be very difficult to prove, and the mere appearance of undue influence is inadequate to challenge the validity of a will.<ref>''Core v. Core's Administrators'', 124 S.E. 453 (Va. 1924).</ref><br />
<br />
In [[probate law]], undue influence is generally defined as a [[testator]]'s loss of free agency regarding property disposition through contemporaneous psychological domination by an advisor, resulting in an excessive benefit to the advisor. It is important to note that "undue influence" is an issue only when the advisor is benefiting, not when advisor is getting a benefit for someone else;<ref>{{cite web|url=http://www.grossmanlaw.net/library/will-contest-based-on-undue-influence.cfm |title=California will contest or trust contest based on undue influence |publisher=Grossman Law Firm}}</ref> in that case it would be considered [[fraud]].<ref>Time Limit and Grounds for [https://www.goinglegal.co.uk/contesting-a-will/ "Contesting a Will"]. Going Legal Limited. Accessed May 15, 2015.</ref>{{Failed verification|date=June 2017}}<br />
<br />
In Germany, to avoid undue influence it is illegal for a testator who is or has been a resident of a [[nursing home]] to bequeath any property to any employee of the nursing home.<ref name="Scalise2008">Ronald J. Scalise Jr., [http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1061&context=djcil "Undue Influence and the Law of Wills: A Comparative Analysis"], 19 Duke J. Comp. & Int'l L. 41, 99 (2008).</ref><br />
<br />
==See also==<br />
* [[Vitiating factors in the law of contract]]<br />
* Compare with [[duress]]<br />
<br />
== References ==<br />
=== Citations ===<br />
{{Reflist}}<br />
<br />
=== Sources ===<br />
{{refbegin}}<br />
* {{cite book |last1=Paterson |first1=J. |last2=Robertson |first2=A. |last3=Duke |first3=A. |title=Principles of Contract Law |year=2016 |publisher=Thomson Reuters (Professional) Australia Limited |edition=5th |last-author-amp=yes |ref=CITEREFPaterson Robertson & Duke 2016}}<br />
{{refend}}<br />
<br />
[[Category:Contract law]]<br />
[[Category:Wills and trusts]]<br />
[[Category:Equitable defenses]]<br />
[[Category:Legal doctrines and principles]]<br />
[[Category:Influence (social and political)]]</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=Contracts/Course_of_dealing&diff=41945Contracts/Course of dealing2022-03-16T18:57:09Z<p>Rezsue: </p>
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<div>{{:Contracts/TOC}}<br />
The term '''course of dealing''' is defined in the [[Contracts/Uniform Commercial Code|Uniform Commercial Code]] as follows:<br />
<br />
<blockquote><br />
A "course of dealing" is a sequence of conduct concerning previous transactions between the parties to a particular transaction that is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.<br />
</blockquote><br />
<br />
[https://www.law.cornell.edu/ucc/1/1-303 UCC § 1-303(b)]. "Course of dealing," as defined in subsection (b), is restricted, literally, to a sequence of conduct between the parties previous to the agreement. A sequence of conduct after or under the agreement, however, is a "[[course of performance]]."<ref>Cmt. 2, UCC §&nbsp;1-303.</ref><br />
<br />
Even though, according to the [[parol evidence rule]], words and terms in a writing intended to be the final expression of the agreement of the parties may not be contradicted by extrinsic evidence of a prior or contemporaneous agreement, extrinsic evidence in the form of course of dealing nonetheless may be used to explain or supplement the writing. An [[integration clause]] in a contract, stating that the parties intend the writing to be a complete and exclusive statement of the terms of the agreement does not suffice to negate the importance of course of dealing, "because these are such an integral part of the contract that they are not normally disclaimed by general language in the [[merger clause]]."<ref>''[[Allapattah Servs. v. Exxon Corp.]]'', 61 F. Supp. 2d 1308, 1314 (S.D. Fla. 1999).</ref><br />
<br />
Under the common law, extrinsic evidence such as course of dealing could be considered only the written contract was ambiguous.<ref>See, e,g, ''Pepcol Mfg. v. Denver Union Corp.'', 687 P.2d 1310, 1314 (Colo. 1984) ("It is only where the terms of an agreement are ambiguous or used in some special or technical sense not apparent from the contractual document itself that the court may look beyond the four corners of the agreement in order to determine the meaning intended by the parties.").</ref> By contrast, "Under the UCC, the lack of facial ambiguity in the contract language is basically irrelevant to whether extrinsic evidence ought to be considered by the court as an initial matter."<ref>See ''[[Amoco Prod. Co. v. W. Slope Gas Co.]]'', 754 F.2d 303, 307-08 (10th Cir. 1985). See also Cmt. 1(c), UCC §&nbsp;1-303: "This section definitely rejects the requirement that a condition precedent to the admissibility of the type of evidence specified in paragraph (a) is an original determination by the court that the language used is ambiguous.").</ref><br />
<br />
Evidence of course of dealing will be disallowed, however, if it is "carefully negated" in the parties' contract by "specific and unequivocal" language.<ref>''Precision Fitness Equip., Inc. v. Nautilus, Inc.'', Civil Action No. 08-cv-01228-CMA-KLM, 2011 U.S. Dist. LEXIS 13576, at *25 (D. Colo. Feb. 2, 2011) (collecting cases). In that case the parties carefully negated course of dealing by including the following sentence in the Agreement: "Past practice and terms of dealing between [Nautilus] and [Precision], or in the industry generally, shall not be used to .&nbsp;.&nbsp;. interpret the terms of this Agreement."<br />
</ref><br />
<br />
Although the term is usually used in US contract law, where the parties' course of dealing helps the court to understand the intention of the contracting parties, it is also used elsewhere in the law. In US patent law the term is used to help interpret the meaning of words used in patent claims by examining the prosecution history of a patent to determine what meaning the applicant and patent examiner understood claim words to have. It has been observed in the [[Federal Circuit]]:<br />
<br />
<blockquote>The prosecution history often proves useful in determining a patent's scope, for it reveals the course of dealing with the Patent Office, which may show a particular meaning attached to the terms, or a position taken by the applicant to ensure that the patent would issue.<ref>''Markman v. Westview Instruments, Inc.'', 52 F.3d 967, 991 (Fed. Cir. 1995) (concurring opinion of Mayer, J).</ref></blockquote><br />
<br />
==References==<br />
{{Reflist}}</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=Contracts/Implication-in-fact&diff=41944Contracts/Implication-in-fact2022-03-16T18:50:24Z<p>Rezsue: </p>
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<div>{{:Contracts/TOC}}<br />
====In General====<br />
An '''implied-in-fact contract''', or an implied contract in the proper sense, arises where the intention of the parties is not expressed, but an agreement in fact, creating an obligation, is implied or presumed from their acts,<ref>'''Hawaii.'''-- [[Wall v. Focke]], 21 Hawaii 399, 403, AnnCas 1916C 677 [quot Cyc].<br /><br />
'''IIl.'''-- [[Peo. v. Dummer]], 274 Ill. 837,113 NE 934.<br /><br />
'''Ind.'''-- [[Yawger v. Joseph]], 184 Ind. 228, 108 NE 774.<br /><br />
'''Iowa.'''-- [[Ottumwa Mill, etc., Co. v. Manchester]], 139 Iowa 334, 115 NW 911, 81<br /><br />
'''La.'''-- [[Baker v. Stoutmeyer]], 2 MeG.<br /><br />
'''N.H.'''-- [[Bixby v. Moore]], 61 N. H. 402.<br /><br />
'''N.J.'''-- [[Gannon v. Brady Brass Co.]], 82 N. J. L. 411. 81 A 727, AnnCas 1913C 1308.<br /><br />
'''N.Y.'''-- [[Peo. v. Speir]], 77 N. Y. 144.<br /><br />
'''Oh.'''-- [[Columbus, etc., R. Co. v. Gaffney]], 85 Oh. St. 104, 61 NE 162.<br /><br />
'''Pa.'''-- [[Hertzog v. Hertzog]], 29 Pa. 466.<br /><br />
Phillipine.-- [[Peres v. Pomar]], 2 Phillipine 882.<br /><br />
'''S.C.'''-- [[Dowling v. Charleston, etc., R. Co.]], 81. SE 313.<br /><br />
'''Tenn.'''-- [[Thompson v. Woodruff]], 7 Coldw. 407, 410. <br /><br />
'''Tex.'''-- [[Cuneo v. De Cuneo]], 24 Tex. Civ. A. 436, 69 SW 284.<br /><br />
"A contract may be implied where an agreement in fact is presumed from the acts of the parties, and this is the proper meaning of an implied contract." [[Peo. v. Dummer]], 274 Ill. 637, 640, 113 NE 934.<br /><br />
"An implied agreement is one where the conduct of the parties with reference to the subject matter is such as to induce the belief that they intended to do that which their acts indicate they have done." [[Cuneo v. De Cuneo]], 24 Tex. Civ. A. 436, 438, 69 SW 284.</ref> or, as it has been otherwise stated, where there are circumstances which, according to the ordinary course of dealing and the, common understanding of men, show a mutual intent to contract.<ref>'''U.S.'''-- [[Wisconsln Steel Co. v. Maryland Steel Co.]], 203 Fed. 408, 121 CCA 607; [[Knapp v. U.S.]], 4S Ct. Ct. 601.<br /><br />
'''Iowa.'''-- [[Fouke v. Jackson County]], 84 Iowa 616, 51 NW 71.<br /><br />
'''N.H.'''-- [[Sceva v. True]], 53 N.H. 627.<br /><br />
'''N.J.'''-- [[Passino v. Brady Brass Co.]], 88 N.J.L. 419, 421, 84 A 616 [cit Cyc].<br /><br />
'''N.Y.'''-- [[Keokuk Commercial Bank v. Pfeiffer]], 22 Hun 327 [aff 108 N.Y. 242, 16 NE 811].<br /><br />
'''Pa.'''-- [[Hertzog v. Hertzog]], 29 Pa. 465.<br /><br />
'''Tex.'''-- [[Pierce v. Aiken]], (Civ. A.) 146 SW 950, 962 [quot Cyc.).<br /><br />
In implied contracts {{Quote|the parties have capacity to contract; facts, circumstances, few or many, clear or complicated, exist, which lead the minds of the jurors to the conclusion that the minds of the parties met. Minds may meet by words, acts, or both. The words even may negative such meeting, but "acts which speak louder than words" may conclude him who denies a tacit contract.}}[[Sceva v. True]], 63 N. H. 627, 629.<br /><br />
"Implied contracts in fact do not arise from the denials and contentions of parties." [[Knapp v. U.S.]], 46 Ct. Cl. 601, 643. </ref> It follows that the only distinction between this species of contract and express contracts rests in the mode of proof;<ref>'''Hawaii.'''-- [[Wall v. Focke]], 22 Hawaii 221.<br /><br />
'''Ill.'''-- [[Peo. v. Dummer]], 274 Ill. 637, 113 NE 934; [[Highway Comrs. v. Bloomington]], 253 Ill. 184, 97 NE 280, AnnCas1913A 471.<br /> ·<br />
'''Me.'''-- [[Saunders v. Saunders]], 90 Me. 284, 38 A 172.<br /><br />
'''Mich.'''-- [[Woods v. Ayres]], 39 Mich. 346, 33 AmR 396.<br /><br />
'''N.Y.'''-- [[McCarthy v. New York]], 96 N.Y. 1, 48 AmR 601; [[Peo. v. Speir]], 77 N.Y. 144.<br /><br />
'''Oh.'''-- [[Columbus, etc., R. Co. v. Gaffney]], 66 Oh. St. 104, 61 NE 162.<br /><br />
'''Tex.'''-- [[Fordtran v. Stowers]], 62 Tex. Civ. A. 226, 113 SW 631.<br /><br />
{{Quote|Neither an express contract nor one by implication can come into existence unless the parties sustain contract relations, and the difference between the two forms consists in the mode of substantiation and not in the nature of the thing itself. . . . To constitute either one or the other the parties must occupy towards each other a contract status and there must be that connection, mutuality of will and interaction of parties, generally expressed though not very clearly by the term "privity." Without this a contract by implication is quite impossible.}} [[Woods v. Ayres]], 39 Mich. 345, 360, 33 AmR 396.<br />
<br />
{{Quote|As ordinarily understood, the only difference between an express contract and an impiled contract is that in the former the parties arrive at their agreement by words, either oral or written, sealed or unsealed, while in the latter their agreement is arrived at by a consideration of their acts and conduct.}} [[Highway Comrs. v. Bloomington]], 263 Ill. 164, 17%. 97 NE 280. AnnCas1913A 471. </ref> the nature of the understanding is the same, and both express contracts and contracts implied in fact are founded on the mutual agreement of the parties.<ref>'''Ala.'''-- [[Montgomery v. Montgomery Water Works Co.]], 77 Ala. 248; [[Keel v. Larkin]], 72 Ala. 49S.<br /><br />
'''Cal.'''-- [[Smlth v. Moynihan]], 44 Cal. 63.<br /><br />
'''Ill.'''-- [[Saul v. Busenbark]], 83 Ill. A. 256 (rev on other grounds 184 Ill. 343. 66 NE 417).<br /><br />
'''Minn.'''-- [[Lombard v. Rahilly]], 127 Minn. 449, 149 NW 960.<br /><br />
'''N.Y.'''-- [[Peo. v. Speir]], 77 N.Y. 144; [[Chilcott v. Trimble]], 13 Barb. 502.<br /><br />
'''Pa.'''-- [[Hertzog v. Hertzog]], 29 Pa. 465; [[Garst v. Wissler]], 21 Pa. Super. 632.<br /><br />
'''Tex.'''-- [[Prichard v. Foster]], (Civ. A.) 170 SW 1077; [[Fordtran v. Stowers]], 52 Tex. Civ. A. 226, 113 SW 631.<br /><br />
'''Vt.'''-- [[Underhlll v. Rutland R. Co.]], 98 A 1017; [[Morse v. Kenney]], 87 Vt. 445, 89 A 866; [[Mathie v. Hancock]], 78 Vt. 414, 63 A 143.<br /><br />
'''Meeting of minds'''-- If the contract to be proved is an actual one, a meeting of minds is as essential to an implied contract as to an express one. [[Columbus, etc., R. Co. v. Gaffney]], 66 Oh. St. 104, 81 NE 162.</ref> The one class is proved by direct, the other by indirect, evidence;<ref>[[Highway Comrs. v. Bloomington]], 253 Ill. 164, 97 NE 280, AnnCas 1913A 471; [[Indianapolis Coal Tract. Co. v. Dalton]], 43 Ind. A. 330, 87 NE 662; [[Pence v. Beckman]], 11 Ind. A. 263, 39 NE 169, 54 AmSR 505; [[Gillan v. O'Leary]], l24 App. Div. 498, 108 NYS 1024; [[Chilcott v. Trimble]], 13 Barb. (N.Y.) 502.</ref> in other words, the one must be proved by an actual agreement, while in the case of the other it will be implied that the party did make such an agreement as, under the circumstances disclosed, he ought in fairness to have made.<ref>[[Smith v. Moynihan]], 44 Cal. 53; [[Rose v. Wollenberg]], 38 Or. 164, 59 P 190; [[Coffroth v. Somerset County]], 19 Pa. Co. 354.</ref> The implication, of course, must be a reasonable deduction from all the circumstances and relations of the parties,<ref>'''Ky.'''-- [[Belknap v. Hayden]], 1 KyL 119, 10 Ky. Op. 652<br /><br />
'''Md.'''-- [[Burt v. Myer]], 71 Md. 467, 18 A 796.<br /><br />
'''Mass.'''-- [[Newmarket Mfg. Co. v. Coon]], 160 Mass. 566, 23 NE 380.<br /><br />
'''N.Y.'''-- [[Miller v. Schloss]], 218 N.Y. 400, 113 NE 387, 89<br /><br />
'''Vt.'''-- [[Morse v. Kenney]], 87 Vt. 445.<br /><br />
'''B.C.'''-- [[Galbraith v. Hudson's Bay Co.]], 7 B.C. 431.<br /><br />
'''Man.'''-- [[Aikens v. Allan]], 14 Man. 549; [[Munro v. Irvine]], 9 Man. 121.<br /><br />
See [[Godfrey v. White]], 43 Mich. 171, 5 NW 243 (holding that a merchant who for his own purposes sends his customers to another dealer does not thereby acquire any claim on him).<br /><br />
'''Evidence held not to show promise:'''<br />
# To pay for building material. [[Citizens Electric Light, etc., Co. v. Van Lent]], (Iowa) 103 NW 796.<br />
# By a bank to pay the debts of the firm to which it succeeded. [[Tecumseh Nat. Bank v. Saunders]], 50 Nebr. 521, 70 NW 42.<br />
# To pay the excess of proceeds of a sale over the debt. [[Holland v. Laconia Bldg., etc., Assoc.]] 68 N.H. 480, 41 A 178.<br />
# Between creditors to prorate loss. [[Swingle v. Brown]], (Tenn. Ch.) 48 SW 347.<br />
# To pay for materials. [[Limer v. Traders' Co.]], 44 w. Va. 175, 28 SE 730.<br />
# To pay for logs cut. [[Tuhotte v. Jervis Inlet Lumber Co.]], (B.C.) 18 WestLR 338.<br />
# To pay for repairs to an automobile after a fire in a garage. [[Helber v. Schaible]], 183 Mich. 379, 150 NW 145.<br /><br />
'''Evidence held to show implied promise of:'''<br />
#Payment to tenant of damage from fallure to complete building. [[Ottumwa Mill., etc., Co. v. Manchester]], 139 Iowa 134, 116 NW 911.<br />
# Payment by person in quarantine for supplies furnished. [[Plymouth Tp. v. Klug]], 28 N.D. 807, 146 NW 130.<br />
# Payment for automobile repairs. [[Helber v. Schaible]], 183 Mich. 379, 150 NW 145.<br />
# Payment of subcontractor. [[Schade v. Muller]], 75 Or. 216, 146 P l44.<br />
# Payment of attorney's fees. [[Caldwell v. Stalcup]], (Tex. Civ. A.) 166 SW 110.<br />
# Payment of money at death. [[Hatch v. Gillette]], 8 App. Div. 806, 40 NYS 1018.<br />
# Payment for storage. [[Taylor v. Dexter Engine Co.]], 146 Mass. 813, 18 NE 462.</ref> although it need not be evidenced by any precise words,<ref>[[Park-Robertson Hardware Co. v. Copeland]], 11 Ala. A. 447, 66 S 880; [[Stobie v. Earp]], 110 Mo. A. 73, 83 SW 1097.<br /><br />
'''Illustration.--'''a promise by a debtor, with the assent of his creditor, to pay his debt to a third person may be implied from any words or conduct evidencing such intention. [[Park-Robertson Hardware Co. v. Copeland]], 11 Ala. A. 447, 66 S 880.</ref> and may result from random statements and uncertain language.<ref>[[Rosenbaum v. Levitt]], l09 Iowa 292, 80 NW 393.</ref> A contract will not be implied where it would result in the perpetration of a wrong,<ref>[[Klug v. Sheriffs]], 129 Wis. 168, 109 NW 656, 116 AmSR 967, 7 LRANS 362, 9 AnnCas 1013.<br /><br />
'''Illustration.--'''Defendant had delvered to plaintiff two photographs of his deceased wife for the purpose of having a portrait painted therefrom. It was agreed between the parties that the portrait should be painted from a specified one of the photographs. This was done, and the portrait was accepted and paid for by defendant. Thereafter. the artist painted a second portrait from the other photograph and submitted it to plaintif, and it was held that plaintiff, on refusing to return such second portrait, did not become liable to the artist for its value. [[Klug v. Sheriffs]], 129 Wis. 168, 109 NW 656, 116 AmSR 967, 7 LRANS 362, 9 AnnCas 1013.</ref> or it would be inequitable to do so,<ref>[[Irwin v. Jones]], 46 Ind. A. 588, 92 NE 787.</ref> or where the parties cannot legally make an express contract;<ref>[[Simpson v. Bowden]], 33 Me. 549; [[Bailey v. Sibley Quarry Co.]], 166 Mich. 321, 129 NW 17; [[Miller v. Schloss]], 218 N.Y. 400, 113 NE 337; [[Chase v. Second Ave. R. Co.]], 97 N.Y. 314, 49 AmR 631; [[Leslie v. Reliable Adv., etc., Agency]], [1915] 1 K.B. 652<br /><br />
'''Illustration.--'''That a postmaster keeping his post office in a store in which he is employed as manager by a corporation, and turning over to it the proceeds of the store and post office, neglects to claim or to withdraw his commissions for four or five years does not vest title to them in the corporation, for the law will not imply a contract with reference to the emoluments of a public office. [[Bailey v. Sibley Quarry Co.]], 166 Mich. 321, 129 NW 17.</ref> so a promise to do an act contrary to duty or to law is never implied.<ref>[[Cary v. Curtis]], 3 How. (U.S.) 236, 11 L. ed. 576; [[American-Hawaiian Engineering, etc., Co. v. Terr.]], 16 Hawaii 711.</ref><br />
<br />
====Adoption of existing contract====<br />
Where a person who is a stranger to a contract deliberately enters into relations with one of the parties which are consistent only with an adoption of such contract, and so acts as to lead such party to believe that he has made the contract his own, he will not be permitted afterward to repudiate it.<ref>[[Wiggins Ferry Co. v. Ohio, etc., R. Co.]], 142 U.S. 398, 12 SCt l33, 35 L. ed. 1055; [[Swift v. Detroit Rock Salt Co.]], 233 Fed. 231, 147 CCA 237; [[Taenzer v. Chicago, etc., R. Co.]], 170 Fed. 240, 95 CCA 436.</ref><br />
<br />
====Questions of what facts will establish an implied contract====<br />
Being identical with the questions of what facts are sufficient to show an offer and acceptance, are treated in connection with the discussion of offer,<ref>See [[Contracts/Offer|Offer]].</ref> acceptance,<ref>See [[Contracts/Acceptance|Acceptance]].</ref> and intent to affect legal relations<ref>See [[Contracts/Intention to Bind|Intention to Bind]].</ref> generally.<br />
<br />
====Other definitions====<br />
# A contract is implied when it is evidenced by conduct manifesting an intention of an agreement."<ref>[[Gillan v. O'Leary]], 124 App. Div. 498, 502, 108 NYS 1024.</ref><br />
# "A contract . . . is implied when the agreement is matter of inference and deduction."<ref>[[Gillan v. O'Leary]], 124 App. Dlv. 498, 501, 108 NYS 1024.</ref><br />
# "An implied contract is co-ordinate and commensurate with duty, and whenever it is certain that one ought to do a particular thing . . . the law presumes the former to have promised that thing."<ref>[[Moore v. Renick]], 95 Mo. A. 202, 207, 68 SW 936.</ref><br />
# "An implied agreement is one where the conduct of the parties with reference to the subject matter is such as to induce the belief that they intended to do that which their acts indicate they have done."<ref>[[Cuneo v. De Cuneo]], 24 Tex. Civ. A. 436, 438, 59 SW 284.</ref><br />
# "An implied promise always exists where equity and justice require a party to do or refrain from doing the thing in question; where the covenant on one side involves some corresponding obligations on the other; where by the relations of the parties and the subject matter of the contract a duty is owing by one not expressly bound by the contract to the other party in reference to the subject of . . . [the contract]; and where it may be rightfully assumed that it would have been made if attention had been drawn to it."<ref>[[Marvin v. Rogers]], 63 Tex. Civ. A. 423, 428, 115 SW 863.</ref><br />
# "An Implied contract, in fact, arises where there is not an express contract, but there is circumstantial evidence showing that the parties did intend to make a contract."<ref>[[Turner v. Owen]], 122 Ill. A. 501, 504.</ref><br />
# An implied contract is one the existence and terms of which "is inferred from the conduct, situation, or mutual relations of the parties, and enforced by the law on the ground or justice."<ref>[[Jennings v. State Bank]], 79 Cal. 323, 326, 21 P 852, 12 AmSR 146, 6 LRA 233.</ref><br />
# "The term implied contract is generally used to denote a promise which the law, from the existence of certain facts, presumes that a party has made."<ref>[[Davis v. Seymour]], 59 Conn. 531, 533, 21 A 1004, 13 LRA 210 (quot 1 Swift Dig. p 182).</ref><br />
<br />
====Statutory definitions====<br />
"One, the existence and terms of which are manifested by conduct." <ref>Cal. Civ.<br />
Code (1903) § 1621; N.D. Rev. Codes (1899) § 3884; Okl. Rev. St. (1903) § 777; S.D. Civ. Code (1903) § 1235.</ref><br />
<br />
====Criticisms of the term====<br />
# "Contracts which are proved by the declarations and conduct of the parties and other circumstances, all of which are explainable only upon the theory of a mutual agreement, are often called, although not with en· tire accuracy, Implied contracts, and this definition will explain the ambiguity of some authorities and the apparent contrariety of others, all of the authorities, however, seem to agree that in suits for compensation for services, where a family relation is conceded or shown to exist, an actual contract must be clearly proved. Such contract may be in writing or it may rest entirely in parol, but it must nevertheless be a contract, and in our opinion it is a misnomer to denominate it an implied contract. It does not arise from nor is it aided by implication, but must be strictly proved."<ref>[[Hinkle v. Sage]], 67 Oh. St. 268, 263, 66 NE 999.</ref><br />
#"It is sometimes said that 'the law implies an agreement' as to the matters omitted to be explicitly stated in the verbal bargain. Strictly speaking, this is inaccurate. The agreement, though not fully expressed in words, is, nevertheless, a genuine agreement of the parties; it is 'implied' only in this, that it is to be inferred from the acts or conduct of the parties instead of from their spoken words; 'the engagement is signified by conduct instead of words.' But acts intended to lead to a certain inference may 'express a promise as well as words would have done.'"<ref><br />
[[Bixby v. Moore]], 61 N.H. 402, 403.</ref><br />
<br />
====Effect of Express Contract====<br />
There can be no implied contract where there is an express contract between the parties in reference to the same subject matter.<ref>'''U.S.'''-- ''[[Hawkins v. U.S.]]'', 98 U.S. 689. 24 L. ed. 607; ''[[Perkins v. Hart]]'', 11 Wheat. 237, 6 L. ed. 463; [[The Corfe Castle]] 221 Fed. 98; [[Amalgamated Gum Co. v. Casein Co.]], 146 Fed. 900; [[Arthur v. Baron de Hirsch Fund]], 121 Fed. 791, 58 CCA 67 [certiorari den 191 U.S. 570, 24 SCt 842, 48 L. ed. 306]; [[Krouse v. Deblois]], 14 F. Cas. No. 7 937, 1 Cranch C.C. 138; [[Hartman v. U.S.]], 40 Ct. Cl. 133.<br /><br />
'''Ala.'''-- [[Loval v. Wolf]], 179 Ala. 505, 60 S 298; [[Alexander v. Alabama Western R. Co.]], 179 Ala. 480, 481, 60 S 295 (cit Cyc); [[Burkham v. Spiers]], 56 Ala. 547; [[Vincent v. Rogers]], 30 Ala. 471.<br /><br />
'''Ark.'''-- [[Jackson v. Jones]], 22 Ark. 158; [[Manuel v. Campbell]], 3 Ark. 324.<br /><br />
'''Conn.'''-- [[Weinhouse v. Cronin]], 68 Conn. 250, 36 A 45; [[King v. Kilbride]], 53 Coon. 109, 19 A 519; [[Leonard v. Dyer]], 26 Conn. 172, 68 AmD 382; [[Weed v. Weed]], 22 Conn. 364; [[Russell v. South Britain Soc.]], 9 Conn. 508; [[Shepard v. Palmer]], 6 Conn. 95; [[Hampton v. Windham]], 2 Root 199; [[Snow v. Chapman]], 2 Root 99; [[White v. Woodruff]], 1 Root 309; [[Carew v. Bond]], 1 Root 269; [[Avery v. Kinsman]], Kirby 354.<br /><br />
'''Del.'''-- [[Draper v. Randolph]], 4 Del. 454.<br />
'''Ga.'''-- [[Baldwin v. Lessner]], 8 Ga. 71.<br />
'''Ill.'''-- [[Miller v. Duntley]], 264 Ill. 268, 106 NE 198; [[Ford v. McVay]], 55 Ill. 119; [[Walker v. Brown]], 28 Ill. 378, 81 Am. Dec. 287; [[Cast v. Roff]], 28 Ill. 462; [[Brougham v. Paul]], 138 Ill. A. 465; [[Brenzel v. Kirschner]], 128 Ill. A. 136; [[Schiml v. Edgeworth]], 118 Ill. A. 332; [[Ramming v. Caldwell]], 43 Ill. A. 175; [[Ginders v. Ginders]], 21 Ill. A. 522; [[Rollins v. Duffy]], 14 Ill. A. 69.<br /><br />
'''Ind.'''-- [[Long v. Straus]], 107 Ind. 94, 6 NE 123, 7 NE 763, 57 AmR 87; [[Cranmer v. Graham]], 1 Blackf. 406.<br /><br />
'''Iowa.'''-- [[Hall v. Luckman]], 107 NW 932; [[Powell v. Crampton]], 102 Iowa<br />
364, 71 NW 579; [[White v. Jones]], 67 Iowa 241, 25 NW 151.<br /><br />
'''Kan.'''-- [[Ray v. Missouri, etc., R. Co.]], 90 Kan. 244, 133 P 847; [[Smyser v. Fair]], 73 Kan. 733, 86 P 408.<br /><br />
'''Ky.'''-- [[Morford v. Ambrose]], 3 J.J. Marsh, 688; [[Coffman v. Allin]], Litt. Sel. Cas. 200; [[Pringle v. Samuel]], 1 Bibb 172; [[Fonda v. Smith]], 6 KyL 853.<br /><br />
'''La.'''-- [[Harris v. Louisiana Mach., etc., Co.]], 112 La. 196, 36 S 320; [[Mazureau v. Morgan]], 25 La. Ann. 281; [[Willis v. Melville]], 19 La. Ann. 13.<br /><br />
'''Me.'''-- [[Simpson v. Bowden]], 33 Me. 549; [[Charles v. Dana]], 14 Me. 383.<br />
'''Md.'''-- [[Sherley v. Sherley]], 118 Md. 1, 84 A 160; [[Speake v. Sheppard]], 6 Harr. & J. 81; [[Watkins v. Hodges]], 8 Harr. & J. 38; [[Hannan v. Lee]], 1 Harr. & J. 131.<br /><br />
'''Mass.'''-- [[Brown v. Fales]], 139 Mass. 21, 29 NE 211; [[Zerrahn v. Ditson]], 117 Mass. 553; [[Whiting v. Sullivan]], 7 Mass. 107; [[Worthen v. Stevens]], 4 Mass. 448.<br /><br />
'''Mich.'''-- [[In re De Haan]], 169 Mich. 146, 134 NW 983; [[Cashin v. Pliter]], 168 Mich. 388, 134 NW 482, AnnCas 1913C 697; [[Hickey v. Lundy]], 168 Mich. 386, 134 NW 4; [[Hathaway v. Vaughan]], 162 Mich. 269, 127 NW 337; [[Boughton v. Francis]], 111 Mich. 26, 69 NW 94; [[Schurr v. Savigny]], 85 Mich. 144, 48 NW 547; [[Keystone Lumber, etc., Mfg. Co. v. Dole]], 43 Mich. 370, 6 NW 412; [[Hunt v. Sackett]], 31 Mich. 18; [[Wilson v. Wagar]], 26 Mich. 452; [[Butterfield v. Seligman]], 17 Mich. 95; [[Galloway v. Holmes]], 1 Dougl. 330.<br /><br />
'''Minn.'''-- [[Marcotte v. Beaupre]], 15 Minn. 162; [[Bond v. Corbett]], 2 Minn. 248.<br /><br />
'''Miss.'''-- [[Musgrove v. Jackson]], 59 Miss. 390; [[New Orleans, etc., R. Co. v. Pressly]], 45 Miss. 66; [[Morrison v. Ives]], 12 Miss. 652.<br /><br />
'''Mo.'''-- [[Chambers v. King]], 8 Mo. 617; [[Stollings v. Sappington]], 8 Mo. 118; [[Christy v. Price]], 7 Mo. 430; [[Johnson v. Strader]], 3 Mo. 359; [[Hicks v. National Surety Co.]], 169 Mo. A. 479, 155 SW 71; [[Clarke v. Kane]], 37 Mo. A. 258; [[Lindersmith v. South Missouri Land Co.]], 31 Mo. A. 258; [[Houck v. Bridwell]], 28 Mo. A. 644; [[Davidson v. Beirmann]], 27 Mo. A. 666; [[Suits v. Taylor]], 20 Mo. A. 166.<br /><br />
'''Nebr.'''-- [[Powder River Live Stock Co. v. Lamb]], 38 Nebr. 339, 56 NW 1019.<br /><br />
'''N.H.'''-- [[Streeter v. Sumner]], 19 N.H. 516; [[Britton v. Turner]], 6 N.H. 481, 26 AmD 713.<br /><br />
'''N.J.'''-- [[Voorhees v. Combs]], 83 N.J. L. 494.<br /><br />
'''N.Y.'''-- [[Miller v. Schloss]], 218 N.Y. 400, 113 NE 337; [[Watson v. Gugino]], 204 N.Y. 636, 911 NE 18, 39 LRANS 1090, AnnCas19UD 216; [[Glacius v. Black]], 60 N.Y. 145, 10 AmR 449; [[Work v. Beach]], 63 Hun 7, 6 NYS 27: [[Preston v. Yates]], 24 Hun 634; [[Harris v. Story]], 2 E.D. Smith 363; [[Gauld v. Lipman]], 4 Misc. 78, 23 NYS 778; [[Merrill v. Ithaca, etc., R. Co.]] 16 Wend. 686, 30 AmD 130; [[Outwater v. Dodge]], 7 Cow. 85; [[Wood v. Edwards]], 19 Johns. 206; [[Clark v. Smith]], 14 Johns. 326; [[Jennings v. Camp]], 13 Johns. 94, 7 AmD 367; [[Raymond v. Bearnard]], 12 Johns. 274, 7 AmD 317. And see [[Patterson v. Kelly]], 59 Hun 626, 14 NYS 111.<br /><br />
'''N.C.'''-- [[Morganton Mfg., etc., Co. v. Andrews]], 165 N.C. 285, 290, 81 SE 418, AnnCas1916A 763 (cit Cyc); [[Lindsay v. Hamburg Bremen Ins. Co.]], 115 N. C. 212, 20 SE 870; [[Lawrence v. Hester]], 93 N.C. 79; [[Dula v. Cowles]], 47 N.C. 454; [[Winstead v. Reid]], 44 N.C. 76, 57 AmD 571.<br /><br />
'''Oh.'''-- [[Kachelmacher v. Laird]], 92 Oh. St. 324, 110 NE 933; [[Abbott v. Inskip]], 29 Oh. St. 59; [[Creighton v. Toledo]], 18 Oh. St. 447; [[Hall v. Blake]], Wright 489; [[Halloway v. Davis]], Wright 129.<br /><br />
'''Or.'''-- [[Fiske v. Kellogg]], 3 Or. 603.<br /><br />
'''Pa.'''-- [[Musser v. Ferguson Tp.]], 6& Pa. 476.<br /><br />
'''S.C.'''-- [[Suber v. Pullin]], 1 S.C. 273; [[Wood v. Ashe]], 32 S. C. L. 407; [[Stent v. Hunt]], 21 S.C. L. 225.<br /><br />
'''Tex.'''-- [[Gammage v. Alexander]], 14 Tex. 414; [[Prichard v. Foster]], (Civ. A.) 170 SW 1077, 1079 (cit Cyc); [[Sanborn v. E. R. Roach Drug Co.]], (Civ. A.) 137 SW 182, 183 {cit Cyc); [[Armstrong v. Cleveland]], 32 Tex. Civ. A. 482, 74 SW 789.<br /><br />
'''Vt.'''-- [[Hemenway v. Smith]], 28 Vt. 701; [[Camp v. Barker]], 21 Vt 469.<br /><br />
'''Wis.'''-- [[Appleton Waterworks Co. v. Appleton]], 132 Wis. 663, 113 NW 44; [[Tletz v. Tietz]], 90 Wis. 66, 62 NW 939; [[Maynard v. Tidball]], 2 Wis. 34.<br /><br />
'''Eng.'''-- [[James v. Cotton]], 7 Bing. 266, 20 ECL 126, 131 Reprint 103; [[Hulle v. Heightman]], 2 East 146, 102 Reprint 324; [[Selway v. Fogg]], 5 M. & W. 83, 151 Reprint 38; [[Cutter v. Powell]], 6 T.R. 320, 101 Reprint 673, 6 ERC 627; [[Toussaint v. Martinnant]], 3 T.R. 104, 100 Reprint 65.<br /><br />
'''Can.'''-- [[Allcroft v. Adams]], 38 Can. S.C. 366; [[Connolly v. St. John]], 35 Can. S.C. 186.<br /><br />
'''Man.'''-- [[Knox v. Munro]], 13 Man. 16.</ref> The reason of the rule is that, since parties are bound by their agreement, there is no ground for implying a promise where there is an express contract,<ref>[[Walker v. Brown]], 28 Ill. 378, 81 AmD 287; [[Morganton Mfg., etc., Co. v. Andrews]], 186 N.C. 286, 81 SE 418. AnnCas1916A 763.</ref> and it can make no difference whether the contract is made by the parties themselves or by others for them.<ref>[[Walker v. Brown]], 28 Ill. 378, 81 AmD 287</ref> This rule only applies, however, where the express and the asserted implied contract relate to the same subject matter, and where the provisions of the express contract would supersede those of the other.<ref>[[Wheeling, etc., R. Co. v. Carpenter]], 218 Fed. 273, 134 CCA 69; [[Rogers v. Becker-Brainard Milling Mach. Co.]], 211 Mass. 669, 98 NE 692; [[Wilson v. Dietrich]], (N.J. Ch.) 59 A 251; [[Commercial Bank v. Pfeiffer]], 22 Hun 327 [aff 108 N.Y. 242, 16 NE 311].</ref> It does not apply where the implied agreement is based on the subsequent conduct of the parties not covered by the express contract.<ref>[[Efron v. Stees]], 113 Minn. 242, 129 NW 374; [[Murphy v. Quigley]], 21 Oh. Cir. Ct. 313, 11 Oh. Cir. Dec. 638.</ref> Further, where the express contract is rescinded, resort may be had to an implied contraet.<ref>'''U.S.'''-- [[Columbia Bank v. Patterson]], 7 Cranch 299, 3 L. ed. 351.<br /><br />
'''Colo.'''-- [[Cody v. Raynaud]], 1 Colo. 272.<br /><br />
'''Ill.'''-- [[Walker v. Brown]], 28 Ill. 378, 81 AmD 287.<br /><br />
'''Miss.'''-- [[Morrison v. Ives]], 12 Miss. 652.<br /><br />
'''Eng.'''-- [[Towers v. Barrett]], 1 T.R. 133, 99 Reprint 1014.</ref> So if the contract has been completely executed, plaintiff may recover as on an implied contract, under an indebitatus assumpsit, the price of his services, but the contract must regulate the amount of recovery.<ref>[[Columbia Bank v. Patterson]], 7 Cranch 299, 3 L. ed. 351.<br /><br />
'''Conn.'''-- [[Londregon v. Crowley]], 12 Conn. 558.<br /><br />
'''Ill.'''-- [[Walker v. Brown]], 28 Ill. 378, 81 AmD 287; [[Holmes v. Stummel]], 24 Ill. 370.<br /><br />
'''Me.'''-- [[Charles v. Dana]], 14 Me. 383,<br /><br />
'''Eng.'''-- [[James v. Cotton]], 7 Bing. 266, 20 ECL 125, 131 Reprint 103.</ref> Further, a contract may be implied when the express agreement is unenforceable for certain reasons.<ref>[[Walker v. Brown]], 28 Ill. 378, 81 AmD 287; [[Gay v. Mooney]], 67 N.J.L. 27, 50 A 596 (aff 67 N.J.L. 687, 52 A 1131) (where the agreement was to devise land in payment and it was unenforceable because of the statute of frauds)</ref><br />
<br />
== See also ==<br />
* [[Contracts/Definitions#Implied in Law or Quasi or Constructive Contracts|Implied in law contract]]<br />
* [[Contracts/Statute of frauds|Statute of frauds]]<br />
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==References==<br />
{{Reflist}}<br />
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{{DEFAULTSORT:Implied-In-Fact Contract}}<br />
[[Category:Contract law]]<br />
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{{law-term-stub}}</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=Contracts/Definitions&diff=41943Contracts/Definitions2022-03-16T18:47:38Z<p>Rezsue: </p>
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<div>{{:Contracts/TOC}}<br />
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==Promise==<br />
A promise is the declaration by any person of his intention to do, or to forbear from anything at the request, or for the use, of another. A proposal when accepted becomes a promise.<br />
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==Agreement==<br />
Agreement in the law of contracts is the expression by two or more persons of a common intention to affect their legal relations; it consists in their being of the same mind and intention concerning the matter agreed on.<ref>'''U.S.'''-- ''[[U. S. v. Richards]]'', 149 Fed. 443, 450.<br />'''Ky.'''-- ''[[Tucker v. Sheeran]]'', 155 Ky. 670, 672, 160 SW 176; ''[[Dixie F. Ins. Co. v. Wallace]]'', 153 Ky. 677, 679, 156 SW 140, 142, AnnCas1915C 409 [cit Cyc].<br />'''Mich.'''-- ''[[Hudson v. Columbian Transfer Co.]]'', 137 Mich. 255, 257, 100 NW 402, 109 AmSR 679 (cit Cyc).<br />'''Nebr.'''-- ''[[McGavock v. Morton]]'', 57 Nebr. 385, 77 NW 785.<br />'''N.Y.'''-- ''[[Bruce v. Pearson]]'', 3 Johns. 534.<br />'''Oh.'''''-- [[Columbus, etc., R. Co. v. Gaffney]]'', 65 Oh. St. 104, 117, 61 NE 152.</ref><br />
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Another definition of '''Agreement''' is "a coming together of parties in opinion or determination; the union of two or more minds in a thing done or to be done; a mutual assent to do a thing."<ref>''[[Carter v. Prairie Oil, etc., Co.]]'', (Okl.) 160 P 319, 322.</ref><br />
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''See also'' [[Contracts/Offer and acceptance]].<br />
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The term "agreement" is sometimes used as synonymous with "contract."<ref>''[[Douglass v. W. L. Williams Art Co.]]'', 143 Ga. 846, 85 SE 993; ''[[Michael v. Kennedy]]'', 166 Mo. A. 462, 466, 148 SW 983 ("We are unable to distinguish the difference between a contract and an agreement"). ''But see [[Tucker v. Sheeran]]'', 155 Ky. 670, 160 SW 176 (holding that an agreement does not necessarily affect the legal relations of the parties so as to amount to a contract, It being necessary for that purpose that it produce a legal, binding result on their mutual relations).</ref><br />
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==Obligation==<br />
The duty imposed by law on the parties to a contract to perform their undertaking constitutes the obligation of the contract.<ref>''[[Ogden v. Saunders]]'', 12 Wheat. (U. S.) 213, 257, 6 L/ ed. 606; ''[[Mobile L. Ins. Co. v. Randall]]'', 74 Ala. 170, 177; ''[[State v. Carew]]'', 47 S. C. L. 498, 91 AmD 245; ''see [[Charles River Bridge v. Warren Bridge]]'', 11 Pet. (U. S.) 420, 572, 9 L. ed. 773, 938 (where it is said that a contract "is an agreement between two or more persons to do or not to do a particular thing. The obligation of the contract is founded in the terms of the agreement, sanctioned by oral and legal principles").[</ref> <br />
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'''A well-recognized distinction''' is drawn between a contract itself and its obligation. The contract is the agreement of the parties; the obligation is the remedy which the law affords for its enforcement. <ref>''[[Moore v. Holland]]'', 16 S. C. 15.</ref><br />
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The existence of such an obligation is essential to the existence of a contract.<ref>''[[United Transp., etc., Co. v. New York, etc., Transp. Line]]'', 180 Fed. 902; ''see [[Quinn v. Shields]]'', 62 Iowa 129, 139, 17 NW 437, 49 AmR 141 (where it is said that a "contract," in its more extensive sense, includes every description of agreement or publication whereby one party becomes bound to another to pay a sum of money, or to do or omit to do a certain act; or a contract is an act which contacts a perfect obligation).</ref> The questions of what acts impair the obligations of contracts,<ref>[[Constitutional Law]]</ref> and of what are contracts within the scope of the constitutional protection,<ref>[[Constitutional Law]]</ref> are elsewhere treated.<br />
<br />
==Compact==<br />
"Compact" and "contract" are used as convertible terms.<ref>''[[Chesapeake, etc., Canal Co. v. Baltimore, etc., R. Co.]]'', 4 Gill &: J. (Md.) 1, 130 ("It is a mutual consent of the minds of the parties concerned, respecting some property or right, that is the object of the stipulation, or something that is to be done or forborne; 'a transaction between two or more persons, in which each party comes under an obligation to the other, and each reciprocally acquires a right to whatever is promised or stipulated by the other,' and any words manifesting that ''congregatio mentium'', are sufficient to constitute a contract").</ref><br />
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==Express Contracts==<br />
An express contract is one where the intention of the parties and the terms of the agreement are declared or expressed by the parties, in writing or orally, at the time it is entered into.<ref>'''Colo.'''-- [[Casserleigh v. Green]], 28 Colo. 392, 65 P. 32 (aff. 12 Colo. A. 515, 56 P. 189).<br />
<br /><br />
'''Del.'''-- [[Jones v. Tucker]], 26 Del. 422, 423, 84 A 1012.<br />
<br /><br />
'''Ill.'''-- [[Peo. v. Dummer]], 274 Ill. 637, 640, 113 NE 934; [[Turner v. Owen]], 122 Ill. A. 501, 504.<br />
<br /><br />
'''Ind.'''-- [[Yawger v. Joseph]], 184 Ind. 228, 108 NE 774, 775 (cit Cyc).<br />
<br /><br />
'''Oh.'''-- [[Turney v. Wooley]], 23 Oh. Cir. Ct. N.S. 111, 114.<br />
<br /><br />
'''Pa.'''-- [[Hertzog v. Hertzog]], 29 Pa. 465, 467.<br />
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'''Tenn.'''-- [[Thompson v. Woodruff]], 7 Coldw. 401, 409.<br />
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'''Tex.'''-- [[Ragley v. Godley]], (Civ. A.) 90 SW 66.</ref> It is an express contract, although some of its terms are dependent on the happening of a future event,<ref>[[Voorheis v. Bovell]], 20 Ill. A. 538.</ref> or although consummated by an agent.<ref>[[Bule v. Shipman]], 46 N. C. 10.</ref><br />
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===Other Definitions===<br />
# "A contract is express when the agreement is formal, and stated either verbally or In writing" <ref>[[Gillan v. O'Leary]], 124 App. Dlv. 498, 501, 108 NYS 1024.</ref> <br />
# "An agreement whose terms are openly uttered or expressed by the contracting parties." <ref>[[Linn v. Ross]], 10 Oh. 412, 414, 36 AmD 96. To same effect [[Wickham v. Weil]], 17 NYS 618; [[Thompson v. Woodruff]], 7 Coldw. (Tenn.) 401.</ref><br />
# "Such as are voluntarily made by the parties thereto." <ref>[[Grevell v. Whiteman]], 32 Misc. 279, 280, 65 NYS 974.</ref><br />
# "One where a bargain has been made by the two parties covering the subject in question." <ref>[[Cotfroth v. Somerset County]], 19 Pa. Co. 354, 358.</ref><br />
# "A contract is express when it consists of words written or spoken, expressing an actual agreement of the parties." <ref>[[Gillan v. O'Leary]], 124 App. Div. 498, 502, 108 NYS 1024; [[Prichard v. Foster]], (Tex. Civ. A.) 170 SW 1077, 1078.</ref><br />
# "An express agreement is where the parties thereto expressly agree." <ref>[[Cuneo v. De Cuneo]], 24 Tex. Civ. A. 436, 438, 59 SW 284.</ref><br />
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===Express contracts classified===<br />
Express contracts are properly divided into two classes, contracts under seal or specialties, and contracts in parol.<ref>[[Whitehill v. Wilson]], 3 Penr. & W. (Pa.) 405, 24 AmD 326; [[Rann v. Hughes]], 7 T.R. 350, 101 Reprint 1014.</ref><br />
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==Implied Contracts==<br />
===Classes and Distinctions===<br />
Implied contracts are frequently spoken of as being divisible into two classes:<ref>[[Miller v. Schloss]], 218 N. Y. 400, 113 NE 337; [[Morse v. Kenney]] 87 Vt. 445, 89 A. 865.</ref> (1) Contracts implied in fact;<ref>See infra. [[#Contracts Implied in Fact|Contracts Implied in Fact]] and [[#Effect of Express Contract|Effect of Express Contract]]</ref> and (2) contracts implied in law.<ref>See infra. [[#Implied in Law or Quasi or Constructive Contracts|Implied in Law or Quasi or Constructive Contracts]]</ref> This division has been subjected to some criticism,<ref>[[Nevada Co. v. Farnsworth]], 89 Fed. 164; [[Columbus. etc. R. Co. v. Gaffney]], 66 Oh. St. 104, 61 NE 152; [[Hertzog v. Hertzog]], 29 Pa. 465.</ref> and perhaps justly so, because of the absence from so called contracts implied in law of the elements of true contracts.<ref>See infra. [[#Implied in Law or Quasi or Constructive Contracts|Implied in Law or Quasi or Constructive Contracts]]</ref> A more accurate designation of the so called contracts implied in law, and one which is frequently, employed, is quasi or constructive contracts.<ref>[[Hertzog v. Hertzog]], 29 Pa. 465, 467 (where the court, after quoting as follows, "Implied [contracts) are such as reason and justice dictate; and which, therefore, the law presumes that every man undertakes to perform. As, if I employ a person to do any business for me, or perform any work, the law implies that I undertook and contracted to pay him as much as his labour deserves. If I take up wares of a tradesman without any agreement of price, the law concludes that I contracted to pay their real value," said: {{Quote|This is the language of Blackstone, 2 Comm. 443, and it is open to some criticism. There is some looseness of thought in supposing that reason and justice ever dictate any contracts between parties, or impose such upon them. All true contracts grow out of the intentions of the parties to transactions, and are dictated only by their mutual and accordant wills. When this intention is expressed, we call the contract an express one. When it is not expressed, it may be inferred, implied, or presumed, from circumstances as really existing, and then the contract, thus ascertained, is called an implied one. The instances given by Blackstone are an illustration of this. . . . It is quite apparent, therefore, that radically different relations are classified under the same term, and this must often give rise to indistinctness of thought. And this was not at all necessary; for we have another well-authorized technical term exactly adapted to the office of making the true distinction. The latter class are merely constructive contracts, while the former are truly implied ones. In one case the contract is mere fiction, a form imposed in order to adapt the case to a given remedy; in the other it is a fact legitimately inferred. In one, the intention is disregarded; in the other, it is ascertained and enforced. In one, the duty defines the contract; in the other, the contract defines the duty}}). See also [[Willard v. Doran, etc., Co.,]] 48 Hun 402, 403, 1 NYS 345, 588 (where the court said: {{Quote|There has been some inaccuracy in the use of this phrase [Implied contract]. If it is applied only to cases in which parties enter into a real contract, but without express words, then it is accurately used. If A borrows money of B, he really agrees to repay it, although he does not expressly say so. But . . . [in case of money lost on a wager], there is no contract to repay the money, either express or implied; and to call the liability an "implied contract" gives an incorrect idea of the nature of the liability. Such use of this phrase probably arose under the old forms of pleading when the action of assumpsit was found so useful. It was necessary in that action to allege a promise, while the action often lay in cases where no promise had been made. The civil law writers found the difficulty of attempting to classify actions into those ''ex contractu'' and those ''ex delicto''. Therefore they made two other classes, viz., ''quasi ex contractu'' and ''quasi ex delicto''. Thus they said that the action to recover back money paid by mistake was ''quasi ex contractu'', for the party was so far from being bound by a contract, that he was bound rather ''ex distractu'' than ''ex contractu'', because money paid was rather to dissolve than to form a contract. (Inst., III. 27, 6.) Similarly in this case the defendant made no contract to pay the plaintiff the money demanded. The actual contract between the parties, even if valid, would not be that which the plaintiff seeks to enforce. He claims that the defendant has money of his which, in justice and good conscience, the defendant should return. This right of action is not unlike the action to recover money paid by mistake. In each the money is paid voluntarily, in each it is unjust for the defendant to retain that which he has received. In neither has he agreed to return it. We might then class this as an action ''quasi ex contractu'', for there is no agreement to return the money, which would give an action ''ex contractu''. And on the other hand, possession of the money was not obtained by force or fraud, and thus the action is not strictly ''ex delicto''}}).</ref> The term "implied contracts," however, as it is ordinarily employed, is broad enough to include both contracts implied in fact and quasi or constructive contracts.<ref>[[Harty Bros., etc., Co. v. Polakow]], 237 I11. 659, 86 NE 1086 [rev. 141 Ill. A. 570]; [[Umlauf v. Umlauf]], 101 Ill. 651; [[Musgrove v. Jackson]], 59 Miss. 390. See [[Chudnovski v. Eckels]], 232 Ill. 312, 317, 83 NE 846 (where the court said: {{Quote|The term "implied contract" is a familiar one in the law. By reason of the relation of the parties or the existence of an obligation or duty a contract may be implied by law which the party never actually intended to enter into and the obligation of which he did actually intend never to assume. Whether or not it accords with scientific terminology to call an obligation imposed by the existence of a duty an implied contract, yet in the ordinary use of language by courts and writers it has been almost universally so called. "Implied contracts," says Blackstone, "are such as reason and justice dictate, and which, therefore, the law presumes that every man has contracted to perform, and upon this presumption makes him answerable to such persons as suffer by his non-performance." (3 Com. 158.) In the sixth subdivision of his classification of implied contracts which arise from natural reason and the just construction of the law, he says: "The last class of contracts, implied by reason and construction of law, arises upon this supposition: that every one who undertakes any office, employment, trust or duty, contracts with those who employ or entrust him, to perform it with integrity, diligence and skill; and if by his want of either of those qualities any injury accrues to individuals, they have their remedy in damages by a special action on the case." (Ibid. 163.) And among the instances of implied contracts are mentioned those of the common inn-keeper to secure his guest's goods in his inn, of the common carrier to be answerable for the goods he carries, and of the common carrier that he shoes a horse well without laming him}}).</ref><br />
<br />
====Ambiguous definitions of term "implied contract"====<br />
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#"An implied agreement is where the terms of the contract are not expressed between the contracting parties, but the obligations of natural justice by reason of some legal liability impose the payment of money or the performance of some duty, and raise a promise to that effect."<ref>[[Linn v. Ross]], 10 Oh. 412, 414, 36 AmD 96.</ref> <br />
#An implied contract "is created by law to establish justice between parties. It does not require mutual consent, but may bind a party against his will."<ref>[[Adams v. Hilliard]], 14 NYS 120, 122.</ref><br />
# Implied contracts "are such as reason and justice dictate, and which therefore the law presumes that every man undertakes to perform."<ref>2 Blackstone Comm. p 443; [[Day v. Connecticut Gen. L. Ins. Co.]], 45 Conn. 480, 490, 29 AmR 693; [[Hamilton v. Winterrowd]], 48 Ind. 393, 396; [[Ottumwa Mill, etc., Co. v. Manchester]], 139 Iowa 334, 337, 115 NW 911; [[Nolan v. Swift]], 111 Mich. 56, 60, 69 NW 96; [[Deane v. Hodge]], 35 Minn. 146, 150, 27 NW 917, 59 AmR 321; [[McSorley v. Faulkner]], 18 NYS 460, 462; [[Wickham v. Weil]], 17 NYS 518, 619; [[Peo. v. Bennett]], 6 AbbPr (N.Y.) 343, 348; [[Thompson v. Woodruff]], 7 Coldw. (Tenn.) 401, 410; [[Wyoming Nat. Bank v. Brown]], 7 Wyo. 494, 501, 53 P 291, 75 AmSR 935. To same effect [[Hawkes v. Taylor]], 176 Ill. 344, 61 NE 811.</ref><br />
# "Implied contracts are such as reason and justice dictate, and which the law presumes from the relations and circumstances of the parties."<ref>[[Miller's App.]], 100 Pa. 668, 670, 45 AmR 394.</ref><br />
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====Statutory uses of term "implied contracts"====<br />
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{{Quote|However unscientific such a classification is, simple implied contracts are usually subdivided into contracts implied in fact and contracts implied in law. . . . This classification of implied contracts makes it difficult to interpret a statute where the term is used. In each case it becomes a question whether the general meaning, or the more limited, if more accurate, meaning, was, by the legislature, intended. . . . In the absence of any light thrown thereon by the language or object of the statute, or of other statutes ''in pari materia'', it must be held . . . that the legislature intended that meaning which is commonly assigned to the words, even if such definition be less accurate or scientific.<ref>[[Nevada Co. v. Farnsworth]], 89 Fed. 164, 165. See [[Pache v. Oppenheim]], 92 App. Div. 221, 87 NYS 704 (holding that an action "upon contract" may be maintained on "quasi contract"). Compare [[Oppenheimer v. Regan]], 32 Mont. 110, 79 P. 695 (holding that "actions arising on contract" as employed in a statute fixing the jurisdiction of justices of the peace did not include agreements resting upon a fiction of the law).</ref>}}<br />
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====Distinctions====<br />
A contract implied in fact is a true contract, the agreement of the parties being inferred from the circumstances, while a contract implied in law is but a duty imposed by law and treated as a contract for the purposes of a remedy only.<ref>'''U.S.'''-- [[Nevada Co. v. Farnsworth]], 89 Fed. 164; [[Harley v. U.S.]], 39 Ct. Cl. 106 [aff 198 U.S. 229, 25 SCt 634, 49 L. ed. 1029].<br /><br />
'''Conn.'''-- [[Weinhouse v. Cronin]], 68 Conn. 260. 36 A 46.<br /><br />
'''Ill.'''-- [[Hickey v. Chicago City R. Co.]], 148 Ill. A. 197; [[Chicago v. Pittsburg, etc., R. Co.]], 146 Ill. A. 403 [aff 242 Ill. 30, 89 NE 648].<br /> <br />
'''Mo.'''-- [[Weinsberg v. St. Louis Cordage Co.]], 135 Mo. A. 553, 116 SW 461.<br /> <br />
'''N.Y.'''-- [[McCoun v. New York Cent., etc., R. Co.]], 50 N.Y. 176; [[McSorley v. Faulkner]], 18 NYS 460.<br /><br />
'''Oh.'''-- [[Columbus, etc., R. Co. v. Gaffney]], 66 Oh. St. 104, 61 NE 152.<br /> <br />
'''Tex.'''-- [[Leonard v. State]], 56 Tex. Cr. 307, 316, 120 SW 183 (quot Cyc).<br /><br />
'''Wis.'''-- [[Wojahn v. Oshkosh Nat. Union Bank]], 144 Wis. 646, 129 NW 1068.<br /><br />
{{Quote|The evidence of an actual contract is generally to be found either in some writing made by the parties, or in verbal communications which passed between them, or in their acts and conduct considered in the light of the circumstances of each particular case. A contract implied by law, on the contrary, rests upon no evidence. It has no actual existence; it is simply a mythical creation of the law. The law says that it shall be taken that there was a promise, when, in point of fact, there was none. Of course this is not good logic, for the obvious and sufficient reason that it is not true. It is a legal fiction, resting wholly for its support on a plain legal obligation and a plain legal right. If it were true, it would not be a fiction. There is a class of legal rights, with their correlative legal duties, analogous to the obligations quasi ex contractu of the civil law, which seem to lie in the region between contracts on the one hand, and torts on the other, to call for the application of a remedy not strictly furnished either by actions ex contractu or actions ex delicto.}} [[Sceva v. True]], 53 N.H. 627, 632.</ref> In the case of contracts implied in fact, there must be an assent of the parties, as in express contracts,<ref>See Infra. [[Contracts/Intention to Bind#Necessity of Mutual Assent|Necessity of Mutual Assent]].</ref> while in the case of contracts implied in law or more properly quasi or constructive contracts the obligation arises, not from consent, but from the law or natural equity.<ref>See Infra. [[#Implied in Law or Quasi or Constructive Contracts|Implied in Law or Quasi or Constructive Contracts]].</ref> In the case of contracts implied in fact, the contract defines the duty, while in the case of constructive contracts, the duty defines the contract.<ref>[[Graham v. Cummings]], 208 Pa. 516, 57 A 943; [[Hertzog v. Hertzog]], 29 Pa. 465.</ref><br />
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===Contracts Implied in Fact===<br />
An '''implied-in-fact contract''' is a form of an implied [[contract]] formed by non-verbal conduct, rather than by explicit words. The [[United States Supreme Court]] has defined it as "an agreement 'implied in fact'" as "founded upon a meeting of minds, which, although not embodied in an express contract, is [[Inference|inferred]], as a fact, from conduct of the parties showing, in the light of the surrounding circumstances, their tacit understanding."<ref>{{ussc|name=Baltimore & Ohio R. Co. v. United States|261|592|1923}}</ref><br />
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Although the parties may not have exchanged words of agreement, their conduct may indicate that an agreement existed. <br />
<br />
For example, if a patient goes to a doctor's appointment, his actions indicate he intends to receive treatment in exchange for paying reasonable/fair doctor's fees. Likewise, by seeing the patient, the doctor's actions indicate he intends to treat the patient in exchange for payment of the bill. Therefore, it seems that a contract actually existed between the doctor and the patient, even though nobody spoke any words of agreement. (They both agreed to the same essential terms, and acted in accordance with that agreement. There was mutuality of [[Consideration under American law|consideration]].) In such a case, the court will probably find that (as a [[Contracts/Question of fact|matter of fact]]) the parties had an implied contract. If the patient refuses to pay after being examined, he will have [[Contracts/Breach of contract|breached]] the implied contract. Another example of an implied contract is the payment method known as a letter of credit.<br />
<br />
Generally, an implied contract has the same legal force as an [[#Express Contracts|express contract]]. However, it may be more difficult to prove the existence and terms of an implied contract should a dispute arise. In some jurisdictions, contracts involving real estate may not be created on an implied-in-fact basis, requiring the transaction to be in writing. <br />
<br />
[[Contacts/Unilateral contract|Unilateral contracts]] are often the subject matter of these types of contracts where acceptance is being made by beginning a specified task.<br />
<br />
====Potential conduct implying implied contract====<br />
* A prior history of similar agreements.<br />
* When recipient accepts something of value knowing other party expects payment.<br />
<br />
===Implied in Law or Quasi or Constructive Contracts===<br />
Contracts implied in law, or more properly quasi or constructive contracts, are a class of obligations which are imposed or created by law without regard to the assent of the party bound, on the ground that they are dictated by reason and justice, and which are allowed to be enforced by an action ex eontractu.<ref><br />
'''U.S.'''-- [[Nevada Co. v. Farnsworth]], 89 Fed. 164. 165.<br /><br />
'''Ill.'''-- [[Peo. v. Dummer]], 274 Ill. 637, 641, 113 NE 934; [[Chudnovskl v. Eckels]], 232 Ill. 312, 317, 83 NE 846; [[Chicago v. Pittsburg, etc., R. Co.]], 146 Ill. A. 403, 410 [aFf 242 Ill. 30, 89 NE 648].<br /><br />
'''N.Y.'''-- [[Gutta Percha, etc., Mfg. Co. v. Houston]], 108 N.Y. 276, 278, 15 NE 402. 2 AmSR 412; [[Peo. v. Speir]], 77 N.Y. 144, 150; [[Munger Vehicle Tire Co. v. Rubber Goods Mfg. Co.]], 39 Misc. 817. 818. 81 NYS 302; [[Wickham v. Well]], 17 NYS 518.<br /><br />
'''Pa.'''-- [[Hertzog v. Hertzog]], 29 Pa. 465, 467 [quot 2 Blackstone Comm. p H3].<br /><br />
'''S.C.'''-- [[Abbott v. Sumter Lumber Co.]], 93 S.C. 131, 138, 146, 76 SE 146 ac[cIt Cyc].<br /><br />
'''S.D.'''-- [[Meade County v. Welch]], 34 S.D. 348, 349, 356, 148 NW 601 [cit Cyc].<br /><br />
'''Tex.'''-- [[Leonard v. State]], 56 Tex. Cr. 307 315, 120 SW 183.<br /><br />
{{Quote|The term "implied contract" has also been applied to a class of obligations which are created by law without regard to the assent of the party upon whom the obligation is imposed, on the ground that they are dictated by reason and justice. They are not concontract obligations in the true sense because there is no agreement of the parties, but they are constructive contracts created hy the law.}} [[Peo. v. Dummer]], 274 Ill. 637, 641, 113 NE 934.<br /><br />
'''Foundation of doctrine.'''<br />
#"The whole theory of contracts implied in law was originated for the purpose of giving a remedy ex contractu for certain wrongs." [[Nevada Co. v. Farnsworth]], 89 Fed. 164, 165.<br />
#{{Quote|After subtracting express contracts and contracts implied in fact, there is still left another large class of obligations, to enforce which the action of general assumpsit is a well established remedy. The principle upon which this latter class of obligations rests is equitable in its nature, and was, like most other equitable principles, derived from the civil law. This obligation was under the civil law designated "quasi-contractus." Stated as a civil law principle, it was an obligation similar in character to that of a contract, but which arises not from an agreement of parties but from some relation between them or from a voluntary act of one of them, or, stated in other language, an obllgation springing from voluntary and lawful acts of parties in the absence of any agreement. (Howe's Studies of Civil Law, 171; Morey on Roman Law, 371).}}[[Highway Comrs. v. Bloomington]], 253 Ill. 164, 173, 97 NE 280, AnnCast913A 471.<br />
# A quasi promise is "an implied promise In law, founded either on the doctrine that one shall not be allowed to enrich himself unjustly at the expense of another; or on the doctrine that when an obligation is imposed by law upon one to do an act because of an interest in the public to have it done, and that one fails to do it, he who does do it, expecting compensation, may recover therefor of him on whom the obligation is imposed." [[Mathie v. Hancock]], 78 Vt. 414, 417, 63 A 143.</ref> They rest solely on a legal fiction,<ref>[[Peo. v. Dummer]], 274 Ill. 637, 113 NE 934; [[Graham v. Cummings]], 208 Pa. 516, 57 A 943.</ref> and are not contract obligations at all in the true sense, for there is no agreement; but they are clothed with the semblance of contract for the purpose of the remedy,<ref>'''Colo.'''-- [[Brown v. Stair]], 25 Colo. A. 140, 136 P 1003.<br /><br />
'''Ga.'''-- [[Western Union Tel. Co. v. Taylor]], 84 Ga. 408, 11 SE 396, 8 LRA 189.<br /><br />
'''Ill.'''-- [[Peo. v. Dummer]], 274 Ill. 637, 113 NE 934.<br /><br />
'''Mich.'''-- [[Woods v. Ayres]], 39 Mich. 345, 33 AmR 396.<br /><br />
'''Minn.'''-- [[Penas v. Chicago, etc., R. Co.]], 112 Minn. 203, 127 NW 926, 140 AmSR 470, 30 LRANS 627 [cit Cyc].<br /><br />
'''Mo.'''-- [[Weknsberg v. St. Louis Cordage Co.]], 135 Mo. A. 553, 116 SW 461.<br /><br />
'''Mont'''.-- [[Schaeffer v. Miller]], 41 Mont. 417, 109 P 970, 137 AmSR 746 [quot Cyc].<br /><br />
'''N.H.'''-- [[Sceva v. True]], 53 N.H. 627.<br /><br />
'''N.Y.'''-- [[MiIler v. Schloss]], 218 N.Y. 400, 113 NE 337.<br /><br />
'''Pa.'''-- [[Pierce's App.]], 103 Pa. 27; [[Hertzog v. Hertzog]], 29 Pa. 465.<br /><br />
'''S.D.'''-- [[Meade County v. Welch]], 34 S.D. 348, 349, 148 NW 601 [cit Cyc].<br /><br />
'''Tex.'''-- [[Leonard v. State]], 56 Tex. Cr. 307, 315, 120 SW 183 [quot Cyc].<br /><br />
'''Vt.'''-- [[Morse v. Kenney]], 87 Vt. 45, 89 A 865; [[Bliss v. Hoyt]], 70 Vt. 534, 41 A 1026.<br /><br />
"Such contracts are contracts merely In the sense that a remedy is by the statutory remedy of assumpsit and are created and governed by the principles of equity." [[Peo. v. Dummer]], 274 Ill. 637, 642, 113 NE 934.<br /><br />
"The quasi contract is a constructive contract, as distinguished from either implied or express contracts, and is defined rather as a relation than as a contract--a fiction of law adapted to enforce legal duties by actions of contract where no proper contract exists, express or implied." [[Brown v. Stair]], 25 Colo. A. 140, 150, 136 P 1003.</ref> and the obligation arises not from consent, as in the case of true contracts, but from the law or natural equity.<ref>'''Ill.'''-- [[Highway Comrs. v. Bloomington]], 263 Ill. 164, 97 NE 280. AnnCas1913A 471; [[Harty Bros., etc., Co. v. Polakow]], 237 Ill. 569, 88 NE 1085.<br /><br />
'''Mont.'''-- [[Schaeffer v. Miller]], 41 Mont. 417, 109 P 970, 137 AmSR 746.<br /><br />
'''N.Y.'''-- [[Miller v. Schloss]], 218 N.Y. 400, 113 NE 337.<br /><br />
'''Vt.'''-- [[Underhlll v. Rutland R. Co.]], 98 A 1017.<br /><br />
'''Can.'''-- [[Gresham Blank Book Co. v. Rex]], 14 Can. Exch. 236.<br /><br />
{{Quote|A quasi or constructive contract rests upon the equitable principle that a person shall not be allowed to enrich himself unjustly at the expense of another. In truth, it is not a contract or promlse at all. It is an obligation which the law creates, in the absence of any agreement, when and because the acta of the parties or others have placed in the possession of one person money, or its equlvalent, under such circumstances that in equity and good conscience he ought not to retain it, and which ''ex aequo et bono'' ["according to the right and good"] belongs to another. Duty, and not a promise or agreement or intention of the person sought to be charged, defines it. It is fictitiously deemed contractual, in order to fit the cause of action to the contractual remedy.}}<br />
[[Miller v. Schloss]], 218 N.Y. 400, 407, 113 NE 337</ref> So, when the party to be bound is under a legal obligation to perform the duty from which his promise is inferred, the law may infer a promise even as against his intention.<ref>[[Morse v. Kenney]], 87 Vt. 445, 89 A 865. See [[Smith v. Hibler]], (N.J. Sup.) 92 A 364 (holding that under a statute providing that one who trespasses on lands after having been forbidden so to do shall forfeit a specified sum, to be recovered in an action of debt, the statutory action so given is in legal contemplation an "action upon contract"). But see [[Bigby v. U.S.]], 103 Fed. 597 [aff. 188 U.S. 400, 23 SCt 468, 47 L. ed. 519] (holding that, where the duty is expressly imposed by statute, the obligation to perform, however, does not rest on a legal fiction that the person commanded to perform impliedly contracted to do the act).<br /><br />
'''Act which party refuses to permit.'''--{{Quote|The rule is that one cannot be held liable on an implied contract to pay for that which he declines to permit to be done on his account. The exception to the rule is that when the law imposes upon one an obligation to do something which he declines to do, and which must be done to meet some legal requirement, the law . . . treats performance by another as performan for him, and implies a contract on his part to pay for it.}}<br />
[[Keith v. De Bussigney]], 179 Mass. 255, 259, 60 NE 614.</ref> Among the instances of quasi or constructive contracts may be mentioned cases in which one person has received money which another person ought to have received, and which the latter is allowed to recover from the former in an action of assumpsit for money had and received, or money received to the use of plaintiff;<ref>[[Barnett v. Warren]], 82 Ala. 557, 561, 2 S 457; [[Boyett v. Potter]], 80 Ala. 476, 479, 2 S 534; [[Merchants' Bank v. Rawls]], 7 Ga. 191, 195, 50 AmD 394; [[O'Fallon v. Boismenu]], 3 Mo. 405, 407, 26 AmD 678; [[Lawson v. Lawson]], 16 Gratt. (57 Va.) 230, 232, 80 AmD 702.</ref> cases in which one person has been compelled to pay money which another ought to have paid, and which the former is allowed to recover from the latter in an action of assumpsit for money paid to his use;<ref>[[Tuttle v. Armstead]], 53 Conn. 175, 22 A 677; [[Wells v. Porter]], 7 Wend. (N.Y.) 119; [[Eastwood v. McNab]], [1914] 2 K.B. 361; [[Exall v. Partridge]], 8 T.R. 308, 101 Reprint 1405.</ref> cases of account stated, from which the law implies a promise which will support an action of assumpsit;<ref>[[Marshall v. Lewark]], 117 Ind. 377, 378, Vt. 331, 334, 17 A 741; [[Hopkins v. Logan]], 5 M. & W. 241, 249, 151 Reprint 103.</ref> judgments on which an action of assumpsit or debt may be maintained, according to the circumstances, because of a promise to pay implied by law;<ref>[[Grevell v. Whiteman]], 32 Misc. 279, 65 NYS 974; [[Williams v. Jones]], 13 M. & W. 628, 153 Reprint 262.</ref> cases in which an obligation to pay money is imposed by a statute;<ref>'''U.S.'''-- [[Pacific Mail SS. Co. v. Joliffe]], 2 Wall. 450, 17 L. ed. 805.<br /><br />
'''Mass'''-- [[Milford v. Com.]], 144 Mass. 64, 10 NE 516.<br /><br />
'''Mich.'''-- [[Woods v. Ayres]], 39 Mich. 345, 33 AmR 396.<br /><br />
'''S.D.'''-- [[Yankton Bd. of Education v. Yankton County School Dlst.]], 23 S.D. 425, 431, 122 NW 411 [cit Cyc].<br /><br />
'''Vt.'''-- [[Woodstock v. Hancock]], 62 Vt. 348, 19 A 991.</ref> cases where a person by wrongfully appropriating property to his own use becomes liable to pay the owners the reasonable value thereof;<ref>[[Reed v. Weule]], 176 Fed. 660, 100 CCA 212; [[Champlain Constr. Co. v. O'Brien]], 117 Fed. 271; [[Weaver v. Norway Tack Co.]], 80 Fed. 700; [[Brush Electric Light, etc., Co. v. Montgomery]], 114 Ala. 433, 21 S 960; [[Rees v. Western Exposition Soc.]], 44 Pa. Super. 381; [[Northwestern Wheel, etc., Co. v. Milwaukee Electric St., etc., Co.]], Wis. 603, 69 NW 371.</ref> cases in which a person fails to deliver specific property and becomes liable for the money value thereof;<ref>[[Cushing v. Chapman]], 115 Fed. 237.</ref> cases where one party wrongfully compels another to render him valuable services, and a promise to pay their value is implied;<ref>[[Mobile Light, etc., Co. v. Copeland]], (Ala. A.) 73 S 131; [[Hamby v. Collier]], 136 Ga. 309, 71 SE 431.</ref> cases where one man has obtained money from another by oppression, extortion, or deceit, or by the commission of a trespass;<ref>See [[Chudnovski v. Eckels]], 232 Ill. 312, 83 NE 846.</ref> cases where necessaries have been furnished to a wife wrongfully abandoned by her husband, although he has given notice that he will not be responsible; and cases in which the husband is permitted to recover the wife's funeral expenses from her estate.<ref>[[Pache v. Oppenheim]], 93 App. Div. 221, 87 NYS 704.</ref> In order that a contract may be implied in law from the wrong of a party, it must have been committed with the intention of benefiting his own estate.<ref>[[Atchison, etc., R. Co. v. Phelps]], 4 Kan. A. 139, 46 P 183 (holding that, when one willfully and maliciously orders cars in which to shop stock, without any intention of making use of them, in order to damage the railroad company, and also delays a train for the same purpoae, there is no implied contract on which may be brought by the company on waiving the tort).</ref><br />
<br />
==Executed and Executory Contracts==<br />
An executed contract is one where nothing remains to be done by either party.<ref> U.S.-Farrl n g ton v . T e n n e s atj HU:- S. 6 7 9 , 683, 2 4 L. ed. 6 5 8 : 1, . Peck. 6 Cranch 8 7 . 1 3 6 . 12 . Cincinnati, etc. , R. Co. V'l!!cll ... 64 Fed. 3 6 , 4 6, 12 CCA ett --y. Coope r, 1 3 Fed. 5 8 6<br /><br />
Colo.-McCutchen v. Klaea, 26 Colo. A. 3 7 4 , 3 7 7 , H3 P 1 4 3 .<br /><br />
Ill.-Fox v. Kltton, 19 Ill. 619. 632.<br /><br />
Iowa.-Keokuk v. Ft. Wayne Electric Co. , 90 Iowa 87, 71, 67 NW 6 8 9 .<br /><br />
N . .T.--8tate v. Jersey Ci ty, 31 N. J. L. 676, 681, 86 AmD 240.<br /><br />
Tenn.-Hale v. Sharpe, 4 Coldw.<br /><br />
Utah.-- A dams v. Reed, 11 Utah 480. 5 0 1. 40 P 720 ratr 16 8 u. s. 673, ts set 1 7 9 . 42 L. ea. 684].<br /><br />
'''[a] Other definitions.'''-<br />
#"One In whlcll all the parties thereto have performed all the obligations which they have originally assumed." Wat· klns v. Nuf.en, 118 Ga. 372, 374, 45 SE 262.<br />
# 'One In which the object of the co ntra ct Is _performed." Fletcher v. Peck, 6 Cranch (U. S. ) 87, •136, 3 L. ed. 162 (per Marshall, C. :J. ); nastln Tel. Co. v. Richmond Tel. Co., 117 Ky. 122, 126, 77 SW 702, 26 KyL 1249; Skelly v. :Jefferson Branch Bank, 9 Oh. St. 607, 6 2 3 ; Sa ndusk.f City Bank v. Wllbor, 7 Oh. St. 48. 494.<br />
# "One the object 'o f which Is f ully performed." Cal. Clv. Code (1903) 1 1661 ; N. D. Rev. Codes (1899) I 3919 ; Okl. Rev. St. ( 1 9 0 3 ) § 8 1 2 .<br />
# "A contract becomes exe cuted when all Is done that Its term" require to be performed. Until that situation Is attained. the con trac t Is executory." Leadbetter v. Hawley, 5 9 Or. 4 22, 4 24. 1 17 P 289.<br />
# "A contract becomes a n executed one when nothing remains to be done by either party, and where the transaction has been completed, or was completed a t the ti me the contract was made." McNett v. Cooper, 13 Fed. 686, 690 ; Kynoch v . The S. C. Ives, 14 F. Cas. No. 7,958, Newb. Adm. 2 0 5 (quot Story Contr. I 18] ; M e t te! v. Gales, 12 S. D. 632, 639, 82 NW 181.<br />
'''[b] A grant actually made''' is an "e xecuted contract," and such a contract requi res no consideration to su pport J t. Farr i ngton v. Tennessee, 95 u. S. 6 7 9 , 6 8 3 , 24 L. ed. 6 6 8.<br /><br />
'''[c] A present conveyance''' of land is an "executed contract." Fulenwider v. Rowan, 1 3 6 Ala. 287. 34 S 97850.</ref> An executory contract is one in which a party binds himself to do or not to do a particular thing in the future.<ref>U. S.-FarrJngton v. Tennessee, 9 5 ·u. S. 679, 24 L. ed. 6 6 8 ; Fletcher v . Peck, 6 Cranch 8 7 , 13 6, 3 L. ed. 1 6 2 ; Cincinnati, e tc., R. Co. v. McKeen , 6 4 Fed. 36, 4 6, 12 CCA 1 4 ; Kynoch v. The S . C. I ves. 1 4 F. Cas. No. 7 , 9 5 8 . Newb. Adm. 2 0 5 .<br /><br />
Ala.-Fulenwider v. Rowan, 1 3 6 Al a. 2 8 7 , 3 4 S 9 7 5 .<br /><br />
Colo.-Dickson v. Dick , 6 9 Colo. 5 8 3 , 6 8 7 , 58 8, 1 5 1 P 4 4 1 f e l t Cyc ] .<br /><br />
Iowa.-Keokuk v . Ft. Wayne Electric Co . . 9 0 Iowa 67. 71, 6 7 NW 6 8 9 .<br /><br />
N.J.-:Jersey C i ty, etc., R. Co. v. Je rsey City, 31 N. :J. L. 6 7 6 , 6 8 1 , 8 6 A m D 2 4 0.<br /><br />
N. Y.-:Justlce v. LanL 4 2 N. Y. 4 9 3, 49 6 , 1 9\.mR 6 7 6 ; Wi ckham v. Wel l, 1 7 NYS 6 1 8 .<br /><br />
Oh.-Sandusky City Ba.nk v . Wllbor, 7 Oh. St. 481.<br /><br />
S. D.-Mettel v. Gales, 12 S. D. 832. 639, 8Z NW 181.<br /><br />
Utah.-Adams v. Reed, 1 1 Utah 480. 601, 40 P 720 [atf 1 6 8 U. S. 6 73 , 18 SCt 17.9. 42 L. ed. 684].<br /><br />
See Kl11ebrew v. M urray, 151 K y. 346, 15 1 SW 662 (holding contract executory) .<br /><br />
'''[a] Other definitions.'''--<br />
#"A con· tract to do some f u t ure act." Hale v. Sharpe, 4 Coldw. (Tenn.) 275 , 286.<br />
# "One where It Is s t ipulated ... upon a sufficient consideration that something Is to be done or not to be done by one or both of the parties." Bergere v. Chaves, 14 N. M. 352, 364, 93 P 762, 61 LRA NS 50.<br />
# "One In wh ich something remains to be don e by one or more parties." Watkins v. Nugen, 118 Ga. 3 72, 374, 4'5 SE 262.<br />
# "A ll contracts other thai!' those the object of which Is fully performed are executory con· tracts." Cal. Clv. Code (1903) 1 1661 ; N. D. Rev. Codes (1899) f 3919; Okl. Rev. St. ( 1 903 ) I 812.<br />
# "Whilst any act remains to be done, tt1 e contract Is understood to be executory." Fox v. Kitt o n, 19 Ill. 519, 532.<br />
'''[b] Illustrations'''--<br />
# A con tract betw e en a ci ty and an electric light company, by which the company Is to !lu rn l sh lights for a cer tai n number o f years at a fixed price, Is an executory. and not an executed, contract. K eokuk v. Ft. Wayne Electric Co.. 90 Iowa 67, 57 NW 689.<br />
# Where parties In the sale of stock agreed to pay a certain sum of money on one day, a nd on a subsequent day a certain other sum, and at some time to execute a r.ote for a third sum, and such acts were done on such days, the co ntract ca n· not be said to be execu tory merely because the note given was unpaid. Cincinnati, etc .. R. Co. v. McKeen, 64 Fed. 36, 12 CCA 1 4.<br />
# An agreemen t to se ll Is an execu tory con tract. Fulenwider v. Rowan, 136 Ala. 287, 34 S 9 75.<br />
# A defective deed, be ing only a contra ct to convey, Is therefore an executory contract to convey. Adams v. Reed, 11 Utah 4 8 0, 4 0 P 7 2 0.</ref> An executory contract conveys a chose in action; an executed contract, a chose in possession.<ref>C.a s.K.y Nnoo. ch7 , 9v5.8 ,T Nhee wSb. . CA. dImve. s,2 0U6; McDo nald v. Hewett. 1 6 :Johns. ( N.Y. ) 3 4 9 , 8 A m D 2 4 1 ; Roberts v. Beatty, 2</ref> A contract may be partly executed and partly executory,<ref>Ri ggs v. Tayloe, 2 0 F. Cas. No. 1 1 . 8 3 2 , 2 Cranch C. C. 697 [ rev on other grounds 1 Pet. 6 9 1, 7 L. ed. 2 7 6 ) ; Schroe p p e l v . Corni ng, 10 Barb. 5 7 6 (atf 6 N. Y. 1 0 7 ] ; Par melee v. Oswego, etc .. R. Co .. 7 Barb. 699 fatf 6 N. Y. 7 4 J; Hale v . Sharpe, 4 Coldw. ( Tenn. ) 2 7 o .<br /><br />
'''[a] performance begun.'''--One who has begun to do what he promised, but has not fi nished, has execu ted h i s u n 'd e t,.. n art. Adams v. Reed, 11 Utah 480, 40 P 720.</ref> and may be executory as to one party and executed as to the other.<ref>U. S.-Howe v. Howe, etc.. Ball Bearing Co., 164 Fed. 820, 83 CCA 636. .<br /><br />
Ala.-Southern States Co. v. Long, (A. ) 73 B 1 4 8 .<br /><br />
Cal.-Dean v. Sedan Milling Co., 1 9 Cal. A. 28. 124 P 7 3 6, 739 [ci t Cyc).<br /><br />
Colo.-Omaha Lumber Co. v. Co- operative Inv. Co. , 55 Colo. 271, 1 33 P 1112, 1116 [cit Cy c) .<br /><br />
Okl.--Oalbreath Gas Co. v. Lind- sey, 161 P 826.<br /><br />
Pa.-Moody v. McTaggart, 29 Pa. Super. 465. 468 [quot Cyc ].<br /><br />
S. C. -Tucker v. Cox, 101 S. C. 4 7 3, 47,8, 86 S E 28 fquot Cyc ).<br /><br />
'''[a] Illustration.'''-- Where two p ar- ties enter Into a w ritten contract by the terms ot which an easement In real estate Is granted by the first exparty tor a term ot years, In con- charslderatl on ot certain things to be per- f o rmed by the second party duri ng said term of years, on the exec<Jtlon stgntftcaof the c on tract, If the same Is tree fro m fraud In Its execution, It be- comes an executed contract, and the considera ti on a paid consideration, so far as the first party Is concerned, and the contract becomes an ex- ecutory contract as to the secon d party, and Is binding on sai d sec- ond party. Galbreath Gas Co. v. Lindsey, (Okl.) 1 6 1 P 826.</ref> While it has been said that an executed contract is not properly a contract at all, but that the contractual obligation having been performed, the parties are no longer bound,<ref> Mette! v. Gales, 12 S. D. 632, 82 NW 181.</ref> this is not strictly accurate, for the reason that, in cases wherein the contract operates as a grant, there is an implied contract on the part of the grantor not to reassert the right which he has granted.<ref>State v. Jersey City, 31 N. J.<br />
L. 6 7 6 , 86 AmD 240.</ref><br />
<br />
===Formal Execution===<br />
The word "executed" is also used with reference to contracts in the sense of "made," a meaning which is, of course, entirely distinct from that already given.<ref>See Case v. Cglllns. a7 Ind. A. 491, 76 NE 781; Watson v. C oast, 36 W. Va. 463, 14 SE 249.<br /><br />
'''Formal execution of contracts''' see [[Contracts/Formal requisites#Signing--Necessity for|Signing--Necessity for]].</ref><br />
<br />
==Simple or Parol Contracts==<br />
Contracts are divisible into two classes, simple contracts, and contracts by specialty.<ref>Perrine v. Cheeseman, 1 1 N. J. L. 174, 19 AmD 3 8 8 ; Balla rd v. [a) OOJli:la .. lllt ooDtnot.-A con- contract tor a permanent reduc tion Walker. 3 Johns. Cas. ( N. Y.) 6 0 .</ref> Simple contracts are contracts which are not under seal.<ref>Y.) 88. Ludwig v. Bungart, 26 Misc. 247. 2 51, 56 NYS 51 [rev on other grounds 4 8 App. Dlv. 61 3, 63 NYS 9 1 ) ; Rann v. Hug hes. 7 T. R. 350, 101 Repri n t 1014. To sa me etrect Q ulgly v. 'Muse, 15 La. Ann. 197 ; Sta bl e r v. Cowman, 7 Gi l l & J. ( Md.) 284; P er- rin e v. C heese m an , 11 N. J . L. 174. 19 A m D 388 ; De Crano v. Moore. 50 App. Dlv. 361, 63 NYS 7 6 4 , 64 NYS 3; Ballard v. Wal ker, 3 Johns. · Cas. (N. Y. ) 60 (per Kent, J. ).<br />
<br />'''[a] Other definitions'''--<br />
# "Those whose validity does not depend upon t heir form. but upon the presence Bec:kof a considerat ion. With the excep, tlon of c on tracts under s e al and con- tracts of record. every c on tract re- quires a consideration to su pport it." Corcoran v. New York Ce nt .. etc., R. Co .. 20 Misc. 197, 200. 4 6 NYS 861 [str 25 App. Dlv. 4 7 9, 4 9 NYS 701 <atr 164 N. Y. 587 mem. 68 NE 1086 mem)].<br />
# "An agreemen t between two parties. a draw ing to geth e r of two minds to a common Intent. and must be voluntary as well as mutual." Cash ion v. Weetern Union Tel. Co., 124 N. c. 4 6 9, 468, 32 SE 746, 46 LRA 160.<br />
<br />'''[b] In Georgia''' "simple contracts" are defined by the code as all others than those s peci fied as contracts of record and s pecialties. Code I 2718; Western Union Tel. Co. v. Taylor, 84 Ga. 4 08. 418, 1 1 SE 396. 8 LRA 1R9.<br />
<br />'''Contracts under seal''' see [[Contracts/Formal requisites#Seal|Contracts under seal]].</ref> They may be either written or oral,<ref>Webs te r v. Flemi n g, 178 Ill. 140 , 52 NE 975; Perrine v. Cheese- m an , 11 N. J. L. 174, 19 A mD 388.</ref> and the term is synonymous with the term "parol contracts,"<ref>90. Just i ce v. Lang, 4 2 N. Y. 493, 1 AmR 57 6.</ref> which is also used to distinguish contracts made verbally or not under seal.<ref>91. K lme v. Tobyhanna Creek Ice Co., 240 Pa. 81, 87 A 278.</ref> Properly speaking there is no distinct class of contracts merely in writing.<ref>Perrine v. Cheeseman, 11 N J. L. 174, 19 AmD 388; B alla rd v. Walker, a Johns. Cas. (N. Y.) 60.</ref><br />
<br />
==Written and Oral Contracts==<br />
A written contract is one which, in all its terms, is in writing.<ref>Railway Pass., etc .. Conductors Mut. Aid, etc., Assoc. v. Lo o m is, U2 Ill. 660, 667, 32 NE 424 · Ames v. Molr, 130 Ill. 6 8 2, 689, 22 NE 635,i Wood v. Will iams, 4 0 Ill. A. 115, 118 [atr 142 Ill. 269, 31 NE; 881. 34 AmSR 7 9 ); M arl o n C ou n t y v. Shipley, 77 Ind. 533, 6 55; Wri ght v. Latham. 7 N. C. 298. 301; Morrison v. Davis, 20 Pa. 171, 177, o7 AmD 696 .<br /> <br />
"A written contract creates a specified relation between the parties, and when the duties of that relation are not fully defined In the con trac t, the law defines th em according to the circumstances." M orrison v. Davis, 20 Pa. 171, 1 7 7 67 AmD 695.<br /> <br />
"A contract in writing contains, In express terms. or by natural Inter- ences, the stipulation I nto which the pa rt ies have thought proper to en- ter.'' Wright v. Latham, 7 N. C. 298, 3 0 1 .<br /> <br />
'''[a] Contingent contract.'''-- A contract in wrltfng Is none the less so because it expresses, a nd Its oper- atlon depends on, a contingency. When the contingency happens. the minds of the parties meet as to all the terms wh ich t he con tract ex- presses. and to write them over' again would be one ot those useless acts which th e law does not requi re. Jn- surance, e tc .. Co. v. State Nat. Bank, 5 Mo. A. 333 [atr 71 Mo. 58 1 .</ref> A contract which is not entirely in writing is regarded as an oral or verbal contract.<ref>U.S.--snow v . N e son, 113 Fed. 353. 357.<br /> <br />
D. C.-Evans v. Schoonmaker, 2 App. 62. 71.<br /> <br />
111.-Railway Pass .. etc .. Conductors Mut. Ald. etc., Assoc. v. Loomis, 142 Ill. 5 60, 567. 32 N E 4 24 [ cit Bishop Contr. I 1 6 3 ) ; Fuchs, etc .. Mfg. Co. v. K ittred ge, 146 Ill. A. 350, 363 [atr 242 Ill. 8 8 , 89 NE 723]· Rittenh o use. etc .• Co. v. Barry, 98 111. A. 648, 654 [rev on other grou nds 1 9 8 Ill. 602, 64 NE 995) ; Murphy v. C icero Lu mber Co .. 9 7 Ill. A. 5 1 0.<br /> <br />
Ind.-Loulsvllle. e tc .. p. Co. v. Rey- nolds, 118 Ind. 170, 1 7 •• 20 NE 711; Marl on C ou nty v. Shi p ley , 77 InJt. 563, 666 ; Flshbeh;t v. Paine. 52 Ind. A. 441, 100 NE 768; Locomoti ve Flre- men Brotherhood L. F. & E. v. Cor- der, 6 2 Ind. A. 214. 97 NE 125. 128: Miller v. Sha r pe, 62 Ind. A. 11. 100 NE :1,.08, 109; Stautrer v. Llnentbal. 29 Ini:J. A. 306, 64 NE 64 3.<br /> <br />
B. C.-Emb,ree v. McKee, lf B. c. 46 46.<br /> <br />
"When the w hole of a contract bas not been reduced to writing, such a contract In Its entirety Is to be regarded as a parol contract. subject to all the Incidents ot purely parol contracts." Evans v. Schoonmaker. 2 App, ( D. C. ) 62. 7 1.</ref> Further, in order that a contract may be deemed to be in writing, it must be in legible characters.<ref>Aradalou v. New York. etc .• R. Co., (Mass. ) 114 NE 297, 299. "When the parties undertake to put their agreement In writing and exparty press Its crucial terms by charslderatl acters or srmbols ao Illegible that the tribuna established to try the facts cannot determine the stgntftcaof tlon of that which ls'on the paper. then no contract In writing has been made." Aradalou v. New York, etc .. R. Co., supra.</ref> The word "contract" is broad enough to include contracts both in writing and by parol.<ref>Frankfort Modes Olal!& Works v. Arbogast, 1 4 8 Ky. 4, 145 SW 11!2; Musgrove v. Jackaon,. 69 Miss. 390: Rann v. Hu ghes, 7 T. R. 850, 101 Reprin t 1 0 1 4 .</ref><br />
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==Special Contracts==<br />
A special contract<ref>'''Sealed Contracts''' see [[Contracts/Formal requisites#Seal|Contracts under seal]].</ref> is one with peculiar provisions or stipulations not found in the ordinary contract relating to the same subject matter. These provisions are such as, if omitted from the ordinary contract, the law will never supply.<ref>Jackson v. C reek. H Ind. A. 541, 94 NE 418, 418; I ndi anapol is Coal Tract. Co. v. Dal ton, 4 3 Ind. .A. 330, 87 NE 652, 664; Pence v. Bec:kof ma n. 11 I nd. A. 264, 39 NE 169, 170. 54 AmSR 605 ; Fo res ter v. Fo rester. 10 Ind. A. 880, 88 NE 4 26. 427. See also Ward v. Missouri Pac. R. Co .. 158 Mo. 228, 68 SW 28 (holding a contract special only as it alters general terms and conditions).</ref> A special contract may rest in parol,<ref>Midland Roofing Mfg. Co. v. Pickens. 96 S. C. 286, 80 SE 484.</ref> and the term does not require a eontract by specialty.<ref>Midland Roofing Mfg. Co. v. Pickens. 96 S. C. 286, 80 SE 484.<br />
<br />'''Specialty contracts''' see [[Contracts/Formal requisites#Seal|Contracts under seal]].</ref><br />
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==Conditional Contracts==<br />
A conditiona1 contract is an executory contract, the performance of which depends on a condition. It is not simply an executory contract, since the latter may be an absolute agreement to do, or not to do, something, but it is a contract whose very existence and performance depends on a contingency and condition.<ref>Nashville, etc., R. Co. v. Jones, 2 Coldw. (Tenn.) 574, 594 [quot Story Contr. t20]; French v. Osmer, 7 Vt.. 427. 431, 32 A 254.</ref><br />
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==Gratuitous Contracts==<br />
A gratuitous contract is defined to be one the object of which is the benefit of the person with whom it is made, without any profit received or promised as a consideration for it, as, for example, a gift.<ref>Georgia Penitentiary Co. v. Nelms, 65 Ga. 499, 505, 38 AmR 793 [quot Bouvier L.D.].</ref><br />
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==Bilateral and Unilateral Contracts==<br />
A bilateral contract is one in which there are reciprocal promises, so that there is something on both sides to be done or forborne,<ref>Wickham v. Well, 17 N Y S 5 1 8 , 5 1 9; Winders v. Kenan, 161 N.C. 6 2 8 , ti2, 77 S E 687 f e l t Cyc].</ref> while a unilateral contract is one in which there is a promise on one side only, the consideration on the other side being executed.<ref>Haynes Auto Co. v. Turner, 1 8 GL A. !2. 2 3 . 8 8 S E 7 1 7; Wickham v. Weil, 1i NYS 518, 51 9; Winders v. Kenan, 161 N.C. 628, 632, 7 7 SE 6 8 7 [cit Cyc.].</ref> "Unilateral," however, is frequently employed by the courts to express absence of mutuality.<ref>See Wefel v. Stillman, 1 5 1 Ala. ts. 44 S 203; Georgia Fruit Exch. v. Turnipseed, 9 Ala. A. 1 2 3 . 62 S 5 4 2 : Cothran v. Wi tham, 1 23 Ga. 1 9 0, 6 1 .S E 2 8 5; Joseph Sch1itz Brewing. Co. v. Komp, 1 1 8 Ill. A. 5 6 6; High Wheel Auto Parts Co. v. Journal Co., 50 Ind. A 396, 98 NE 442; Seltzer v. Chicago, etc., R. Co., 156 Iowa 1, 134; Owen v. Satlonal Hatchet Co., 1 4 7 Iowa 3 9 3 . 121 NW 1 076. 1 2 6 N W 313; Buffington v. McNally, 1 9 3 Mass. 1 9 8 , 78 NE 3 0 9.<br /><br />
'''Necessity and existence of mutuality''' see [[Contracts/Consideration#Mutuality|Mutuality]].</ref><br />
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==Commutative Contracts==<br />
"Commutative contract" is a term used in the civil law to designate a contract in which each of the contracting parties gives and receives an equivalent.<ref>'''[a] Different classes.'''- "Such contracts are, usually distributed into four classes namely: ''Do ut des'' (I give that you may give); ''Facio ut facias'' (I do that you may do); ''Facio ut des'' (I do that you may give); ''Do ut facias'' (I give that you may do)." Bouvier L. D.<br /><br />
'''[b]''' {{Quote|'''A resolutory condition is implied in all commutative contracts''', to take effect in case either of the parties does not comply with his engagements; in this case the contract is not dissolved of right; the party complaining of a breach of the contract may either sue for its dissolution with damages, or, if the circumstances of the case permit, demand a specific performance. . . . The dissolving condition . . . when accomplished, operates the revocation of the obligation, placing matters in the same state as though the obligation had not existed. The creditor seeking to avail himself of it is obliged to restore what he has received. . . . If the buyer does not pay the price, the seller may sue for the dissolution of the sale. . . . In certain cases the jduge may grant to the buyer a longer or shorter time, according to circumstances, provided such term exceed not six months. . . . In order to enforce the resolutory con d i t i o n th e re m u s t be a j u d i cial demand a n d a regular adj u d i c a t i o n . . . . T h i s res olu tory co n d i t i o n may be waived. or such c h a n g e s m a y have take n p l a c e t h a t the parties can n o t be p u t back Into the same position I n wh ich they were, o r the del i n qu e n t pa r ty may have had a proper ex cuse fo r want of p rompt ness In performance ; all which th ings are p roper to be submitted to the j u d g m e n t of a cou rt.}} Ridings v. John s o n , 1 2 8 u. s. 2 1 2 . 216, 9 set 7 2. 3 2 L. ed. 401.<br /><br />
'''[c] In Louisiana''' commutative contracts are declared to be "those in which what is done, given or promIsed b y on e party, Is con side red as e quival ent to, or a cons ideration for what is done. given or promised by the other." Clv. Code art 1768 : Rid· irgs v . Johpson, 1 2 8 U. S. 2 1 2 . 2 1 5 , 9 S C:t 72. 32 L. ed. 401 : Goodson v. Vivian 011 Co., 1 2 9 La. 9 6 5 , 57 S 281. See Delabl nrre v. New Orleans Sec. on d Municipality, 3 La. Ann. 230.</ref> The contract of sale is of thls kind: the seller gives the thing sold, and receives the price which is the equivalent; the buyer gives the price, and receives the thing sold, which is the equivalent.<br />
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==References==<br />
{{reflist}}</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=Contracts/Implication-in-fact&diff=41942Contracts/Implication-in-fact2022-03-16T18:33:34Z<p>Rezsue: /* See also */</p>
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<div>{{:Contracts/TOC}}<br />
An '''implied-in-fact contract''' is a form of an implied [[contract]] formed by non-verbal conduct, rather than by explicit words. The [[United States Supreme Court]] has defined it as "an agreement 'implied in fact'" as "founded upon a meeting of minds, which, although not embodied in an express contract, is [[Inference|inferred]], as a fact, from conduct of the parties showing, in the light of the surrounding circumstances, their tacit understanding."<ref>{{ussc|name=Baltimore & Ohio R. Co. v. United States|261|592|1923}}</ref><br />
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Although the parties may not have exchanged words of agreement, their conduct may indicate that an agreement existed. <br />
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For example, if a patient goes to a doctor's appointment, his actions indicate he intends to receive treatment in exchange for paying reasonable/fair doctor's fees. Likewise, by seeing the patient, the doctor's actions indicate he intends to treat the patient in exchange for payment of the bill. Therefore, it seems that a contract actually existed between the doctor and the patient, even though nobody spoke any words of agreement. (They both agreed to the same essential terms, and acted in accordance with that agreement. There was mutuality of [[Consideration under American law|consideration]].) In such a case, the court will probably find that (as a [[Question of fact|matter of fact]]) the parties had an implied contract. If the patient refuses to pay after being examined, he will have [[breach of contract|breached]] the implied contract. Another example of an implied contract is the payment method known as a [[letter of credit]].<br />
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Generally, an implied contract has the same legal force as an [[express contract]]. However, it may be more difficult to prove the existence and terms of an implied contract should a dispute arise. In some [[jurisdiction]]s, contracts involving [[real estate]] may not be created on an implied-in-fact basis, requiring the transaction to be in writing. <br />
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[[Unilateral contract]]s are often the subject matter of these types of contracts where acceptance is being made by beginning a specified task.<br />
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==Potential conduct implying implied contract==<br />
* A prior history of similar agreements.<br />
* When recipient accepts something of value knowing other party expects payment.<br />
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== See also ==<br />
* [[Contracts/Definitions#Implied in Law or Quasi or Constructive Contracts|Implied in law contract]]<br />
* [[Contracts/Statute of frauds|Statute of frauds]]<br />
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==References==<br />
{{Reflist}}<br />
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{{DEFAULTSORT:Implied-In-Fact Contract}}<br />
[[Category:Contract law]]<br />
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{{law-term-stub}}</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=Contracts/Definitions&diff=41940Contracts/Definitions2022-03-16T17:45:07Z<p>Rezsue: </p>
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<div>{{:Contracts/TOC}}<br />
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==Promise==<br />
A promise is the declaration by any person of his intention to do, or to forbear from anything at the request, or for the use, of another. A proposal when accepted becomes a promise.<br />
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==Agreement==<br />
Agreement in the law of contracts is the expression by two or more persons of a common intention to affect their legal relations; it consists in their being of the same mind and intention concerning the matter agreed on.<ref>'''U.S.'''-- ''[[U. S. v. Richards]]'', 149 Fed. 443, 450.<br />'''Ky.'''-- ''[[Tucker v. Sheeran]]'', 155 Ky. 670, 672, 160 SW 176; ''[[Dixie F. Ins. Co. v. Wallace]]'', 153 Ky. 677, 679, 156 SW 140, 142, AnnCas1915C 409 [cit Cyc].<br />'''Mich.'''-- ''[[Hudson v. Columbian Transfer Co.]]'', 137 Mich. 255, 257, 100 NW 402, 109 AmSR 679 (cit Cyc).<br />'''Nebr.'''-- ''[[McGavock v. Morton]]'', 57 Nebr. 385, 77 NW 785.<br />'''N.Y.'''-- ''[[Bruce v. Pearson]]'', 3 Johns. 534.<br />'''Oh.'''''-- [[Columbus, etc., R. Co. v. Gaffney]]'', 65 Oh. St. 104, 117, 61 NE 152.</ref><br />
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Another definition of '''Agreement''' is "a coming together of parties in opinion or determination; the union of two or more minds in a thing done or to be done; a mutual assent to do a thing."<ref>''[[Carter v. Prairie Oil, etc., Co.]]'', (Okl.) 160 P 319, 322.</ref><br />
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''See also'' [[Contracts/Offer and acceptance]].<br />
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The term "agreement" is sometimes used as synonymous with "contract."<ref>''[[Douglass v. W. L. Williams Art Co.]]'', 143 Ga. 846, 85 SE 993; ''[[Michael v. Kennedy]]'', 166 Mo. A. 462, 466, 148 SW 983 ("We are unable to distinguish the difference between a contract and an agreement"). ''But see [[Tucker v. Sheeran]]'', 155 Ky. 670, 160 SW 176 (holding that an agreement does not necessarily affect the legal relations of the parties so as to amount to a contract, It being necessary for that purpose that it produce a legal, binding result on their mutual relations).</ref><br />
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==Obligation==<br />
The duty imposed by law on the parties to a contract to perform their undertaking constitutes the obligation of the contract.<ref>''[[Ogden v. Saunders]]'', 12 Wheat. (U. S.) 213, 257, 6 L/ ed. 606; ''[[Mobile L. Ins. Co. v. Randall]]'', 74 Ala. 170, 177; ''[[State v. Carew]]'', 47 S. C. L. 498, 91 AmD 245; ''see [[Charles River Bridge v. Warren Bridge]]'', 11 Pet. (U. S.) 420, 572, 9 L. ed. 773, 938 (where it is said that a contract "is an agreement between two or more persons to do or not to do a particular thing. The obligation of the contract is founded in the terms of the agreement, sanctioned by oral and legal principles").[</ref> <br />
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'''A well-recognized distinction''' is drawn between a contract itself and its obligation. The contract is the agreement of the parties; the obligation is the remedy which the law affords for its enforcement. <ref>''[[Moore v. Holland]]'', 16 S. C. 15.</ref><br />
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The existence of such an obligation is essential to the existence of a contract.<ref>''[[United Transp., etc., Co. v. New York, etc., Transp. Line]]'', 180 Fed. 902; ''see [[Quinn v. Shields]]'', 62 Iowa 129, 139, 17 NW 437, 49 AmR 141 (where it is said that a "contract," in its more extensive sense, includes every description of agreement or publication whereby one party becomes bound to another to pay a sum of money, or to do or omit to do a certain act; or a contract is an act which contacts a perfect obligation).</ref> The questions of what acts impair the obligations of contracts,<ref>[[Constitutional Law]]</ref> and of what are contracts within the scope of the constitutional protection,<ref>[[Constitutional Law]]</ref> are elsewhere treated.<br />
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==Compact==<br />
"Compact" and "contract" are used as convertible terms.<ref>''[[Chesapeake, etc., Canal Co. v. Baltimore, etc., R. Co.]]'', 4 Gill &: J. (Md.) 1, 130 ("It is a mutual consent of the minds of the parties concerned, respecting some property or right, that is the object of the stipulation, or something that is to be done or forborne; 'a transaction between two or more persons, in which each party comes under an obligation to the other, and each reciprocally acquires a right to whatever is promised or stipulated by the other,' and any words manifesting that ''congregatio mentium'', are sufficient to constitute a contract").</ref><br />
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==Express Contracts==<br />
An express contract is one where the intention of the parties and the terms of the agreement are declared or expressed by the parties, in writing or orally, at the time it is entered into.<ref>'''Colo.'''-- [[Casserleigh v. Green]], 28 Colo. 392, 65 P. 32 (aff. 12 Colo. A. 515, 56 P. 189).<br />
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'''Del.'''-- [[Jones v. Tucker]], 26 Del. 422, 423, 84 A 1012.<br />
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'''Ill.'''-- [[Peo. v. Dummer]], 274 Ill. 637, 640, 113 NE 934; [[Turner v. Owen]], 122 Ill. A. 501, 504.<br />
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'''Ind.'''-- [[Yawger v. Joseph]], 184 Ind. 228, 108 NE 774, 775 (cit Cyc).<br />
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'''Oh.'''-- [[Turney v. Wooley]], 23 Oh. Cir. Ct. N.S. 111, 114.<br />
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'''Pa.'''-- [[Hertzog v. Hertzog]], 29 Pa. 465, 467.<br />
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'''Tenn.'''-- [[Thompson v. Woodruff]], 7 Coldw. 401, 409.<br />
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'''Tex.'''-- [[Ragley v. Godley]], (Civ. A.) 90 SW 66.</ref> It is an express contract, although some of its terms are dependent on the happening of a future event,<ref>[[Voorheis v. Bovell]], 20 Ill. A. 538.</ref> or although consummated by an agent.<ref>[[Bule v. Shipman]], 46 N. C. 10.</ref><br />
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===Other Definitions===<br />
# "A contract is express when the agreement is formal, and stated either verbally or In writing" <ref>[[Gillan v. O'Leary]], 124 App. Dlv. 498, 501, 108 NYS 1024.</ref> <br />
# "An agreement whose terms are openly uttered or expressed by the contracting parties." <ref>[[Linn v. Ross]], 10 Oh. 412, 414, 36 AmD 96. To same effect [[Wickham v. Weil]], 17 NYS 618; [[Thompson v. Woodruff]], 7 Coldw. (Tenn.) 401.</ref><br />
# "Such as are voluntarily made by the parties thereto." <ref>[[Grevell v. Whiteman]], 32 Misc. 279, 280, 65 NYS 974.</ref><br />
# "One where a bargain has been made by the two parties covering the subject in question." <ref>[[Cotfroth v. Somerset County]], 19 Pa. Co. 354, 358.</ref><br />
# "A contract is express when it consists of words written or spoken, expressing an actual agreement of the parties." <ref>[[Gillan v. O'Leary]], 124 App. Div. 498, 502, 108 NYS 1024; [[Prichard v. Foster]], (Tex. Civ. A.) 170 SW 1077, 1078.</ref><br />
# "An express agreement is where the parties thereto expressly agree." <ref>[[Cuneo v. De Cuneo]], 24 Tex. Civ. A. 436, 438, 59 SW 284.</ref><br />
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===Express contracts classified===<br />
Express contracts are properly divided into two classes, contracts under seal or specialties, and contracts in parol.<ref>[[Whitehill v. Wilson]], 3 Penr. & W. (Pa.) 405, 24 AmD 326; [[Rann v. Hughes]], 7 T.R. 350, 101 Reprint 1014.</ref><br />
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==Implied Contracts==<br />
===Classes and Distinctions===<br />
Implied contracts are frequently spoken of as being divisible into two classes:<ref>[[Miller v. Schloss]], 218 N. Y. 400, 113 NE 337; [[Morse v. Kenney]] 87 Vt. 445, 89 A. 865.</ref> (1) Contracts implied in fact;<ref>See infra. [[#Contracts Implied in Fact|Contracts Implied in Fact]] and [[#Effect of Express Contract|Effect of Express Contract]]</ref> and (2) contracts implied in law.<ref>See infra. [[#Implied in Law or Quasi or Constructive Contracts|Implied in Law or Quasi or Constructive Contracts]]</ref> This division has been subjected to some criticism,<ref>[[Nevada Co. v. Farnsworth]], 89 Fed. 164; [[Columbus. etc. R. Co. v. Gaffney]], 66 Oh. St. 104, 61 NE 152; [[Hertzog v. Hertzog]], 29 Pa. 465.</ref> and perhaps justly so, because of the absence from so called contracts implied in law of the elements of true contracts.<ref>See infra. [[#Implied in Law or Quasi or Constructive Contracts|Implied in Law or Quasi or Constructive Contracts]]</ref> A more accurate designation of the so called contracts implied in law, and one which is frequently, employed, is quasi or constructive contracts.<ref>[[Hertzog v. Hertzog]], 29 Pa. 465, 467 (where the court, after quoting as follows, "Implied [contracts) are such as reason and justice dictate; and which, therefore, the law presumes that every man undertakes to perform. As, if I employ a person to do any business for me, or perform any work, the law implies that I undertook and contracted to pay him as much as his labour deserves. If I take up wares of a tradesman without any agreement of price, the law concludes that I contracted to pay their real value," said: {{Quote|This is the language of Blackstone, 2 Comm. 443, and it is open to some criticism. There is some looseness of thought in supposing that reason and justice ever dictate any contracts between parties, or impose such upon them. All true contracts grow out of the intentions of the parties to transactions, and are dictated only by their mutual and accordant wills. When this intention is expressed, we call the contract an express one. When it is not expressed, it may be inferred, implied, or presumed, from circumstances as really existing, and then the contract, thus ascertained, is called an implied one. The instances given by Blackstone are an illustration of this. . . . It is quite apparent, therefore, that radically different relations are classified under the same term, and this must often give rise to indistinctness of thought. And this was not at all necessary; for we have another well-authorized technical term exactly adapted to the office of making the true distinction. The latter class are merely constructive contracts, while the former are truly implied ones. In one case the contract is mere fiction, a form imposed in order to adapt the case to a given remedy; in the other it is a fact legitimately inferred. In one, the intention is disregarded; in the other, it is ascertained and enforced. In one, the duty defines the contract; in the other, the contract defines the duty}}). See also [[Willard v. Doran, etc., Co.,]] 48 Hun 402, 403, 1 NYS 345, 588 (where the court said: {{Quote|There has been some inaccuracy in the use of this phrase [Implied contract]. If it is applied only to cases in which parties enter into a real contract, but without express words, then it is accurately used. If A borrows money of B, he really agrees to repay it, although he does not expressly say so. But . . . [in case of money lost on a wager], there is no contract to repay the money, either express or implied; and to call the liability an "implied contract" gives an incorrect idea of the nature of the liability. Such use of this phrase probably arose under the old forms of pleading when the action of assumpsit was found so useful. It was necessary in that action to allege a promise, while the action often lay in cases where no promise had been made. The civil law writers found the difficulty of attempting to classify actions into those ''ex contractu'' and those ''ex delicto''. Therefore they made two other classes, viz., ''quasi ex contractu'' and ''quasi ex delicto''. Thus they said that the action to recover back money paid by mistake was ''quasi ex contractu'', for the party was so far from being bound by a contract, that he was bound rather ''ex distractu'' than ''ex contractu'', because money paid was rather to dissolve than to form a contract. (Inst., III. 27, 6.) Similarly in this case the defendant made no contract to pay the plaintiff the money demanded. The actual contract between the parties, even if valid, would not be that which the plaintiff seeks to enforce. He claims that the defendant has money of his which, in justice and good conscience, the defendant should return. This right of action is not unlike the action to recover money paid by mistake. In each the money is paid voluntarily, in each it is unjust for the defendant to retain that which he has received. In neither has he agreed to return it. We might then class this as an action ''quasi ex contractu'', for there is no agreement to return the money, which would give an action ''ex contractu''. And on the other hand, possession of the money was not obtained by force or fraud, and thus the action is not strictly ''ex delicto''}}).</ref> The term "implied contracts," however, as it is ordinarily employed, is broad enough to include both contracts implied in fact and quasi or constructive contracts.<ref>[[Harty Bros., etc., Co. v. Polakow]], 237 I11. 659, 86 NE 1086 [rev. 141 Ill. A. 570]; [[Umlauf v. Umlauf]], 101 Ill. 651; [[Musgrove v. Jackson]], 59 Miss. 390. See [[Chudnovski v. Eckels]], 232 Ill. 312, 317, 83 NE 846 (where the court said: {{Quote|The term "implied contract" is a familiar one in the law. By reason of the relation of the parties or the existence of an obligation or duty a contract may be implied by law which the party never actually intended to enter into and the obligation of which he did actually intend never to assume. Whether or not it accords with scientific terminology to call an obligation imposed by the existence of a duty an implied contract, yet in the ordinary use of language by courts and writers it has been almost universally so called. "Implied contracts," says Blackstone, "are such as reason and justice dictate, and which, therefore, the law presumes that every man has contracted to perform, and upon this presumption makes him answerable to such persons as suffer by his non-performance." (3 Com. 158.) In the sixth subdivision of his classification of implied contracts which arise from natural reason and the just construction of the law, he says: "The last class of contracts, implied by reason and construction of law, arises upon this supposition: that every one who undertakes any office, employment, trust or duty, contracts with those who employ or entrust him, to perform it with integrity, diligence and skill; and if by his want of either of those qualities any injury accrues to individuals, they have their remedy in damages by a special action on the case." (Ibid. 163.) And among the instances of implied contracts are mentioned those of the common inn-keeper to secure his guest's goods in his inn, of the common carrier to be answerable for the goods he carries, and of the common carrier that he shoes a horse well without laming him}}).</ref><br />
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====Ambiguous definitions of term "implied contract"====<br />
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#"An implied agreement is where the terms of the contract are not expressed between the contracting parties, but the obligations of natural justice by reason of some legal liability impose the payment of money or the performance of some duty, and raise a promise to that effect."<ref>[[Linn v. Ross]], 10 Oh. 412, 414, 36 AmD 96.</ref> <br />
#An implied contract "is created by law to establish justice between parties. It does not require mutual consent, but may bind a party against his will."<ref>[[Adams v. Hilliard]], 14 NYS 120, 122.</ref><br />
# Implied contracts "are such as reason and justice dictate, and which therefore the law presumes that every man undertakes to perform."<ref>2 Blackstone Comm. p 443; [[Day v. Connecticut Gen. L. Ins. Co.]], 45 Conn. 480, 490, 29 AmR 693; [[Hamilton v. Winterrowd]], 48 Ind. 393, 396; [[Ottumwa Mill, etc., Co. v. Manchester]], 139 Iowa 334, 337, 115 NW 911; [[Nolan v. Swift]], 111 Mich. 56, 60, 69 NW 96; [[Deane v. Hodge]], 35 Minn. 146, 150, 27 NW 917, 59 AmR 321; [[McSorley v. Faulkner]], 18 NYS 460, 462; [[Wickham v. Weil]], 17 NYS 518, 619; [[Peo. v. Bennett]], 6 AbbPr (N.Y.) 343, 348; [[Thompson v. Woodruff]], 7 Coldw. (Tenn.) 401, 410; [[Wyoming Nat. Bank v. Brown]], 7 Wyo. 494, 501, 53 P 291, 75 AmSR 935. To same effect [[Hawkes v. Taylor]], 176 Ill. 344, 61 NE 811.</ref><br />
# "Implied contracts are such as reason and justice dictate, and which the law presumes from the relations and circumstances of the parties."<ref>[[Miller's App.]], 100 Pa. 668, 670, 45 AmR 394.</ref><br />
<br />
====Statutory uses of term "implied contracts"====<br />
<br />
{{Quote|However unscientific such a classification is, simple implied contracts are usually subdivided into contracts implied in fact and contracts implied in law. . . . This classification of implied contracts makes it difficult to interpret a statute where the term is used. In each case it becomes a question whether the general meaning, or the more limited, if more accurate, meaning, was, by the legislature, intended. . . . In the absence of any light thrown thereon by the language or object of the statute, or of other statutes ''in pari materia'', it must be held . . . that the legislature intended that meaning which is commonly assigned to the words, even if such definition be less accurate or scientific.<ref>[[Nevada Co. v. Farnsworth]], 89 Fed. 164, 165. See [[Pache v. Oppenheim]], 92 App. Div. 221, 87 NYS 704 (holding that an action "upon contract" may be maintained on "quasi contract"). Compare [[Oppenheimer v. Regan]], 32 Mont. 110, 79 P. 695 (holding that "actions arising on contract" as employed in a statute fixing the jurisdiction of justices of the peace did not include agreements resting upon a fiction of the law).</ref>}}<br />
<br />
====Distinctions====<br />
A contract implied in fact is a true contract, the agreement of the parties being inferred from the circumstances, while a contract implied in law is but a duty imposed by law and treated as a contract for the purposes of a remedy only.<ref>'''U.S.'''-- [[Nevada Co. v. Farnsworth]], 89 Fed. 164; [[Harley v. U.S.]], 39 Ct. Cl. 106 [aff 198 U.S. 229, 25 SCt 634, 49 L. ed. 1029].<br /><br />
'''Conn.'''-- [[Weinhouse v. Cronin]], 68 Conn. 260. 36 A 46.<br /><br />
'''Ill.'''-- [[Hickey v. Chicago City R. Co.]], 148 Ill. A. 197; [[Chicago v. Pittsburg, etc., R. Co.]], 146 Ill. A. 403 [aff 242 Ill. 30, 89 NE 648].<br /> <br />
'''Mo.'''-- [[Weinsberg v. St. Louis Cordage Co.]], 135 Mo. A. 553, 116 SW 461.<br /> <br />
'''N.Y.'''-- [[McCoun v. New York Cent., etc., R. Co.]], 50 N.Y. 176; [[McSorley v. Faulkner]], 18 NYS 460.<br /><br />
'''Oh.'''-- [[Columbus, etc., R. Co. v. Gaffney]], 66 Oh. St. 104, 61 NE 152.<br /> <br />
'''Tex.'''-- [[Leonard v. State]], 56 Tex. Cr. 307, 316, 120 SW 183 (quot Cyc).<br /><br />
'''Wis.'''-- [[Wojahn v. Oshkosh Nat. Union Bank]], 144 Wis. 646, 129 NW 1068.<br /><br />
{{Quote|The evidence of an actual contract is generally to be found either in some writing made by the parties, or in verbal communications which passed between them, or in their acts and conduct considered in the light of the circumstances of each particular case. A contract implied by law, on the contrary, rests upon no evidence. It has no actual existence; it is simply a mythical creation of the law. The law says that it shall be taken that there was a promise, when, in point of fact, there was none. Of course this is not good logic, for the obvious and sufficient reason that it is not true. It is a legal fiction, resting wholly for its support on a plain legal obligation and a plain legal right. If it were true, it would not be a fiction. There is a class of legal rights, with their correlative legal duties, analogous to the obligations quasi ex contractu of the civil law, which seem to lie in the region between contracts on the one hand, and torts on the other, to call for the application of a remedy not strictly furnished either by actions ex contractu or actions ex delicto.}} [[Sceva v. True]], 53 N.H. 627, 632.</ref> In the case of contracts implied in fact, there must be an assent of the parties, as in express contracts,<ref>See Infra. [[Contracts/Intention to Bind#Necessity of Mutual Assent|Necessity of Mutual Assent]].</ref> while in the case of contracts implied in law or more properly quasi or constructive contracts the obligation arises, not from consent, but from the law or natural equity.<ref>See Infra. [[#Implied in Law or Quasi or Constructive Contracts|Implied in Law or Quasi or Constructive Contracts]].</ref> In the case of contracts implied in fact, the contract defines the duty, while in the case of constructive contracts, the duty defines the contract.<ref>[[Graham v. Cummings]], 208 Pa. 516, 57 A 943; [[Hertzog v. Hertzog]], 29 Pa. 465.</ref><br />
<br />
===Contracts Implied in Fact===<br />
====In General====<br />
A contract implied in fact, or an implied contract in the proper sense, arises where the intention of the parties is not expressed, but an agreement in fact, creating an obligation, is implied or presumed from their acts,<ref>'''Hawaii.'''-- [[Wall v. Focke]], 21 Hawaii 399, 403, AnnCas 1916C 677 [quot Cyc].<br /><br />
'''IIl.'''-- [[Peo. v. Dummer]], 274 Ill. 837,113 NE 934.<br /><br />
'''Ind.'''-- [[Yawger v. Joseph]], 184 Ind. 228, 108 NE 774.<br /><br />
'''Iowa.'''-- [[Ottumwa Mill, etc., Co. v. Manchester]], 139 Iowa 334, 115 NW 911, 81<br /><br />
'''La.'''-- [[Baker v. Stoutmeyer]], 2 MeG.<br /><br />
'''N.H.'''-- [[Bixby v. Moore]], 61 N. H. 402.<br /><br />
'''N.J.'''-- [[Gannon v. Brady Brass Co.]], 82 N. J. L. 411. 81 A 727, AnnCas 1913C 1308.<br /><br />
'''N.Y.'''-- [[Peo. v. Speir]], 77 N. Y. 144.<br /><br />
'''Oh.'''-- [[Columbus, etc., R. Co. v. Gaffney]], 85 Oh. St. 104, 61 NE 162.<br /><br />
'''Pa.'''-- [[Hertzog v. Hertzog]], 29 Pa. 466.<br /><br />
Phillipine.-- [[Peres v. Pomar]], 2 Phillipine 882.<br /><br />
'''S.C.'''-- [[Dowling v. Charleston, etc., R. Co.]], 81. SE 313.<br /><br />
'''Tenn.'''-- [[Thompson v. Woodruff]], 7 Coldw. 407, 410. <br /><br />
'''Tex.'''-- [[Cuneo v. De Cuneo]], 24 Tex. Civ. A. 436, 69 SW 284.<br /><br />
"A contract may be implied where an agreement in fact is presumed from the acts of the parties, and this is the proper meaning of an implied contract." [[Peo. v. Dummer]], 274 Ill. 637, 640, 113 NE 934.<br /><br />
"An implied agreement is one where the conduct of the parties with reference to the subject matter is such as to induce the belief that they intended to do that which their acts indicate they have done." [[Cuneo v. De Cuneo]], 24 Tex. Civ. A. 436, 438, 69 SW 284.</ref> or, as it has been otherwise stated, where there are circumstances which, according to the ordinary course of dealing and the, common understanding of men, show a mutual intent to contract.<ref>'''U.S.'''-- [[Wisconsln Steel Co. v. Maryland Steel Co.]], 203 Fed. 408, 121 CCA 607; [[Knapp v. U.S.]], 4S Ct. Ct. 601.<br /><br />
'''Iowa.'''-- [[Fouke v. Jackson County]], 84 Iowa 616, 51 NW 71.<br /><br />
'''N.H.'''-- [[Sceva v. True]], 53 N.H. 627.<br /><br />
'''N.J.'''-- [[Passino v. Brady Brass Co.]], 88 N.J.L. 419, 421, 84 A 616 [cit Cyc].<br /><br />
'''N.Y.'''-- [[Keokuk Commercial Bank v. Pfeiffer]], 22 Hun 327 [aff 108 N.Y. 242, 16 NE 811].<br /><br />
'''Pa.'''-- [[Hertzog v. Hertzog]], 29 Pa. 465.<br /><br />
'''Tex.'''-- [[Pierce v. Aiken]], (Civ. A.) 146 SW 950, 962 [quot Cyc.).<br /><br />
In implied contracts {{Quote|the parties have capacity to contract; facts, circumstances, few or many, clear or complicated, exist, which lead the minds of the jurors to the conclusion that the minds of the parties met. Minds may meet by words, acts, or both. The words even may negative such meeting, but "acts which speak louder than words" may conclude him who denies a tacit contract.}}[[Sceva v. True]], 63 N. H. 627, 629.<br /><br />
"Implied contracts in fact do not arise from the denials and contentions of parties." [[Knapp v. U.S.]], 46 Ct. Cl. 601, 643. </ref> It follows that the only distinction between this species of contract and express contracts rests in the mode of proof;<ref>'''Hawaii.'''-- [[Wall v. Focke]], 22 Hawaii 221.<br /><br />
'''Ill.'''-- [[Peo. v. Dummer]], 274 Ill. 637, 113 NE 934; [[Highway Comrs. v. Bloomington]], 253 Ill. 184, 97 NE 280, AnnCas1913A 471.<br /> ·<br />
'''Me.'''-- [[Saunders v. Saunders]], 90 Me. 284, 38 A 172.<br /><br />
'''Mich.'''-- [[Woods v. Ayres]], 39 Mich. 346, 33 AmR 396.<br /><br />
'''N.Y.'''-- [[McCarthy v. New York]], 96 N.Y. 1, 48 AmR 601; [[Peo. v. Speir]], 77 N.Y. 144.<br /><br />
'''Oh.'''-- [[Columbus, etc., R. Co. v. Gaffney]], 66 Oh. St. 104, 61 NE 162.<br /><br />
'''Tex.'''-- [[Fordtran v. Stowers]], 62 Tex. Civ. A. 226, 113 SW 631.<br /><br />
{{Quote|Neither an express contract nor one by implication can come into existence unless the parties sustain contract relations, and the difference between the two forms consists in the mode of substantiation and not in the nature of the thing itself. . . . To constitute either one or the other the parties must occupy towards each other a contract status and there must be that connection, mutuality of will and interaction of parties, generally expressed though not very clearly by the term "privity." Without this a contract by implication is quite impossible.}} [[Woods v. Ayres]], 39 Mich. 345, 360, 33 AmR 396.<br />
<br />
{{Quote|As ordinarily understood, the only difference between an express contract and an impiled contract is that in the former the parties arrive at their agreement by words, either oral or written, sealed or unsealed, while in the latter their agreement is arrived at by a consideration of their acts and conduct.}} [[Highway Comrs. v. Bloomington]], 263 Ill. 164, 17%. 97 NE 280. AnnCas1913A 471. </ref> the nature of the understanding is the same, and both express contracts and contracts implied in fact are founded on the mutual agreement of the parties.<ref>'''Ala.'''-- [[Montgomery v. Montgomery Water Works Co.]], 77 Ala. 248; [[Keel v. Larkin]], 72 Ala. 49S.<br /><br />
'''Cal.'''-- [[Smlth v. Moynihan]], 44 Cal. 63.<br /><br />
'''Ill.'''-- [[Saul v. Busenbark]], 83 Ill. A. 256 (rev on other grounds 184 Ill. 343. 66 NE 417).<br /><br />
'''Minn.'''-- [[Lombard v. Rahilly]], 127 Minn. 449, 149 NW 960.<br /><br />
'''N.Y.'''-- [[Peo. v. Speir]], 77 N.Y. 144; [[Chilcott v. Trimble]], 13 Barb. 502.<br /><br />
'''Pa.'''-- [[Hertzog v. Hertzog]], 29 Pa. 465; [[Garst v. Wissler]], 21 Pa. Super. 632.<br /><br />
'''Tex.'''-- [[Prichard v. Foster]], (Civ. A.) 170 SW 1077; [[Fordtran v. Stowers]], 52 Tex. Civ. A. 226, 113 SW 631.<br /><br />
'''Vt.'''-- [[Underhlll v. Rutland R. Co.]], 98 A 1017; [[Morse v. Kenney]], 87 Vt. 445, 89 A 866; [[Mathie v. Hancock]], 78 Vt. 414, 63 A 143.<br /><br />
'''Meeting of minds'''-- If the contract to be proved is an actual one, a meeting of minds is as essential to an implied contract as to an express one. [[Columbus, etc., R. Co. v. Gaffney]], 66 Oh. St. 104, 81 NE 162.</ref> The one class is proved by direct, the other by indirect, evidence;<ref>[[Highway Comrs. v. Bloomington]], 253 Ill. 164, 97 NE 280, AnnCas 1913A 471; [[Indianapolis Coal Tract. Co. v. Dalton]], 43 Ind. A. 330, 87 NE 662; [[Pence v. Beckman]], 11 Ind. A. 263, 39 NE 169, 54 AmSR 505; [[Gillan v. O'Leary]], l24 App. Div. 498, 108 NYS 1024; [[Chilcott v. Trimble]], 13 Barb. (N.Y.) 502.</ref> in other words, the one must be proved by an actual agreement, while in the case of the other it will be implied that the party did make such an agreement as, under the circumstances disclosed, he ought in fairness to have made.<ref>[[Smith v. Moynihan]], 44 Cal. 53; [[Rose v. Wollenberg]], 38 Or. 164, 59 P 190; [[Coffroth v. Somerset County]], 19 Pa. Co. 354.</ref> The implication, of course, must be a reasonable deduction from all the circumstances and relations of the parties,<ref>'''Ky.'''-- [[Belknap v. Hayden]], 1 KyL 119, 10 Ky. Op. 652<br /><br />
'''Md.'''-- [[Burt v. Myer]], 71 Md. 467, 18 A 796.<br /><br />
'''Mass.'''-- [[Newmarket Mfg. Co. v. Coon]], 160 Mass. 566, 23 NE 380.<br /><br />
'''N.Y.'''-- [[Miller v. Schloss]], 218 N.Y. 400, 113 NE 387, 89<br /><br />
'''Vt.'''-- [[Morse v. Kenney]], 87 Vt. 445.<br /><br />
'''B.C.'''-- [[Galbraith v. Hudson's Bay Co.]], 7 B.C. 431.<br /><br />
'''Man.'''-- [[Aikens v. Allan]], 14 Man. 549; [[Munro v. Irvine]], 9 Man. 121.<br /><br />
See [[Godfrey v. White]], 43 Mich. 171, 5 NW 243 (holding that a merchant who for his own purposes sends his customers to another dealer does not thereby acquire any claim on him).<br /><br />
'''Evidence held not to show promise:'''<br />
# To pay for building material. [[Citizens Electric Light, etc., Co. v. Van Lent]], (Iowa) 103 NW 796.<br />
# By a bank to pay the debts of the firm to which it succeeded. [[Tecumseh Nat. Bank v. Saunders]], 50 Nebr. 521, 70 NW 42.<br />
# To pay the excess of proceeds of a sale over the debt. [[Holland v. Laconia Bldg., etc., Assoc.]] 68 N.H. 480, 41 A 178.<br />
# Between creditors to prorate loss. [[Swingle v. Brown]], (Tenn. Ch.) 48 SW 347.<br />
# To pay for materials. [[Limer v. Traders' Co.]], 44 w. Va. 175, 28 SE 730.<br />
# To pay for logs cut. [[Tuhotte v. Jervis Inlet Lumber Co.]], (B.C.) 18 WestLR 338.<br />
# To pay for repairs to an automobile after a fire in a garage. [[Helber v. Schaible]], 183 Mich. 379, 150 NW 145.<br /><br />
'''Evidence held to show implied promise of:'''<br />
#Payment to tenant of damage from fallure to complete building. [[Ottumwa Mill., etc., Co. v. Manchester]], 139 Iowa 134, 116 NW 911.<br />
# Payment by person in quarantine for supplies furnished. [[Plymouth Tp. v. Klug]], 28 N.D. 807, 146 NW 130.<br />
# Payment for automobile repairs. [[Helber v. Schaible]], 183 Mich. 379, 150 NW 145.<br />
# Payment of subcontractor. [[Schade v. Muller]], 75 Or. 216, 146 P l44.<br />
# Payment of attorney's fees. [[Caldwell v. Stalcup]], (Tex. Civ. A.) 166 SW 110.<br />
# Payment of money at death. [[Hatch v. Gillette]], 8 App. Div. 806, 40 NYS 1018.<br />
# Payment for storage. [[Taylor v. Dexter Engine Co.]], 146 Mass. 813, 18 NE 462.</ref> although it need not be evidenced by any precise words,<ref>[[Park-Robertson Hardware Co. v. Copeland]], 11 Ala. A. 447, 66 S 880; [[Stobie v. Earp]], 110 Mo. A. 73, 83 SW 1097.<br /><br />
'''Illustration.--'''a promise by a debtor, with the assent of his creditor, to pay his debt to a third person may be implied from any words or conduct evidencing such intention. [[Park-Robertson Hardware Co. v. Copeland]], 11 Ala. A. 447, 66 S 880.</ref> and may result from random statements and uncertain language.<ref>[[Rosenbaum v. Levitt]], l09 Iowa 292, 80 NW 393.</ref> A contract will not be implied where it would result in the perpetration of a wrong,<ref>[[Klug v. Sheriffs]], 129 Wis. 168, 109 NW 656, 116 AmSR 967, 7 LRANS 362, 9 AnnCas 1013.<br /><br />
'''Illustration.--'''Defendant had delvered to plaintiff two photographs of his deceased wife for the purpose of having a portrait painted therefrom. It was agreed between the parties that the portrait should be painted from a specified one of the photographs. This was done, and the portrait was accepted and paid for by defendant. Thereafter. the artist painted a second portrait from the other photograph and submitted it to plaintif, and it was held that plaintiff, on refusing to return such second portrait, did not become liable to the artist for its value. [[Klug v. Sheriffs]], 129 Wis. 168, 109 NW 656, 116 AmSR 967, 7 LRANS 362, 9 AnnCas 1013.</ref> or it would be inequitable to do so,<ref>[[Irwin v. Jones]], 46 Ind. A. 588, 92 NE 787.</ref> or where the parties cannot legally make an express contract;<ref>[[Simpson v. Bowden]], 33 Me. 549; [[Bailey v. Sibley Quarry Co.]], 166 Mich. 321, 129 NW 17; [[Miller v. Schloss]], 218 N.Y. 400, 113 NE 337; [[Chase v. Second Ave. R. Co.]], 97 N.Y. 314, 49 AmR 631; [[Leslie v. Reliable Adv., etc., Agency]], [1915] 1 K.B. 652<br /><br />
'''Illustration.--'''That a postmaster keeping his post office in a store in which he is employed as manager by a corporation, and turning over to it the proceeds of the store and post office, neglects to claim or to withdraw his commissions for four or five years does not vest title to them in the corporation, for the law will not imply a contract with reference to the emoluments of a public office. [[Bailey v. Sibley Quarry Co.]], 166 Mich. 321, 129 NW 17.</ref> so a promise to do an act contrary to duty or to law is never implied.<ref>[[Cary v. Curtis]], 3 How. (U.S.) 236, 11 L. ed. 576; [[American-Hawaiian Engineering, etc., Co. v. Terr.]], 16 Hawaii 711.</ref><br />
<br />
====Adoption of existing contract====<br />
Where a person who is a stranger to a contract deliberately enters into relations with one of the parties which are consistent only with an adoption of such contract, and so acts as to lead such party to believe that he has made the contract his own, he will not be permitted afterward to repudiate it.<ref>[[Wiggins Ferry Co. v. Ohio, etc., R. Co.]], 142 U.S. 398, 12 SCt l33, 35 L. ed. 1055; [[Swift v. Detroit Rock Salt Co.]], 233 Fed. 231, 147 CCA 237; [[Taenzer v. Chicago, etc., R. Co.]], 170 Fed. 240, 95 CCA 436.</ref><br />
<br />
====Questions of what facts will establish an implied contract====<br />
Being identical with the questions of what facts are sufficient to show an offer and acceptance, are treated in connection with the discussion of offer,<ref>See [[Contracts/Offer|Offer]].</ref> acceptance,<ref>See [[Contracts/Acceptance|Acceptance]].</ref> and intent to affect legal relations<ref>See [[Contracts/Intention to Bind|Intention to Bind]].</ref> generally.<br />
<br />
====Other definitions====<br />
# A contract is implied when it is evidenced by conduct manifesting an intention of an agreement."<ref>[[Gillan v. O'Leary]], 124 App. Div. 498, 502, 108 NYS 1024.</ref><br />
# "A contract . . . is implied when the agreement is matter of inference and deduction."<ref>[[Gillan v. O'Leary]], 124 App. Dlv. 498, 501, 108 NYS 1024.</ref><br />
# "An implied contract is co-ordinate and commensurate with duty, and whenever it is certain that one ought to do a particular thing . . . the law presumes the former to have promised that thing."<ref>[[Moore v. Renick]], 95 Mo. A. 202, 207, 68 SW 936.</ref><br />
# "An implied agreement is one where the conduct of the parties with reference to the subject matter is such as to induce the belief that they intended to do that which their acts indicate they have done."<ref>[[Cuneo v. De Cuneo]], 24 Tex. Civ. A. 436, 438, 59 SW 284.</ref><br />
# "An implied promise always exists where equity and justice require a party to do or refrain from doing the thing in question; where the covenant on one side involves some corresponding obligations on the other; where by the relations of the parties and the subject matter of the contract a duty is owing by one not expressly bound by the contract to the other party in reference to the subject of . . . [the contract]; and where it may be rightfully assumed that it would have been made if attention had been drawn to it."<ref>[[Marvin v. Rogers]], 63 Tex. Civ. A. 423, 428, 115 SW 863.</ref><br />
# "An Implied contract, in fact, arises where there is not an express contract, but there is circumstantial evidence showing that the parties did intend to make a contract."<ref>[[Turner v. Owen]], 122 Ill. A. 501, 504.</ref><br />
# An implied contract is one the existence and terms of which "is inferred from the conduct, situation, or mutual relations of the parties, and enforced by the law on the ground or justice."<ref>[[Jennings v. State Bank]], 79 Cal. 323, 326, 21 P 852, 12 AmSR 146, 6 LRA 233.</ref><br />
# "The term implied contract is generally used to denote a promise which the law, from the existence of certain facts, presumes that a party has made."<ref>[[Davis v. Seymour]], 59 Conn. 531, 533, 21 A 1004, 13 LRA 210 (quot 1 Swift Dig. p 182).</ref><br />
<br />
====Statutory definitions====<br />
"One, the existence and terms of which are manifested by conduct." <ref>Cal. Civ.<br />
Code (1903) § 1621; N.D. Rev. Codes (1899) § 3884; Okl. Rev. St. (1903) § 777; S.D. Civ. Code (1903) § 1235.</ref><br />
<br />
====Criticisms of the term====<br />
# "Contracts which are proved by the declarations and conduct of the parties and other circumstances, all of which are explainable only upon the theory of a mutual agreement, are often called, although not with en· tire accuracy, Implied contracts, and this definition will explain the ambiguity of some authorities and the apparent contrariety of others, all of the authorities, however, seem to agree that in suits for compensation for services, where a family relation is conceded or shown to exist, an actual contract must be clearly proved. Such contract may be in writing or it may rest entirely in parol, but it must nevertheless be a contract, and in our opinion it is a misnomer to denominate it an implied contract. It does not arise from nor is it aided by implication, but must be strictly proved."<ref>[[Hinkle v. Sage]], 67 Oh. St. 268, 263, 66 NE 999.</ref><br />
#"It is sometimes said that 'the law implies an agreement' as to the matters omitted to be explicitly stated in the verbal bargain. Strictly speaking, this is inaccurate. The agreement, though not fully expressed in words, is, nevertheless, a genuine agreement of the parties; it is 'implied' only in this, that it is to be inferred from the acts or conduct of the parties instead of from their spoken words; 'the engagement is signified by conduct instead of words.' But acts intended to lead to a certain inference may 'express a promise as well as words would have done.'"<ref><br />
[[Bixby v. Moore]], 61 N.H. 402, 403.</ref><br />
<br />
====Effect of Express Contract====<br />
There can be no implied contract where there is an express contract between the parties in reference to the same subject matter.<ref>'''U.S.'''-- ''[[Hawkins v. U.S.]]'', 98 U.S. 689. 24 L. ed. 607; ''[[Perkins v. Hart]]'', 11 Wheat. 237, 6 L. ed. 463; [[The Corfe Castle]] 221 Fed. 98; [[Amalgamated Gum Co. v. Casein Co.]], 146 Fed. 900; [[Arthur v. Baron de Hirsch Fund]], 121 Fed. 791, 58 CCA 67 [certiorari den 191 U.S. 570, 24 SCt 842, 48 L. ed. 306]; [[Krouse v. Deblois]], 14 F. Cas. No. 7 937, 1 Cranch C.C. 138; [[Hartman v. U.S.]], 40 Ct. Cl. 133.<br /><br />
'''Ala.'''-- [[Loval v. Wolf]], 179 Ala. 505, 60 S 298; [[Alexander v. Alabama Western R. Co.]], 179 Ala. 480, 481, 60 S 295 (cit Cyc); [[Burkham v. Spiers]], 56 Ala. 547; [[Vincent v. Rogers]], 30 Ala. 471.<br /><br />
'''Ark.'''-- [[Jackson v. Jones]], 22 Ark. 158; [[Manuel v. Campbell]], 3 Ark. 324.<br /><br />
'''Conn.'''-- [[Weinhouse v. Cronin]], 68 Conn. 250, 36 A 45; [[King v. Kilbride]], 53 Coon. 109, 19 A 519; [[Leonard v. Dyer]], 26 Conn. 172, 68 AmD 382; [[Weed v. Weed]], 22 Conn. 364; [[Russell v. South Britain Soc.]], 9 Conn. 508; [[Shepard v. Palmer]], 6 Conn. 95; [[Hampton v. Windham]], 2 Root 199; [[Snow v. Chapman]], 2 Root 99; [[White v. Woodruff]], 1 Root 309; [[Carew v. Bond]], 1 Root 269; [[Avery v. Kinsman]], Kirby 354.<br /><br />
'''Del.'''-- [[Draper v. Randolph]], 4 Del. 454.<br />
'''Ga.'''-- [[Baldwin v. Lessner]], 8 Ga. 71.<br />
'''Ill.'''-- [[Miller v. Duntley]], 264 Ill. 268, 106 NE 198; [[Ford v. McVay]], 55 Ill. 119; [[Walker v. Brown]], 28 Ill. 378, 81 Am. Dec. 287; [[Cast v. Roff]], 28 Ill. 462; [[Brougham v. Paul]], 138 Ill. A. 465; [[Brenzel v. Kirschner]], 128 Ill. A. 136; [[Schiml v. Edgeworth]], 118 Ill. A. 332; [[Ramming v. Caldwell]], 43 Ill. A. 175; [[Ginders v. Ginders]], 21 Ill. A. 522; [[Rollins v. Duffy]], 14 Ill. A. 69.<br /><br />
'''Ind.'''-- [[Long v. Straus]], 107 Ind. 94, 6 NE 123, 7 NE 763, 57 AmR 87; [[Cranmer v. Graham]], 1 Blackf. 406.<br /><br />
'''Iowa.'''-- [[Hall v. Luckman]], 107 NW 932; [[Powell v. Crampton]], 102 Iowa<br />
364, 71 NW 579; [[White v. Jones]], 67 Iowa 241, 25 NW 151.<br /><br />
'''Kan.'''-- [[Ray v. Missouri, etc., R. Co.]], 90 Kan. 244, 133 P 847; [[Smyser v. Fair]], 73 Kan. 733, 86 P 408.<br /><br />
'''Ky.'''-- [[Morford v. Ambrose]], 3 J.J. Marsh, 688; [[Coffman v. Allin]], Litt. Sel. Cas. 200; [[Pringle v. Samuel]], 1 Bibb 172; [[Fonda v. Smith]], 6 KyL 853.<br /><br />
'''La.'''-- [[Harris v. Louisiana Mach., etc., Co.]], 112 La. 196, 36 S 320; [[Mazureau v. Morgan]], 25 La. Ann. 281; [[Willis v. Melville]], 19 La. Ann. 13.<br /><br />
'''Me.'''-- [[Simpson v. Bowden]], 33 Me. 549; [[Charles v. Dana]], 14 Me. 383.<br />
'''Md.'''-- [[Sherley v. Sherley]], 118 Md. 1, 84 A 160; [[Speake v. Sheppard]], 6 Harr. & J. 81; [[Watkins v. Hodges]], 8 Harr. & J. 38; [[Hannan v. Lee]], 1 Harr. & J. 131.<br /><br />
'''Mass.'''-- [[Brown v. Fales]], 139 Mass. 21, 29 NE 211; [[Zerrahn v. Ditson]], 117 Mass. 553; [[Whiting v. Sullivan]], 7 Mass. 107; [[Worthen v. Stevens]], 4 Mass. 448.<br /><br />
'''Mich.'''-- [[In re De Haan]], 169 Mich. 146, 134 NW 983; [[Cashin v. Pliter]], 168 Mich. 388, 134 NW 482, AnnCas 1913C 697; [[Hickey v. Lundy]], 168 Mich. 386, 134 NW 4; [[Hathaway v. Vaughan]], 162 Mich. 269, 127 NW 337; [[Boughton v. Francis]], 111 Mich. 26, 69 NW 94; [[Schurr v. Savigny]], 85 Mich. 144, 48 NW 547; [[Keystone Lumber, etc., Mfg. Co. v. Dole]], 43 Mich. 370, 6 NW 412; [[Hunt v. Sackett]], 31 Mich. 18; [[Wilson v. Wagar]], 26 Mich. 452; [[Butterfield v. Seligman]], 17 Mich. 95; [[Galloway v. Holmes]], 1 Dougl. 330.<br /><br />
'''Minn.'''-- [[Marcotte v. Beaupre]], 15 Minn. 162; [[Bond v. Corbett]], 2 Minn. 248.<br /><br />
'''Miss.'''-- [[Musgrove v. Jackson]], 59 Miss. 390; [[New Orleans, etc., R. Co. v. Pressly]], 45 Miss. 66; [[Morrison v. Ives]], 12 Miss. 652.<br /><br />
'''Mo.'''-- [[Chambers v. King]], 8 Mo. 617; [[Stollings v. Sappington]], 8 Mo. 118; [[Christy v. Price]], 7 Mo. 430; [[Johnson v. Strader]], 3 Mo. 359; [[Hicks v. National Surety Co.]], 169 Mo. A. 479, 155 SW 71; [[Clarke v. Kane]], 37 Mo. A. 258; [[Lindersmith v. South Missouri Land Co.]], 31 Mo. A. 258; [[Houck v. Bridwell]], 28 Mo. A. 644; [[Davidson v. Beirmann]], 27 Mo. A. 666; [[Suits v. Taylor]], 20 Mo. A. 166.<br /><br />
'''Nebr.'''-- [[Powder River Live Stock Co. v. Lamb]], 38 Nebr. 339, 56 NW 1019.<br /><br />
'''N.H.'''-- [[Streeter v. Sumner]], 19 N.H. 516; [[Britton v. Turner]], 6 N.H. 481, 26 AmD 713.<br /><br />
'''N.J.'''-- [[Voorhees v. Combs]], 83 N.J. L. 494.<br /><br />
'''N.Y.'''-- [[Miller v. Schloss]], 218 N.Y. 400, 113 NE 337; [[Watson v. Gugino]], 204 N.Y. 636, 911 NE 18, 39 LRANS 1090, AnnCas19UD 216; [[Glacius v. Black]], 60 N.Y. 145, 10 AmR 449; [[Work v. Beach]], 63 Hun 7, 6 NYS 27: [[Preston v. Yates]], 24 Hun 634; [[Harris v. Story]], 2 E.D. Smith 363; [[Gauld v. Lipman]], 4 Misc. 78, 23 NYS 778; [[Merrill v. Ithaca, etc., R. Co.]] 16 Wend. 686, 30 AmD 130; [[Outwater v. Dodge]], 7 Cow. 85; [[Wood v. Edwards]], 19 Johns. 206; [[Clark v. Smith]], 14 Johns. 326; [[Jennings v. Camp]], 13 Johns. 94, 7 AmD 367; [[Raymond v. Bearnard]], 12 Johns. 274, 7 AmD 317. And see [[Patterson v. Kelly]], 59 Hun 626, 14 NYS 111.<br /><br />
'''N.C.'''-- [[Morganton Mfg., etc., Co. v. Andrews]], 165 N.C. 285, 290, 81 SE 418, AnnCas1916A 763 (cit Cyc); [[Lindsay v. Hamburg Bremen Ins. Co.]], 115 N. C. 212, 20 SE 870; [[Lawrence v. Hester]], 93 N.C. 79; [[Dula v. Cowles]], 47 N.C. 454; [[Winstead v. Reid]], 44 N.C. 76, 57 AmD 571.<br /><br />
'''Oh.'''-- [[Kachelmacher v. Laird]], 92 Oh. St. 324, 110 NE 933; [[Abbott v. Inskip]], 29 Oh. St. 59; [[Creighton v. Toledo]], 18 Oh. St. 447; [[Hall v. Blake]], Wright 489; [[Halloway v. Davis]], Wright 129.<br /><br />
'''Or.'''-- [[Fiske v. Kellogg]], 3 Or. 603.<br /><br />
'''Pa.'''-- [[Musser v. Ferguson Tp.]], 6& Pa. 476.<br /><br />
'''S.C.'''-- [[Suber v. Pullin]], 1 S.C. 273; [[Wood v. Ashe]], 32 S. C. L. 407; [[Stent v. Hunt]], 21 S.C. L. 225.<br /><br />
'''Tex.'''-- [[Gammage v. Alexander]], 14 Tex. 414; [[Prichard v. Foster]], (Civ. A.) 170 SW 1077, 1079 (cit Cyc); [[Sanborn v. E. R. Roach Drug Co.]], (Civ. A.) 137 SW 182, 183 {cit Cyc); [[Armstrong v. Cleveland]], 32 Tex. Civ. A. 482, 74 SW 789.<br /><br />
'''Vt.'''-- [[Hemenway v. Smith]], 28 Vt. 701; [[Camp v. Barker]], 21 Vt 469.<br /><br />
'''Wis.'''-- [[Appleton Waterworks Co. v. Appleton]], 132 Wis. 663, 113 NW 44; [[Tletz v. Tietz]], 90 Wis. 66, 62 NW 939; [[Maynard v. Tidball]], 2 Wis. 34.<br /><br />
'''Eng.'''-- [[James v. Cotton]], 7 Bing. 266, 20 ECL 126, 131 Reprint 103; [[Hulle v. Heightman]], 2 East 146, 102 Reprint 324; [[Selway v. Fogg]], 5 M. & W. 83, 151 Reprint 38; [[Cutter v. Powell]], 6 T.R. 320, 101 Reprint 673, 6 ERC 627; [[Toussaint v. Martinnant]], 3 T.R. 104, 100 Reprint 65.<br /><br />
'''Can.'''-- [[Allcroft v. Adams]], 38 Can. S.C. 366; [[Connolly v. St. John]], 35 Can. S.C. 186.<br /><br />
'''Man.'''-- [[Knox v. Munro]], 13 Man. 16.</ref> The reason of the rule is that, since parties are bound by their agreement, there is no ground for implying a promise where there is an express contract,<ref>[[Walker v. Brown]], 28 Ill. 378, 81 AmD 287; [[Morganton Mfg., etc., Co. v. Andrews]], 186 N.C. 286, 81 SE 418. AnnCas1916A 763.</ref> and it can make no difference whether the contract is made by the parties themselves or by others for them.<ref>[[Walker v. Brown]], 28 Ill. 378, 81 AmD 287</ref> This rule only applies, however, where the express and the asserted implied contract relate to the same subject matter, and where the provisions of the express contract would supersede those of the other.<ref>[[Wheeling, etc., R. Co. v. Carpenter]], 218 Fed. 273, 134 CCA 69; [[Rogers v. Becker-Brainard Milling Mach. Co.]], 211 Mass. 669, 98 NE 692; [[Wilson v. Dietrich]], (N.J. Ch.) 59 A 251; [[Commercial Bank v. Pfeiffer]], 22 Hun 327 [aff 108 N.Y. 242, 16 NE 311].</ref> It does not apply where the implied agreement is based on the subsequent conduct of the parties not covered by the express contract.<ref>[[Efron v. Stees]], 113 Minn. 242, 129 NW 374; [[Murphy v. Quigley]], 21 Oh. Cir. Ct. 313, 11 Oh. Cir. Dec. 638.</ref> Further, where the express contract is rescinded, resort may be had to an implied contraet.<ref>'''U.S.'''-- [[Columbia Bank v. Patterson]], 7 Cranch 299, 3 L. ed. 351.<br /><br />
'''Colo.'''-- [[Cody v. Raynaud]], 1 Colo. 272.<br /><br />
'''Ill.'''-- [[Walker v. Brown]], 28 Ill. 378, 81 AmD 287.<br /><br />
'''Miss.'''-- [[Morrison v. Ives]], 12 Miss. 652.<br /><br />
'''Eng.'''-- [[Towers v. Barrett]], 1 T.R. 133, 99 Reprint 1014.</ref> So if the contract has been completely executed, plaintiff may recover as on an implied contract, under an indebitatus assumpsit, the price of his services, but the contract must regulate the amount of recovery.<ref>[[Columbia Bank v. Patterson]], 7 Cranch 299, 3 L. ed. 351.<br /><br />
'''Conn.'''-- [[Londregon v. Crowley]], 12 Conn. 558.<br /><br />
'''Ill.'''-- [[Walker v. Brown]], 28 Ill. 378, 81 AmD 287; [[Holmes v. Stummel]], 24 Ill. 370.<br /><br />
'''Me.'''-- [[Charles v. Dana]], 14 Me. 383,<br /><br />
'''Eng.'''-- [[James v. Cotton]], 7 Bing. 266, 20 ECL 125, 131 Reprint 103.</ref> Further, a contract may be implied when the express agreement is unenforceable for certain reasons.<ref>[[Walker v. Brown]], 28 Ill. 378, 81 AmD 287; [[Gay v. Mooney]], 67 N.J.L. 27, 50 A 596 (aff 67 N.J.L. 687, 52 A 1131) (where the agreement was to devise land in payment and it was unenforceable because of the statute of frauds)</ref><br />
<br />
===Implied in Law or Quasi or Constructive Contracts===<br />
Contracts implied in law, or more properly quasi or constructive contracts, are a class of obligations which are imposed or created by law without regard to the assent of the party bound, on the ground that they are dictated by reason and justice, and which are allowed to be enforced by an action ex eontractu.<ref><br />
'''U.S.'''-- [[Nevada Co. v. Farnsworth]], 89 Fed. 164. 165.<br /><br />
'''Ill.'''-- [[Peo. v. Dummer]], 274 Ill. 637, 641, 113 NE 934; [[Chudnovskl v. Eckels]], 232 Ill. 312, 317, 83 NE 846; [[Chicago v. Pittsburg, etc., R. Co.]], 146 Ill. A. 403, 410 [aFf 242 Ill. 30, 89 NE 648].<br /><br />
'''N.Y.'''-- [[Gutta Percha, etc., Mfg. Co. v. Houston]], 108 N.Y. 276, 278, 15 NE 402. 2 AmSR 412; [[Peo. v. Speir]], 77 N.Y. 144, 150; [[Munger Vehicle Tire Co. v. Rubber Goods Mfg. Co.]], 39 Misc. 817. 818. 81 NYS 302; [[Wickham v. Well]], 17 NYS 518.<br /><br />
'''Pa.'''-- [[Hertzog v. Hertzog]], 29 Pa. 465, 467 [quot 2 Blackstone Comm. p H3].<br /><br />
'''S.C.'''-- [[Abbott v. Sumter Lumber Co.]], 93 S.C. 131, 138, 146, 76 SE 146 ac[cIt Cyc].<br /><br />
'''S.D.'''-- [[Meade County v. Welch]], 34 S.D. 348, 349, 356, 148 NW 601 [cit Cyc].<br /><br />
'''Tex.'''-- [[Leonard v. State]], 56 Tex. Cr. 307 315, 120 SW 183.<br /><br />
{{Quote|The term "implied contract" has also been applied to a class of obligations which are created by law without regard to the assent of the party upon whom the obligation is imposed, on the ground that they are dictated by reason and justice. They are not concontract obligations in the true sense because there is no agreement of the parties, but they are constructive contracts created hy the law.}} [[Peo. v. Dummer]], 274 Ill. 637, 641, 113 NE 934.<br /><br />
'''Foundation of doctrine.'''<br />
#"The whole theory of contracts implied in law was originated for the purpose of giving a remedy ex contractu for certain wrongs." [[Nevada Co. v. Farnsworth]], 89 Fed. 164, 165.<br />
#{{Quote|After subtracting express contracts and contracts implied in fact, there is still left another large class of obligations, to enforce which the action of general assumpsit is a well established remedy. The principle upon which this latter class of obligations rests is equitable in its nature, and was, like most other equitable principles, derived from the civil law. This obligation was under the civil law designated "quasi-contractus." Stated as a civil law principle, it was an obligation similar in character to that of a contract, but which arises not from an agreement of parties but from some relation between them or from a voluntary act of one of them, or, stated in other language, an obllgation springing from voluntary and lawful acts of parties in the absence of any agreement. (Howe's Studies of Civil Law, 171; Morey on Roman Law, 371).}}[[Highway Comrs. v. Bloomington]], 253 Ill. 164, 173, 97 NE 280, AnnCast913A 471.<br />
# A quasi promise is "an implied promise In law, founded either on the doctrine that one shall not be allowed to enrich himself unjustly at the expense of another; or on the doctrine that when an obligation is imposed by law upon one to do an act because of an interest in the public to have it done, and that one fails to do it, he who does do it, expecting compensation, may recover therefor of him on whom the obligation is imposed." [[Mathie v. Hancock]], 78 Vt. 414, 417, 63 A 143.</ref> They rest solely on a legal fiction,<ref>[[Peo. v. Dummer]], 274 Ill. 637, 113 NE 934; [[Graham v. Cummings]], 208 Pa. 516, 57 A 943.</ref> and are not contract obligations at all in the true sense, for there is no agreement; but they are clothed with the semblance of contract for the purpose of the remedy,<ref>'''Colo.'''-- [[Brown v. Stair]], 25 Colo. A. 140, 136 P 1003.<br /><br />
'''Ga.'''-- [[Western Union Tel. Co. v. Taylor]], 84 Ga. 408, 11 SE 396, 8 LRA 189.<br /><br />
'''Ill.'''-- [[Peo. v. Dummer]], 274 Ill. 637, 113 NE 934.<br /><br />
'''Mich.'''-- [[Woods v. Ayres]], 39 Mich. 345, 33 AmR 396.<br /><br />
'''Minn.'''-- [[Penas v. Chicago, etc., R. Co.]], 112 Minn. 203, 127 NW 926, 140 AmSR 470, 30 LRANS 627 [cit Cyc].<br /><br />
'''Mo.'''-- [[Weknsberg v. St. Louis Cordage Co.]], 135 Mo. A. 553, 116 SW 461.<br /><br />
'''Mont'''.-- [[Schaeffer v. Miller]], 41 Mont. 417, 109 P 970, 137 AmSR 746 [quot Cyc].<br /><br />
'''N.H.'''-- [[Sceva v. True]], 53 N.H. 627.<br /><br />
'''N.Y.'''-- [[MiIler v. Schloss]], 218 N.Y. 400, 113 NE 337.<br /><br />
'''Pa.'''-- [[Pierce's App.]], 103 Pa. 27; [[Hertzog v. Hertzog]], 29 Pa. 465.<br /><br />
'''S.D.'''-- [[Meade County v. Welch]], 34 S.D. 348, 349, 148 NW 601 [cit Cyc].<br /><br />
'''Tex.'''-- [[Leonard v. State]], 56 Tex. Cr. 307, 315, 120 SW 183 [quot Cyc].<br /><br />
'''Vt.'''-- [[Morse v. Kenney]], 87 Vt. 45, 89 A 865; [[Bliss v. Hoyt]], 70 Vt. 534, 41 A 1026.<br /><br />
"Such contracts are contracts merely In the sense that a remedy is by the statutory remedy of assumpsit and are created and governed by the principles of equity." [[Peo. v. Dummer]], 274 Ill. 637, 642, 113 NE 934.<br /><br />
"The quasi contract is a constructive contract, as distinguished from either implied or express contracts, and is defined rather as a relation than as a contract--a fiction of law adapted to enforce legal duties by actions of contract where no proper contract exists, express or implied." [[Brown v. Stair]], 25 Colo. A. 140, 150, 136 P 1003.</ref> and the obligation arises not from consent, as in the case of true contracts, but from the law or natural equity.<ref>'''Ill.'''-- [[Highway Comrs. v. Bloomington]], 263 Ill. 164, 97 NE 280. AnnCas1913A 471; [[Harty Bros., etc., Co. v. Polakow]], 237 Ill. 569, 88 NE 1085.<br /><br />
'''Mont.'''-- [[Schaeffer v. Miller]], 41 Mont. 417, 109 P 970, 137 AmSR 746.<br /><br />
'''N.Y.'''-- [[Miller v. Schloss]], 218 N.Y. 400, 113 NE 337.<br /><br />
'''Vt.'''-- [[Underhlll v. Rutland R. Co.]], 98 A 1017.<br /><br />
'''Can.'''-- [[Gresham Blank Book Co. v. Rex]], 14 Can. Exch. 236.<br /><br />
{{Quote|A quasi or constructive contract rests upon the equitable principle that a person shall not be allowed to enrich himself unjustly at the expense of another. In truth, it is not a contract or promlse at all. It is an obligation which the law creates, in the absence of any agreement, when and because the acta of the parties or others have placed in the possession of one person money, or its equlvalent, under such circumstances that in equity and good conscience he ought not to retain it, and which ''ex aequo et bono'' ["according to the right and good"] belongs to another. Duty, and not a promise or agreement or intention of the person sought to be charged, defines it. It is fictitiously deemed contractual, in order to fit the cause of action to the contractual remedy.}}<br />
[[Miller v. Schloss]], 218 N.Y. 400, 407, 113 NE 337</ref> So, when the party to be bound is under a legal obligation to perform the duty from which his promise is inferred, the law may infer a promise even as against his intention.<ref>[[Morse v. Kenney]], 87 Vt. 445, 89 A 865. See [[Smith v. Hibler]], (N.J. Sup.) 92 A 364 (holding that under a statute providing that one who trespasses on lands after having been forbidden so to do shall forfeit a specified sum, to be recovered in an action of debt, the statutory action so given is in legal contemplation an "action upon contract"). But see [[Bigby v. U.S.]], 103 Fed. 597 [aff. 188 U.S. 400, 23 SCt 468, 47 L. ed. 519] (holding that, where the duty is expressly imposed by statute, the obligation to perform, however, does not rest on a legal fiction that the person commanded to perform impliedly contracted to do the act).<br /><br />
'''Act which party refuses to permit.'''--{{Quote|The rule is that one cannot be held liable on an implied contract to pay for that which he declines to permit to be done on his account. The exception to the rule is that when the law imposes upon one an obligation to do something which he declines to do, and which must be done to meet some legal requirement, the law . . . treats performance by another as performan for him, and implies a contract on his part to pay for it.}}<br />
[[Keith v. De Bussigney]], 179 Mass. 255, 259, 60 NE 614.</ref> Among the instances of quasi or constructive contracts may be mentioned cases in which one person has received money which another person ought to have received, and which the latter is allowed to recover from the former in an action of assumpsit for money had and received, or money received to the use of plaintiff;<ref>[[Barnett v. Warren]], 82 Ala. 557, 561, 2 S 457; [[Boyett v. Potter]], 80 Ala. 476, 479, 2 S 534; [[Merchants' Bank v. Rawls]], 7 Ga. 191, 195, 50 AmD 394; [[O'Fallon v. Boismenu]], 3 Mo. 405, 407, 26 AmD 678; [[Lawson v. Lawson]], 16 Gratt. (57 Va.) 230, 232, 80 AmD 702.</ref> cases in which one person has been compelled to pay money which another ought to have paid, and which the former is allowed to recover from the latter in an action of assumpsit for money paid to his use;<ref>[[Tuttle v. Armstead]], 53 Conn. 175, 22 A 677; [[Wells v. Porter]], 7 Wend. (N.Y.) 119; [[Eastwood v. McNab]], [1914] 2 K.B. 361; [[Exall v. Partridge]], 8 T.R. 308, 101 Reprint 1405.</ref> cases of account stated, from which the law implies a promise which will support an action of assumpsit;<ref>[[Marshall v. Lewark]], 117 Ind. 377, 378, Vt. 331, 334, 17 A 741; [[Hopkins v. Logan]], 5 M. & W. 241, 249, 151 Reprint 103.</ref> judgments on which an action of assumpsit or debt may be maintained, according to the circumstances, because of a promise to pay implied by law;<ref>[[Grevell v. Whiteman]], 32 Misc. 279, 65 NYS 974; [[Williams v. Jones]], 13 M. & W. 628, 153 Reprint 262.</ref> cases in which an obligation to pay money is imposed by a statute;<ref>'''U.S.'''-- [[Pacific Mail SS. Co. v. Joliffe]], 2 Wall. 450, 17 L. ed. 805.<br /><br />
'''Mass'''-- [[Milford v. Com.]], 144 Mass. 64, 10 NE 516.<br /><br />
'''Mich.'''-- [[Woods v. Ayres]], 39 Mich. 345, 33 AmR 396.<br /><br />
'''S.D.'''-- [[Yankton Bd. of Education v. Yankton County School Dlst.]], 23 S.D. 425, 431, 122 NW 411 [cit Cyc].<br /><br />
'''Vt.'''-- [[Woodstock v. Hancock]], 62 Vt. 348, 19 A 991.</ref> cases where a person by wrongfully appropriating property to his own use becomes liable to pay the owners the reasonable value thereof;<ref>[[Reed v. Weule]], 176 Fed. 660, 100 CCA 212; [[Champlain Constr. Co. v. O'Brien]], 117 Fed. 271; [[Weaver v. Norway Tack Co.]], 80 Fed. 700; [[Brush Electric Light, etc., Co. v. Montgomery]], 114 Ala. 433, 21 S 960; [[Rees v. Western Exposition Soc.]], 44 Pa. Super. 381; [[Northwestern Wheel, etc., Co. v. Milwaukee Electric St., etc., Co.]], Wis. 603, 69 NW 371.</ref> cases in which a person fails to deliver specific property and becomes liable for the money value thereof;<ref>[[Cushing v. Chapman]], 115 Fed. 237.</ref> cases where one party wrongfully compels another to render him valuable services, and a promise to pay their value is implied;<ref>[[Mobile Light, etc., Co. v. Copeland]], (Ala. A.) 73 S 131; [[Hamby v. Collier]], 136 Ga. 309, 71 SE 431.</ref> cases where one man has obtained money from another by oppression, extortion, or deceit, or by the commission of a trespass;<ref>See [[Chudnovski v. Eckels]], 232 Ill. 312, 83 NE 846.</ref> cases where necessaries have been furnished to a wife wrongfully abandoned by her husband, although he has given notice that he will not be responsible; and cases in which the husband is permitted to recover the wife's funeral expenses from her estate.<ref>[[Pache v. Oppenheim]], 93 App. Div. 221, 87 NYS 704.</ref> In order that a contract may be implied in law from the wrong of a party, it must have been committed with the intention of benefiting his own estate.<ref>[[Atchison, etc., R. Co. v. Phelps]], 4 Kan. A. 139, 46 P 183 (holding that, when one willfully and maliciously orders cars in which to shop stock, without any intention of making use of them, in order to damage the railroad company, and also delays a train for the same purpoae, there is no implied contract on which may be brought by the company on waiving the tort).</ref><br />
<br />
==Executed and Executory Contracts==<br />
An executed contract is one where nothing remains to be done by either party.<ref> U.S.-Farrl n g ton v . T e n n e s atj HU:- S. 6 7 9 , 683, 2 4 L. ed. 6 5 8 : 1, . Peck. 6 Cranch 8 7 . 1 3 6 . 12 . Cincinnati, etc. , R. Co. V'l!!cll ... 64 Fed. 3 6 , 4 6, 12 CCA ett --y. Coope r, 1 3 Fed. 5 8 6<br /><br />
Colo.-McCutchen v. Klaea, 26 Colo. A. 3 7 4 , 3 7 7 , H3 P 1 4 3 .<br /><br />
Ill.-Fox v. Kltton, 19 Ill. 619. 632.<br /><br />
Iowa.-Keokuk v. Ft. Wayne Electric Co. , 90 Iowa 87, 71, 67 NW 6 8 9 .<br /><br />
N . .T.--8tate v. Jersey Ci ty, 31 N. J. L. 676, 681, 86 AmD 240.<br /><br />
Tenn.-Hale v. Sharpe, 4 Coldw.<br /><br />
Utah.-- A dams v. Reed, 11 Utah 480. 5 0 1. 40 P 720 ratr 16 8 u. s. 673, ts set 1 7 9 . 42 L. ea. 684].<br /><br />
'''[a] Other definitions.'''-<br />
#"One In whlcll all the parties thereto have performed all the obligations which they have originally assumed." Wat· klns v. Nuf.en, 118 Ga. 372, 374, 45 SE 262.<br />
# 'One In which the object of the co ntra ct Is _performed." Fletcher v. Peck, 6 Cranch (U. S. ) 87, •136, 3 L. ed. 162 (per Marshall, C. :J. ); nastln Tel. Co. v. Richmond Tel. Co., 117 Ky. 122, 126, 77 SW 702, 26 KyL 1249; Skelly v. :Jefferson Branch Bank, 9 Oh. St. 607, 6 2 3 ; Sa ndusk.f City Bank v. Wllbor, 7 Oh. St. 48. 494.<br />
# "One the object 'o f which Is f ully performed." Cal. Clv. Code (1903) 1 1661 ; N. D. Rev. Codes (1899) I 3919 ; Okl. Rev. St. ( 1 9 0 3 ) § 8 1 2 .<br />
# "A contract becomes exe cuted when all Is done that Its term" require to be performed. Until that situation Is attained. the con trac t Is executory." Leadbetter v. Hawley, 5 9 Or. 4 22, 4 24. 1 17 P 289.<br />
# "A contract becomes a n executed one when nothing remains to be done by either party, and where the transaction has been completed, or was completed a t the ti me the contract was made." McNett v. Cooper, 13 Fed. 686, 690 ; Kynoch v . The S. C. Ives, 14 F. Cas. No. 7,958, Newb. Adm. 2 0 5 (quot Story Contr. I 18] ; M e t te! v. Gales, 12 S. D. 632, 639, 82 NW 181.<br />
'''[b] A grant actually made''' is an "e xecuted contract," and such a contract requi res no consideration to su pport J t. Farr i ngton v. Tennessee, 95 u. S. 6 7 9 , 6 8 3 , 24 L. ed. 6 6 8.<br /><br />
'''[c] A present conveyance''' of land is an "executed contract." Fulenwider v. Rowan, 1 3 6 Ala. 287. 34 S 97850.</ref> An executory contract is one in which a party binds himself to do or not to do a particular thing in the future.<ref>U. S.-FarrJngton v. Tennessee, 9 5 ·u. S. 679, 24 L. ed. 6 6 8 ; Fletcher v . Peck, 6 Cranch 8 7 , 13 6, 3 L. ed. 1 6 2 ; Cincinnati, e tc., R. Co. v. McKeen , 6 4 Fed. 36, 4 6, 12 CCA 1 4 ; Kynoch v. The S . C. I ves. 1 4 F. Cas. No. 7 , 9 5 8 . Newb. Adm. 2 0 5 .<br /><br />
Ala.-Fulenwider v. Rowan, 1 3 6 Al a. 2 8 7 , 3 4 S 9 7 5 .<br /><br />
Colo.-Dickson v. Dick , 6 9 Colo. 5 8 3 , 6 8 7 , 58 8, 1 5 1 P 4 4 1 f e l t Cyc ] .<br /><br />
Iowa.-Keokuk v . Ft. Wayne Electric Co . . 9 0 Iowa 67. 71, 6 7 NW 6 8 9 .<br /><br />
N.J.-:Jersey C i ty, etc., R. Co. v. Je rsey City, 31 N. :J. L. 6 7 6 , 6 8 1 , 8 6 A m D 2 4 0.<br /><br />
N. Y.-:Justlce v. LanL 4 2 N. Y. 4 9 3, 49 6 , 1 9\.mR 6 7 6 ; Wi ckham v. Wel l, 1 7 NYS 6 1 8 .<br /><br />
Oh.-Sandusky City Ba.nk v . Wllbor, 7 Oh. St. 481.<br /><br />
S. D.-Mettel v. Gales, 12 S. D. 832. 639, 8Z NW 181.<br /><br />
Utah.-Adams v. Reed, 1 1 Utah 480. 601, 40 P 720 [atf 1 6 8 U. S. 6 73 , 18 SCt 17.9. 42 L. ed. 684].<br /><br />
See Kl11ebrew v. M urray, 151 K y. 346, 15 1 SW 662 (holding contract executory) .<br /><br />
'''[a] Other definitions.'''--<br />
#"A con· tract to do some f u t ure act." Hale v. Sharpe, 4 Coldw. (Tenn.) 275 , 286.<br />
# "One where It Is s t ipulated ... upon a sufficient consideration that something Is to be done or not to be done by one or both of the parties." Bergere v. Chaves, 14 N. M. 352, 364, 93 P 762, 61 LRA NS 50.<br />
# "One In wh ich something remains to be don e by one or more parties." Watkins v. Nugen, 118 Ga. 3 72, 374, 4'5 SE 262.<br />
# "A ll contracts other thai!' those the object of which Is fully performed are executory con· tracts." Cal. Clv. Code (1903) 1 1661 ; N. D. Rev. Codes (1899) f 3919; Okl. Rev. St. ( 1 903 ) I 812.<br />
# "Whilst any act remains to be done, tt1 e contract Is understood to be executory." Fox v. Kitt o n, 19 Ill. 519, 532.<br />
'''[b] Illustrations'''--<br />
# A con tract betw e en a ci ty and an electric light company, by which the company Is to !lu rn l sh lights for a cer tai n number o f years at a fixed price, Is an executory. and not an executed, contract. K eokuk v. Ft. Wayne Electric Co.. 90 Iowa 67, 57 NW 689.<br />
# Where parties In the sale of stock agreed to pay a certain sum of money on one day, a nd on a subsequent day a certain other sum, and at some time to execute a r.ote for a third sum, and such acts were done on such days, the co ntract ca n· not be said to be execu tory merely because the note given was unpaid. Cincinnati, etc .. R. Co. v. McKeen, 64 Fed. 36, 12 CCA 1 4.<br />
# An agreemen t to se ll Is an execu tory con tract. Fulenwider v. Rowan, 136 Ala. 287, 34 S 9 75.<br />
# A defective deed, be ing only a contra ct to convey, Is therefore an executory contract to convey. Adams v. Reed, 11 Utah 4 8 0, 4 0 P 7 2 0.</ref> An executory contract conveys a chose in action; an executed contract, a chose in possession.<ref>C.a s.K.y Nnoo. ch7 , 9v5.8 ,T Nhee wSb. . CA. dImve. s,2 0U6; McDo nald v. Hewett. 1 6 :Johns. ( N.Y. ) 3 4 9 , 8 A m D 2 4 1 ; Roberts v. Beatty, 2</ref> A contract may be partly executed and partly executory,<ref>Ri ggs v. Tayloe, 2 0 F. Cas. No. 1 1 . 8 3 2 , 2 Cranch C. C. 697 [ rev on other grounds 1 Pet. 6 9 1, 7 L. ed. 2 7 6 ) ; Schroe p p e l v . Corni ng, 10 Barb. 5 7 6 (atf 6 N. Y. 1 0 7 ] ; Par melee v. Oswego, etc .. R. Co .. 7 Barb. 699 fatf 6 N. Y. 7 4 J; Hale v . Sharpe, 4 Coldw. ( Tenn. ) 2 7 o .<br /><br />
'''[a] performance begun.'''--One who has begun to do what he promised, but has not fi nished, has execu ted h i s u n 'd e t,.. n art. Adams v. Reed, 11 Utah 480, 40 P 720.</ref> and may be executory as to one party and executed as to the other.<ref>U. S.-Howe v. Howe, etc.. Ball Bearing Co., 164 Fed. 820, 83 CCA 636. .<br /><br />
Ala.-Southern States Co. v. Long, (A. ) 73 B 1 4 8 .<br /><br />
Cal.-Dean v. Sedan Milling Co., 1 9 Cal. A. 28. 124 P 7 3 6, 739 [ci t Cyc).<br /><br />
Colo.-Omaha Lumber Co. v. Co- operative Inv. Co. , 55 Colo. 271, 1 33 P 1112, 1116 [cit Cy c) .<br /><br />
Okl.--Oalbreath Gas Co. v. Lind- sey, 161 P 826.<br /><br />
Pa.-Moody v. McTaggart, 29 Pa. Super. 465. 468 [quot Cyc ].<br /><br />
S. C. -Tucker v. Cox, 101 S. C. 4 7 3, 47,8, 86 S E 28 fquot Cyc ).<br /><br />
'''[a] Illustration.'''-- Where two p ar- ties enter Into a w ritten contract by the terms ot which an easement In real estate Is granted by the first exparty tor a term ot years, In con- charslderatl on ot certain things to be per- f o rmed by the second party duri ng said term of years, on the exec<Jtlon stgntftcaof the c on tract, If the same Is tree fro m fraud In Its execution, It be- comes an executed contract, and the considera ti on a paid consideration, so far as the first party Is concerned, and the contract becomes an ex- ecutory contract as to the secon d party, and Is binding on sai d sec- ond party. Galbreath Gas Co. v. Lindsey, (Okl.) 1 6 1 P 826.</ref> While it has been said that an executed contract is not properly a contract at all, but that the contractual obligation having been performed, the parties are no longer bound,<ref> Mette! v. Gales, 12 S. D. 632, 82 NW 181.</ref> this is not strictly accurate, for the reason that, in cases wherein the contract operates as a grant, there is an implied contract on the part of the grantor not to reassert the right which he has granted.<ref>State v. Jersey City, 31 N. J.<br />
L. 6 7 6 , 86 AmD 240.</ref><br />
<br />
===Formal Execution===<br />
The word "executed" is also used with reference to contracts in the sense of "made," a meaning which is, of course, entirely distinct from that already given.<ref>See Case v. Cglllns. a7 Ind. A. 491, 76 NE 781; Watson v. C oast, 36 W. Va. 463, 14 SE 249.<br /><br />
'''Formal execution of contracts''' see [[Contracts/Formal requisites#Signing--Necessity for|Signing--Necessity for]].</ref><br />
<br />
==Simple or Parol Contracts==<br />
Contracts are divisible into two classes, simple contracts, and contracts by specialty.<ref>Perrine v. Cheeseman, 1 1 N. J. L. 174, 19 AmD 3 8 8 ; Balla rd v. [a) OOJli:la .. lllt ooDtnot.-A con- contract tor a permanent reduc tion Walker. 3 Johns. Cas. ( N. Y.) 6 0 .</ref> Simple contracts are contracts which are not under seal.<ref>Y.) 88. Ludwig v. Bungart, 26 Misc. 247. 2 51, 56 NYS 51 [rev on other grounds 4 8 App. Dlv. 61 3, 63 NYS 9 1 ) ; Rann v. Hug hes. 7 T. R. 350, 101 Repri n t 1014. To sa me etrect Q ulgly v. 'Muse, 15 La. Ann. 197 ; Sta bl e r v. Cowman, 7 Gi l l & J. ( Md.) 284; P er- rin e v. C heese m an , 11 N. J . L. 174. 19 A m D 388 ; De Crano v. Moore. 50 App. Dlv. 361, 63 NYS 7 6 4 , 64 NYS 3; Ballard v. Wal ker, 3 Johns. · Cas. (N. Y. ) 60 (per Kent, J. ).<br />
<br />'''[a] Other definitions'''--<br />
# "Those whose validity does not depend upon t heir form. but upon the presence Bec:kof a considerat ion. With the excep, tlon of c on tracts under s e al and con- tracts of record. every c on tract re- quires a consideration to su pport it." Corcoran v. New York Ce nt .. etc., R. Co .. 20 Misc. 197, 200. 4 6 NYS 861 [str 25 App. Dlv. 4 7 9, 4 9 NYS 701 <atr 164 N. Y. 587 mem. 68 NE 1086 mem)].<br />
# "An agreemen t between two parties. a draw ing to geth e r of two minds to a common Intent. and must be voluntary as well as mutual." Cash ion v. Weetern Union Tel. Co., 124 N. c. 4 6 9, 468, 32 SE 746, 46 LRA 160.<br />
<br />'''[b] In Georgia''' "simple contracts" are defined by the code as all others than those s peci fied as contracts of record and s pecialties. Code I 2718; Western Union Tel. Co. v. Taylor, 84 Ga. 4 08. 418, 1 1 SE 396. 8 LRA 1R9.<br />
<br />'''Contracts under seal''' see [[Contracts/Formal requisites#Seal|Contracts under seal]].</ref> They may be either written or oral,<ref>Webs te r v. Flemi n g, 178 Ill. 140 , 52 NE 975; Perrine v. Cheese- m an , 11 N. J. L. 174, 19 A mD 388.</ref> and the term is synonymous with the term "parol contracts,"<ref>90. Just i ce v. Lang, 4 2 N. Y. 493, 1 AmR 57 6.</ref> which is also used to distinguish contracts made verbally or not under seal.<ref>91. K lme v. Tobyhanna Creek Ice Co., 240 Pa. 81, 87 A 278.</ref> Properly speaking there is no distinct class of contracts merely in writing.<ref>Perrine v. Cheeseman, 11 N J. L. 174, 19 AmD 388; B alla rd v. Walker, a Johns. Cas. (N. Y.) 60.</ref><br />
<br />
==Written and Oral Contracts==<br />
A written contract is one which, in all its terms, is in writing.<ref>Railway Pass., etc .. Conductors Mut. Aid, etc., Assoc. v. Lo o m is, U2 Ill. 660, 667, 32 NE 424 · Ames v. Molr, 130 Ill. 6 8 2, 689, 22 NE 635,i Wood v. Will iams, 4 0 Ill. A. 115, 118 [atr 142 Ill. 269, 31 NE; 881. 34 AmSR 7 9 ); M arl o n C ou n t y v. Shipley, 77 Ind. 533, 6 55; Wri ght v. Latham. 7 N. C. 298. 301; Morrison v. Davis, 20 Pa. 171, 177, o7 AmD 696 .<br /> <br />
"A written contract creates a specified relation between the parties, and when the duties of that relation are not fully defined In the con trac t, the law defines th em according to the circumstances." M orrison v. Davis, 20 Pa. 171, 1 7 7 67 AmD 695.<br /> <br />
"A contract in writing contains, In express terms. or by natural Inter- ences, the stipulation I nto which the pa rt ies have thought proper to en- ter.'' Wright v. Latham, 7 N. C. 298, 3 0 1 .<br /> <br />
'''[a] Contingent contract.'''-- A contract in wrltfng Is none the less so because it expresses, a nd Its oper- atlon depends on, a contingency. When the contingency happens. the minds of the parties meet as to all the terms wh ich t he con tract ex- presses. and to write them over' again would be one ot those useless acts which th e law does not requi re. Jn- surance, e tc .. Co. v. State Nat. Bank, 5 Mo. A. 333 [atr 71 Mo. 58 1 .</ref> A contract which is not entirely in writing is regarded as an oral or verbal contract.<ref>U.S.--snow v . N e son, 113 Fed. 353. 357.<br /> <br />
D. C.-Evans v. Schoonmaker, 2 App. 62. 71.<br /> <br />
111.-Railway Pass .. etc .. Conductors Mut. Ald. etc., Assoc. v. Loomis, 142 Ill. 5 60, 567. 32 N E 4 24 [ cit Bishop Contr. I 1 6 3 ) ; Fuchs, etc .. Mfg. Co. v. K ittred ge, 146 Ill. A. 350, 363 [atr 242 Ill. 8 8 , 89 NE 723]· Rittenh o use. etc .• Co. v. Barry, 98 111. A. 648, 654 [rev on other grou nds 1 9 8 Ill. 602, 64 NE 995) ; Murphy v. C icero Lu mber Co .. 9 7 Ill. A. 5 1 0.<br /> <br />
Ind.-Loulsvllle. e tc .. p. Co. v. Rey- nolds, 118 Ind. 170, 1 7 •• 20 NE 711; Marl on C ou nty v. Shi p ley , 77 InJt. 563, 666 ; Flshbeh;t v. Paine. 52 Ind. A. 441, 100 NE 768; Locomoti ve Flre- men Brotherhood L. F. & E. v. Cor- der, 6 2 Ind. A. 214. 97 NE 125. 128: Miller v. Sha r pe, 62 Ind. A. 11. 100 NE :1,.08, 109; Stautrer v. Llnentbal. 29 Ini:J. A. 306, 64 NE 64 3.<br /> <br />
B. C.-Emb,ree v. McKee, lf B. c. 46 46.<br /> <br />
"When the w hole of a contract bas not been reduced to writing, such a contract In Its entirety Is to be regarded as a parol contract. subject to all the Incidents ot purely parol contracts." Evans v. Schoonmaker. 2 App, ( D. C. ) 62. 7 1.</ref> Further, in order that a contract may be deemed to be in writing, it must be in legible characters.<ref>Aradalou v. New York. etc .• R. Co., (Mass. ) 114 NE 297, 299. "When the parties undertake to put their agreement In writing and exparty press Its crucial terms by charslderatl acters or srmbols ao Illegible that the tribuna established to try the facts cannot determine the stgntftcaof tlon of that which ls'on the paper. then no contract In writing has been made." Aradalou v. New York, etc .. R. Co., supra.</ref> The word "contract" is broad enough to include contracts both in writing and by parol.<ref>Frankfort Modes Olal!& Works v. Arbogast, 1 4 8 Ky. 4, 145 SW 11!2; Musgrove v. Jackaon,. 69 Miss. 390: Rann v. Hu ghes, 7 T. R. 850, 101 Reprin t 1 0 1 4 .</ref><br />
<br />
==Special Contracts==<br />
A special contract<ref>'''Sealed Contracts''' see [[Contracts/Formal requisites#Seal|Contracts under seal]].</ref> is one with peculiar provisions or stipulations not found in the ordinary contract relating to the same subject matter. These provisions are such as, if omitted from the ordinary contract, the law will never supply.<ref>Jackson v. C reek. H Ind. A. 541, 94 NE 418, 418; I ndi anapol is Coal Tract. Co. v. Dal ton, 4 3 Ind. .A. 330, 87 NE 652, 664; Pence v. Bec:kof ma n. 11 I nd. A. 264, 39 NE 169, 170. 54 AmSR 605 ; Fo res ter v. Fo rester. 10 Ind. A. 880, 88 NE 4 26. 427. See also Ward v. Missouri Pac. R. Co .. 158 Mo. 228, 68 SW 28 (holding a contract special only as it alters general terms and conditions).</ref> A special contract may rest in parol,<ref>Midland Roofing Mfg. Co. v. Pickens. 96 S. C. 286, 80 SE 484.</ref> and the term does not require a eontract by specialty.<ref>Midland Roofing Mfg. Co. v. Pickens. 96 S. C. 286, 80 SE 484.<br />
<br />'''Specialty contracts''' see [[Contracts/Formal requisites#Seal|Contracts under seal]].</ref><br />
<br />
==Conditional Contracts==<br />
A conditiona1 contract is an executory contract, the performance of which depends on a condition. It is not simply an executory contract, since the latter may be an absolute agreement to do, or not to do, something, but it is a contract whose very existence and performance depends on a contingency and condition.<ref>Nashville, etc., R. Co. v. Jones, 2 Coldw. (Tenn.) 574, 594 [quot Story Contr. t20]; French v. Osmer, 7 Vt.. 427. 431, 32 A 254.</ref><br />
<br />
==Gratuitous Contracts==<br />
A gratuitous contract is defined to be one the object of which is the benefit of the person with whom it is made, without any profit received or promised as a consideration for it, as, for example, a gift.<ref>Georgia Penitentiary Co. v. Nelms, 65 Ga. 499, 505, 38 AmR 793 [quot Bouvier L.D.].</ref><br />
<br />
==Bilateral and Unilateral Contracts==<br />
A bilateral contract is one in which there are reciprocal promises, so that there is something on both sides to be done or forborne,<ref>Wickham v. Well, 17 N Y S 5 1 8 , 5 1 9; Winders v. Kenan, 161 N.C. 6 2 8 , ti2, 77 S E 687 f e l t Cyc].</ref> while a unilateral contract is one in which there is a promise on one side only, the consideration on the other side being executed.<ref>Haynes Auto Co. v. Turner, 1 8 GL A. !2. 2 3 . 8 8 S E 7 1 7; Wickham v. Weil, 1i NYS 518, 51 9; Winders v. Kenan, 161 N.C. 628, 632, 7 7 SE 6 8 7 [cit Cyc.].</ref> "Unilateral," however, is frequently employed by the courts to express absence of mutuality.<ref>See Wefel v. Stillman, 1 5 1 Ala. ts. 44 S 203; Georgia Fruit Exch. v. Turnipseed, 9 Ala. A. 1 2 3 . 62 S 5 4 2 : Cothran v. Wi tham, 1 23 Ga. 1 9 0, 6 1 .S E 2 8 5; Joseph Sch1itz Brewing. Co. v. Komp, 1 1 8 Ill. A. 5 6 6; High Wheel Auto Parts Co. v. Journal Co., 50 Ind. A 396, 98 NE 442; Seltzer v. Chicago, etc., R. Co., 156 Iowa 1, 134; Owen v. Satlonal Hatchet Co., 1 4 7 Iowa 3 9 3 . 121 NW 1 076. 1 2 6 N W 313; Buffington v. McNally, 1 9 3 Mass. 1 9 8 , 78 NE 3 0 9.<br /><br />
'''Necessity and existence of mutuality''' see [[Contracts/Consideration#Mutuality|Mutuality]].</ref><br />
<br />
==Commutative Contracts==<br />
"Commutative contract" is a term used in the civil law to designate a contract in which each of the contracting parties gives and receives an equivalent.<ref>'''[a] Different classes.'''- "Such contracts are, usually distributed into four classes namely: ''Do ut des'' (I give that you may give); ''Facio ut facias'' (I do that you may do); ''Facio ut des'' (I do that you may give); ''Do ut facias'' (I give that you may do)." Bouvier L. D.<br /><br />
'''[b]''' {{Quote|'''A resolutory condition is implied in all commutative contracts''', to take effect in case either of the parties does not comply with his engagements; in this case the contract is not dissolved of right; the party complaining of a breach of the contract may either sue for its dissolution with damages, or, if the circumstances of the case permit, demand a specific performance. . . . The dissolving condition . . . when accomplished, operates the revocation of the obligation, placing matters in the same state as though the obligation had not existed. The creditor seeking to avail himself of it is obliged to restore what he has received. . . . If the buyer does not pay the price, the seller may sue for the dissolution of the sale. . . . In certain cases the jduge may grant to the buyer a longer or shorter time, according to circumstances, provided such term exceed not six months. . . . In order to enforce the resolutory con d i t i o n th e re m u s t be a j u d i cial demand a n d a regular adj u d i c a t i o n . . . . T h i s res olu tory co n d i t i o n may be waived. or such c h a n g e s m a y have take n p l a c e t h a t the parties can n o t be p u t back Into the same position I n wh ich they were, o r the del i n qu e n t pa r ty may have had a proper ex cuse fo r want of p rompt ness In performance ; all which th ings are p roper to be submitted to the j u d g m e n t of a cou rt.}} Ridings v. John s o n , 1 2 8 u. s. 2 1 2 . 216, 9 set 7 2. 3 2 L. ed. 401.<br /><br />
'''[c] In Louisiana''' commutative contracts are declared to be "those in which what is done, given or promIsed b y on e party, Is con side red as e quival ent to, or a cons ideration for what is done. given or promised by the other." Clv. Code art 1768 : Rid· irgs v . Johpson, 1 2 8 U. S. 2 1 2 . 2 1 5 , 9 S C:t 72. 32 L. ed. 401 : Goodson v. Vivian 011 Co., 1 2 9 La. 9 6 5 , 57 S 281. See Delabl nrre v. New Orleans Sec. on d Municipality, 3 La. Ann. 230.</ref> The contract of sale is of thls kind: the seller gives the thing sold, and receives the price which is the equivalent; the buyer gives the price, and receives the thing sold, which is the equivalent.<br />
<br />
==References==<br />
{{reflist}}</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=Contracts/Intention_to_Bind&diff=41939Contracts/Intention to Bind2022-03-16T17:44:20Z<p>Rezsue: </p>
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===Intention to Bind is Essential===<br />
Agreement consists in two or more persons being of the same mind and intention concerning the subject matter.<ref>Bruce v. Pierson, 3 Johns. 534; Seoggtns v. U. S. 255, Fed. Rep. 825; Davis v . Wells, 8 5 Fed. 89 6.</ref> As it is frequently put by the courts the minds of the parties must meet.<ref>Harper v. Goldschmidt, 156 Cal. 245, 104 Pac. 451; Ross v. Savage, 6 6 Fla. 1 0 6 , 6 3 South 148; Ward v . Erie Co., 149 N. Y . S. 717, 215 N. Y. 629 ; C reecy v. Grief, 108 Va. 320, 61 S. E. 769; Kelly Asphalt Co. v. Barber Co., 211 N. Y. 68; Rodgers Co. v. Bell, 1 5 6 N. C. 378, 72 N. E. 817 ; Smith v. Faulkner, 12 Gray 251 (Mass.).</ref><br />
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This common intention can not be present where there is doubt or difference on either side. Thus if A offers B to sell him his horse and B replies, "I might purchase it at the price you asked," there is no agreement.<ref>Stagg v. Compton, 81 Ind. 171. "I guess I can ship it to you" is not an offer to ship. Topliff v. McKendree, 80 Mich. 148, 55 N. W. Rep. 109. Where, In answer to an order to a wholesale merchant of eight hundred pairs of shoes, the latter acknowledged by postal card the receipt of the order and said, "The same shall have prompt attention," the court said that this was not an absolute acceptance, but merely a courteous promise to give it consideration. Mannler v. Appl ing, 1 1 2 Ala. 663, 20 South. Rep. 978. And the same view was taken of a letter reading, "I am prepared to make the arrangements with you on the terms you name." Havens v. Ins. Co., 11 Ind. App, 315, 39 N.E. 40; Thurber v. Smith, 54 Atl. Rep. (R. I.).</ref> Neither is there where A says, "I will sell you my horse for one hundred dollars," and B replies, "I will give you seventy-five for it."<ref>''See'' [[Contracts/Offer and acceptance#Identical Acceptance and Offer|Identical Acceptance and Offer]]</ref><br />
<br />
A person's state of mind or intention can be ascertained only by outward expressions, such as words or acts. Therefore the law excludes all questions of intention unexpressed, and imputes to a person a state of mind or intention corresponding to the rational and honest meaning of his words and acts. Whatever a man's real intention may be, if he so conducts himself that a reasonable man would believe that he was assenting to what he proposed, and the latter on the faith of this contracts with him, the man so conducting himself is as much bound as if he had actually intended to agree to the other party's terms.<ref>Hudson v. Columbian Co., 100 N. W. Rep. 402 (Mich.) 9 Cyc. 246, 278; Smith v. Hughes, L. R. 6, Q. B. 607; Freeman v. Cooke, 2 Ex. 664; Hand v. Gas Engine, etc., Co., 167 N. Y. 142. 60 N. E. 425; Esterly Harvesting Mach. Co. v. Criswell, 58 Mo. App. 471; Mansfield v. Hodgdon, 147 Mass. 304.</ref><br />
<br />
"If a man intends to buy, and says so to the intended seller, and he intends to sell, and says so to the intended buyer, there is a contract of sale; and so there would be if neither had the intention."<ref>Brown v. Hare, 3 H. & N. 484; U. S. v. Richards, 149 Fed. 443.</ref><br />
<br />
If a man writes a letter to another and its language shows an offer to contract, he will not be allowed to say, "I did not intend to make an offer in writing that letter.<ref>Harris v. Amoskeag Lumber Co., 97 Ga. 465, 25 S. E. 519; Dillon v. Anderson, 43 N. Y. 231.</ref> A person can not set up that he was merely jesting when his conduct and words would warrant a reasonable person in believing that he intended a real agreement.<ref>McKenzie v. Stretch, 53 Ill. App. 184, ''see'' [[#Intention Must Be Serious|Intention Must Be Serious]]</ref><br />
<br />
And it does not matter how formal or informal the words<br />
used may be. A says to B, "I want you to send your wagon<br />
for my goods tomorrow to take them to the station." B<br />
replies, All right." This is an agreement.<ref>Pitts., etc., R. Co. v. Racer, 10 Ind. (App.) 503, 38 N. E. Rep. 186.</ref><br />
<br />
===Necessity of Mutual Assent===<br />
There can be no contract in the true sense, that is, as distinguished from quasi or constructive contracts,<ref>See [[Contracts/Definitions#Implied in Law or Quasi or Constructive Contracts|Implied in Law or Quasi or Constructive Contracts]]</ref> in the absence of the element of agreement, or of mutual assent of the parties.<ref>U. S.- Fire Ins. Assoc. v. Wickham. 141 U. S. 564, 12 SCt 84, 35 !... ed. 860; Clark v. Great No rthern R. Co., 81 Fed. 282 ; Kleinhans v. Jones, 68 Fed. 742. 15 ·ccA 644.<br /><br />
Ala.-McGowin Lumber, etc .. Co. v . R. J. &: B. F. Camp Lumber Co., 192 AllL. SS, 68 S 263; Sanford v. H oward, !t AIL 684, 68 AmD 101. Ariz.-W adln v. Czuczka, 16 Ariz. !it, IU P 491.<br /><br />
Cal.-Harper v. Goldschmidt, 156 Cal. 245, 104 P 451. 184 AmSR 124, !! LRASS 689 ; German Sav., etc., Soc. v. McLellan, 154 Cal. 710. 99 P Ut; Jacks v. Est ee, 139 Cal. 507. 73 P U7; Morrill v. Night ingale , 93 Cal. t5%. %8 P 1068, 27 ArnSR 207; Jules Ltvy v. :Mautz. 16 Cal. A. 666, 117 P Ul; American Can Co. v. Agricultural IIlli. Co., 12 Cal. A. 133, 106 P 720.<br /><br />
Colo.-Grogan v. Travelers' Ins. Co., S5 Colo. A. 517, 139 P 1045.<br /><br />
Conn.-Hartford, etc., R. Co. v. Jack!on, %4 Conn. 514. 63 AmD 177.<br /><br />
D. C.-Patten v. Warner, 11 App. 149; Lyon v. Smith. 2 App. 37.<br /><br />
Fla.-Rou v. Savage, 66 Fla. 106, 63 s 148.<br /><br />
Ga-Martln v. Throw er, 8 Ga. A. iU, 60 SE 825.<br /><br />
Ill-Corcoran v. White, 117 Ill. 118, 7 NE 525. 57 AmR 858; MacKensle r. Barrett, 148 Ill. A. 414.<br /><br />
lnd.-caas C ounty v. Crockett, 111 Ind. SIS, 12 NE 486: Stagg v. Compton, II Ind. 171; Miller v. Sharp, 52 Ind. A. 1 1. 100 NE 108.<br /><br />
lowa- Nicho ll v. Wetmore, 156 NW a19; Stead v. Sampson, 155 NW 571; Alexandria Billiard Co. v. Mlloslowslry, 167 Iowa 395, 149 NW 504.<br /><br />
Ky.-8prlngfleld F. & M. Ins. Co. •.Snowden, 173 Ky. 817,191 SW 439; Arer, ete., Tie Co. v. O'Bannon, 164 Ky. U, 114 SW 783; Gilbert v. Gllbort. iol Ky. 58, 164 SW 316; RehmZelher v. F. G. Wa lker Co., 156 Ky. <. llt SW 777, 49 LRANS 694; Tucker r. Sbeeran, 155 Ky. 6701 160 SW 176.<br /><br />
La.-Holtzman v. Mlllaudon, 18 La. Ann. 2S.<br /><br />
Me.-cumberland Bone Co. v. At• ood Lead Co. , 63 Me. 167; Belfast, etc., R. Co. v. Unity, 6Z Me. 148.<br /><br />
Md.-Ktng v. Warfield, 67 Md. 246, , A 6U, 1 AmSR 884.<br /><br />
Mass.-Harlow v. Curtis, 121 Mass. 220.<br /><br />
Mich.-McCain v. Smith, 172 Mich. 1, 137 NW 616; Thomas v. Greenwood, 69 Mich. 215, 37 NW 195; McGraw v. Dole, 63 Mich. 1, 29 NW 477; Van Buren Dlv. Tol e do. etc., R. Co. '· Lamphear, 54 Mich. 675, 20 NW o_;_ lllehlgan College of Medlctne v. i'""'letworth, 54 .Hich. 522, 20 NW •A": Woods v. Ayres, 39 M ich. 345, 33 , mR Ull; Ferguson v. Hemingway, •I Micll. 158.<br /><br />
Minn.-Emerson v. Pacific Coaat, Paektnc Co., 98 Min n. 1, 104 NW I · lla ArnSR 603. 1 LRANS 445, :cv 973.<br /><br />
M0.- Hudson v. Browning, Z64 Mo. 68, 174 SW 393; O'Connor v. St. LouiR American League Baseball Co.. 193 Mo. A. 167, 181 SW 1167; Llndsly v. Kansas City VIaduct, etc.. Co., 152 Mo. A. 221, 133 SW 389; Jones v. Durgin, 16 Mo. A. 370.<br /><br />
Mont.-State v. State Prison Comrs .. 87 Mont, 378, 96 P 736.<br /><br />
Nebr.-McGavock v. Morton, 57 Neb r. 385, 77 NW 785.<br /><br />
N. J.-Potts v. Whitehe ad, 23 N. J. Eq. 512.<br /><br />
N. Y.-Livlngston v. Livingsto n, 173 N. Y. 877. 66 NE 123, 93 AmSR 600, 61 LRA 800; F it ch v. Snedaker. 38 N. Y. 248, 97 AmD 791; Narganes v. Madan, 161 App. Dlv. 663 , 146 NYS 922 [aff 213 N. Y. 659 mem, 107 NE 1082 mem]; Hooley v. Talcott, 12'9 App. Dlv. 233, 113 NYS 820; G allagher v. White, 31 Barb. 92; Berchorman v. M unk en, 2 E. D. Smith 98; Ward v. Erie R. Co . . 87 Misc. 365. 149 NYS 717; Balmford v. Peffer. 30 Misc. 117. 61 NYS 787; Law v. Pemberton, 10 Misc. 362, 31 NYS 21; Fuller v. Kemp, 16 NYS 158: Wood v. Edwards, 19 Johns. · 206· Keep v. Goodrich, 12 Johns. 39'1 ; Tucke r v. Woods, 12 Johns. 190, 7 AmD 305; Bru ce v. Pearson, 3 Johns. 534; LivIngston v. Rogers, 1 Cat. 487.<br /><br />
N. D.-Yetter v. Goolsby, 26 N. D. 403. 144 NW 1075.<br /><br />
Oh.-Dayton, etc.. Turn p. Cp, v. Coy, 1S Oh. St. 92; Niagara Fire Extinguisher Co. v. Dayto n Folding Box Co., 32 Oh. Clr. Ct. 631.<br /><br />
Okl.-Anderson v. Kell e y, 156 P 1167; Plante v. Fullerton, 46 Okt. 11. 148 P 87, 88 [cit Cyc]; Atw ood v. Rose, 32 Okl, 365, ·122 P 929, 932 [cit Cyc); Love v. Cavett, 26 Okt. 179, 109 P 558; Wm. J. Lemp Brewing Co. v. Secor, 21 Okl. 537, 96 P 636.<br /><br />
Pa.-CQrser v. Hale, 149 Pa. 274. 24 A 285 ; Powers v. Curti s , 147 Pa. 340. 23 A 450.<br /><br />
Phlllpplne.-Tuazon v. Goduco, 23 Pnlllpplne 842; Madrlal v. Stevenson. 15 Ph ilippine 38, 43 felt Cyc]; Roman v. Grtmalt. 6 PhH i pplne 96.<br /><br />
Porto Rlco.-Bigelow v. Porto Rico Planters Co., 7 Port o Rico Fed. 463.<br /><br />
Tenn.-Amerlcan Lead Pencil Co. v. Nashv i lle, etc .. R. Co . . 124 Tenn. 57, 134 SW 613, 32 LRANS 323.<br /><br />
Tex.-Harrls Millinery Co. v. Bryan. 59 Tex. Clv. A. 477, 125 SW 999; San Antonio, etc.. R. Co. v. Timon, 45 Tex. Clv. A. 47, 99 SW 418; Jones v. Gammel-Stateman Pub. Co., (Civ. A.) 94 SW 191; Hubbard City Cotton 011. etc., Co. v. Nichols, (Civ. A.) 89 SW 795.<br /><br />
Va.-Creecy v. Grief, 108. Va. 320. 61 SE 769; Innis v. Roane, 4 Call (8 Va.) 3o79.<br /><br />
Wis.- Teesdale v. Bennett, 123 Wis. 355, 359, 101 NW 688 [cit Cyc]· Mygatt v. Tarbell, 85 Wis. 467, 6 NW 1031.<br /><br />
Eng.--Bcriven v. Hindley, [1913) 3 K. B. 564; Jackson v. Ga lloway, 5 Bing. N. C(I.S. 71, 36 ECL 48, 132 Reprint 1031; Chinnock v. Ely, 4 De G. J. & S. 638 , 69 EngCh 488, 46 Reprint 1066; Hon eyman v. JY(arryatt, 6 H. L. Cas. 112, 10 Re pri nt 1236; Lazarus v. Calm SS. Line, 106 L. T. Rep. N. S. 378: Jordan v. Norton, -4 l\1. & W. 165, 160 Reprint 1382 , 6 ERC 142; Pay ne v. Cave, 3 T. R. 14 8, 100 Rep rin t 602.<br /><br />
Alta.- Larose v. Webster, 7 Al ia. L. 6. 14 DomLR 79,26 WestLR 617 [dlsm app 11 DomLR 319, 24 WestLR 3251: Nova Scotia Bank v. McDougall, 11 DomLR 646, 23 WestLR 753.<br /><br />
B. C .-Tucker v. Puget Sound Bridge, etc .. Co., 14 WestLR 468.<br /><br />
N. B.-Fishe r v. Woodstock. 39 N. B. 192.<br /><br />
Sask.-Langlots v. Amyot, 31 Dom LR 572.<br /><br />
'''[a] Mutual assent''' is assent to the same thing in the same sense and under a common understanding of the stipulations agreed to. Martin v. Thrower, 3 Ga. A. 784, 60 SE 325. </ref> If this assent is wanting on the part of one who signs a contract, his act has no more efficacy than if it had been done under duress or by a person of unsound mind.<ref>Girad v. St. Louts Car-Wheel Co., 123 Mo. 368, 368, 27 SW 1148, 46 AmSR 656, 25 LRA 514 ( where the court said: "Those facts, when established, destroyed the substance of the agreement which the release form expressed. They took from the apparent contract what was essential to Its legal force and validity, namely, the element of assent by the plaintiff. That element Is a necessary part of every contract. Without it. a mere writing, expressing some formula of words, Imposes no obligation. The signature of plaintiff, obtained to such a paper, without the assent of his mind to the act, deprived him of no legal right").</ref> A grumbling assent may be sufficient so long as it stops short of an actual expression of dissatisfaction with the terms.<ref>Johnson v. Federal Union Surety Co., 1 87 Mich. 454, 163 NW 788 [quot Pollock Contr. p 40}.</ref><br />
<br />
===Common Intention===<br />
In order that there may be an agreement, the parties must have a distinct intention common to both and without doubt or difference.<ref>Fla.-Ross v. Savage, 66 P'ls. 106, 63 8 148.<br /><br />
Mass.-Smith v. Faulkner, 12 Gray 251· Anson Contr. p 2.<br /><br />
N. Y.-Consumers' Ice Co. v. Web ster, 79 App. Dlv. 860, 79 NYS 386; Koenigsberg v. Blau, 127 NYS 602.<br /><br />
N. C.-Rankin v. Mitchem, 141 N. C. 277, 53 SE 854.<br /><br />
S. D.-Kelly v. Wheeler, 22 8. D. 611, 119 NW 994.<br /><br />
Ont.-Hoener v. Merner, 7 Ont. 819; McF arren v. Johnson, 6 Ont. 161.<br /><br />
See Havens v. American F. Ins. Co., 11 Ind. A. 315, 39 NE 40 (holding that there was no contract where a person to whom a proposal was made replied: "I am prepared to make the arrangements with you on the terms you name"); Wills v. Carpenter, 76 Md. 80, 83, 26 A 415 (holding that there was no contract where a person wrote another, "My brother, F. A. Carpenter, has some idea of renting your farm. If you and he can agree upon terms of third share as your rent, I will become the renter and enter into contract with you; he to work the farm," and the other replied: "I would agree to terms of one-third rent . . . and that I would be at home to negotiate with Mr. Frank Carpenter'').<br /><br />
'''[a] Doubt Illustrated.'''-There s doubt where a person says to another, "Will you buy my horse if I am inclined to sell?" and the other says, "Possibly I will." Stagg v. Compton, 81 Ind. 171; Marschall v. Elsen Vineyard Co., 7 Misc. 674, 28 NYS 62.<br /><br />
'''[b] Difference Illustrated.'''-There is a difference where a person says to another, "Will you buy my horse for one hundred dollars?" and the other says, "I will give you seventy-five for it." See Bruce v. Pearson, 3 Johns. (N. Y.) 534 (where a person sent an order to another for six hogsheads of rum and other articles at a credit of six months, and the other sent only three hoghsheads, and omitted part of the other articles, charging those sent at a credit of three months, and it was held that there was no agreement).</ref> Until all understand alike, there can be no assent, and, therefore, no contract.<ref>U. S.-Wheeler v. New Brunswick, etc., R. Co., 116 U. S. 29, 5 SCt 1160, 29 L. ed .. 3U; Quincy First Nat. Bank v. Hall, 101 U. S. 43, 25 L. ed. 822; New York Mut. L. Ins. Co. v. Young, 23 Wall, 85, 23 L. ed. 152.<br /><br />
Ala.-Hodges v. Sublett, 91 Ala. 688, 8 s 800.<br /><br />
Cal.-Golden State, etc., Iron Works v. Angell, 89 Cal. 643, t7 P 66.<br /><br />
Ill.-Rupley v. Daggett, H III. 361.<br /><br />
Ind.-Winnemucla Water, etc., Co. v. Model Gas Engine Wks .. 179 Ind. 5.«2, 101 NE 1007; Coppage v. Gregg, 127 Ind. 359. 26 NE 903; Miller v. t:lharp, 52 Ind. A. 11, 100 NE 108.<br /><br />
Me.-Belfast, etc., R. Co. v. Unity, 62 Me. 148.<br /><br />
Mass.-Patton v. Taft, 143 Mass. Hp, 9 NE 577; Kyle v. Kavanagh, 103 Mass. 356, AmR 560; Rice v. Dw'lght Mfg. Co., 2 Cush. 80.<br /><br />
Mich.-Ahearn v. Ayres, 38 Mich. 69; Crane v. Partland, 9 Mich. 493.<br /><br />
N. Y.-Booth v. Bierce, 38 N. Y. 468, 98 AmD 73; First Baptltlt Church v. Brooklyn F. Ins. Co., 28 N. Y. 153; Sidney Glass Works v. Barnes, 86 Hun 374. 33 NYS 508; Fraser v. Small, 13 NYS 468;, Saltus y. Pruyn, 18 HowPr 512; l.:Oies v. Sowne, 13 Paige 526.<br /><br />
Pa.-Powers v. Curtis, 147 Pa. 340, aa A 460.<br /><br />
Tex.--Q'Neal v. Knippa, 19 SW 1020; Gulf, etc., R. Co. v. Dawson, 24 SW 566; Skeeters v. Slater Milling Co .. 4 Tex. Clv. A. 665, 23 SW 1000.<br /><br />
Vt.-Bedell v. Wilder, 65 Vt. 406, Z6 A 589, 36 AmSR 871.<br /><br />
Wis.-.Greve v. Ganger, 38 Wis. 369.<br /><br />
Eng.-Appleby v. Johnson, L. R. 9 C. P. 168; Chinnock v. Ely, 4 De G. J. &: S. 638, 69 EngCh 488, 46 Reprint 1066; Raffles v. Wlchelhaus, 2 H. &: C. 906, 159 Reprint 375, 6 ERC 1'98; calverly v. Williams, 1 Vee. Jr. Z,!O, 30 Reprint 306.<br /><br />
'''Effect of mistake''' see [[Contracts/Consent#Mistake|Consent § Mistake]].</ref> Both parties must assent to the same thing in the same sense,<ref>80. U. S.-Lewls v. Wells, 85 Fed. 896; Hazard v. New England Mar. Ins. Co., 11 F. C&s. No. 6,282, 1 Sumn. 218.<br /><br />
Cal-American Can Co. v. Agricultural Ins, Co .. 12 Cal. A. 133, 106 P 720.<br /><br />
Conn.-Hartford, etc., R. Co. v. Jackson, 24 Conn. 614. 63 AmD 177.<br /><br />
Ill.-Burchard-Hulburt Inv. Co. v. Hanson, 143 Ill. A. 97.<br /><br />
Ind.-Winnemucca Water, etc., Co. v. Model Gas Engine Wks., 179 Ind. 5Ui lOt NE 1007; Miller v. Sharp, li3 nd. A. 11, 100 NE 108.<br /><br />
Mich.-Durgin v. Smith, 133 Mich. 331, 94 NW 1044; Van Buren Dlv. Toledo, etc.. R. Co. v. Lamphear, 54 Mich.· 575, 20 NW 590.i Eggleston v. 'Wagner, 46 Mich. 61u, 10 NW 37; Davfs v. Bush, 28 Mich. 432; Peo. v. Auditor-Gen., 17 Mich. 161.<br /><br />
N. C.-Roberta Mfg. Co. v. Royal Exch. Assur. Co., 161 N. C. 88, 76 SE 865.<br /><br />
Tex.-Harris Millinery Co. v. Bryan, 59 Tex. Clv. A. 477, 125 SW 999.</ref> and their minds must meet as to all the terms.<ref>'''U.S.'''-- ''[[Lord v. U.S.]]'', 217 U.S. (1910); uo. so set 568, 54 L. ed. 790; r.n. Campania Bllbalna de Navlgaclon de Bilbao v. Spanish-American Light, etc., co .. 146 u. s. 483. 13 set 142. 36 L. ed. 1054; Fire Ins. Assoc. v. Wickham. 141 u. s. 664, 12 set 84, 35 L. ed. 860; Minneapolis, etc., R. Co. v. Columbus Rolling-Mill, 119 U. s. 149. 7 set 168, 30 L. ed. 376: Tilley v. Chicago, 103 U. S. 165, 26 L. ed. 374; New York Mut. L. Ins. Co. "· Young, 23 Wall. 85, 23 L. ed. 152; Ellai!Pn v. Henshaw, 4 Wheat. 226, 4 L. ed. 556; National Electric SignalIng Co. v. Fessenden, 207 Fed. 915, 126 CCA 363; Locomoblle Co. v. Bergdoll. 192 Fed. 447; Bowen v. Hart. 101 Fed. 376, 41 CCA 390; Crabtree v, St. ·Paul Opera-House Co., 39 Fed. 746; Shuenfeldt v. Junkermann. 20 Fed. 367; Ellicott Mach. Co. v. U. S., 44 Ct. Cl. 127.<br /><br />
Ala.-Phllllps-Boyd Pub. Co. v. McKinnon, 73 S 43.<br /><br />
Ark.-Crane Co. v. Hempstead, 191 SW 234; Somers v. Musolf, 86 Ark. 97, 109 SW 1173.<br /><br />
Cal-Peerless Glass Co. v. Pacific Crockery, etc., Co., 121 Cal. 641, 54 p 101.<br /><br />
D. C.-Rankin v. Collins, 40 App. 211; Cunningham Mfg. Co. v. Rotagraph Co., 30 App. 624, 15 LRANS 368, 13 AnnCas 1H7; Patten v. Warner, 11 App. 149.<br /><br />
Ga.-Singer v. Grand Rapids Match Co., 117 Ga. 86, 43 SE 756.<br /><br />
Ill.-Illlnols L. Ins. Co. v. Beifeld, 184 Ill. A. 582; Sears v. Winchester Repeating Arms Co., 178 Ill. A. 318; Beard v. Chicago Home for Convalescent Women &: Children, 171 Ill. A. 268; Newlin v. Prevo, 90 Ill. A. 615. Ind.-Prather v. State Bank, 3 Ind. 356.<br /><br />
Iowa.-Foshler v. Fetser, 154 Iowa 147, 134 NW 556; Sheldon v. Crane. 146 Iowa 461, 125 NW 238; Steel v. Miller, 40 Iowa 402.<br /><br />
Kan.-Mooney v. Merriam, 77 Kan. 305. 94 p 263.<br /><br />
Ky.--8prlngfteld F. &: M. Ins. Co. v. Snowden, 173 Ky. 664, 191 SW 439;· Tucker v. Sheeran, 155 Ky. 670, 160 SW 176: Henry v. Reeser, 163 Ky. 8. 154 SW 37l; T,11nnell's Mill, etc., Turnp. Road l.:O. v. Selectman, 14 KyL 174.<br /><br />
Mass.-Stroock Plush Co. v. New England Cotton Yam Co., 213 Mass. 354, 100 NE 617: Sibley v. Felton, 166 Mass. 273. 31 NE 10.<br /><br />
Mich.-Orand Haven Bd. of Trade v. De Bruyn, 138 Mich. 187, 101 NW 262; Sheridan v. Peninsular Sav. Bank, 116 Mich. 546, 74 NW 874; Whiteford v. Hitchcock, 74 Mich. 208, U NW 898.<br /><br />
Mo.-Sutter v. Raeder, 149 Mo. 297, 50 SW 813; Taylor v. Von Schraeder, 107 Mo. 206, 16 SW 675; Green v. Cole, 103 Mo. 70, 15 SW 317; Luckey v. St. Louis, etc., R. Co., 133 Mo. A. 589, 113 SW 703; Robinson v. Estes, 53 Mo. A. 582; Falls Wire Mfg. Co. v. Broderick, 12 Mo. A. 378. 1<br /><br />
Mont.-Brophy v. Idaho Produce, etc .. Co., 31 Mont. 279, 78 P 493.<br /><br />
N. C.-Elks v. North State L. Ins. Co., 159 N. C. 619, 75 SE 808; Trollinger v. Fleer, 157 N. C. 81, ?2 SE 795.<br /><br />
N. D.-Krause v. Krause, 30 N. D. 54. 151 NW 991.<br /><br />
Oh.-Standard Tobacco, etc .. Co. v. Loeb, .24 Oh. Clr. Ct. N. S. 385b· Niagara Fire Extinguisher Co. v. ayton Folding Box Co., 32 Oh. Clr. Ct. 631.<br /><br />
Okl.-McCormlck v. Bonftls, 9 Okl. 605. 60 p 296.<br /><br />
Philippine.-Roman v. Grlmalt, 6 Philippine 96.<br /><br />
R. I.- Clary v. Wolf, 84 R. I. 263. 83 A 115.<br /><br />
S. C.-Farmers' Bank, etc., Co. v. Southern Granite Co., 96 S. C. 106, 79 SE 986, 995 rcit Cyc].<br /><br />
S. D.-Babcock v. Ormsby, 18 S. D. 368. 100 NW 759.<br /><br />
Tex.-san Antonio, etc .. R. Co. v. Timon, 45 Tex. ctv. A. 47, 99 SW 418.<br /><br />
Va.-Belmont v. McAutster, 116 Va. 286, 81 SE 81.<br /><br />
Wash.-Watson v. Bayliss, 71 Wash. 499. 128 P 1061.<br /><br />
Wis.-Zitske v. Grohn, 128 Wis. 159. 107 NW 20.<br /><br />
Man.-Jones Stacker Co. v. Green, 14 Man. 61, 22 CanLTOccNotes 264.<br /><br />
Ont.-Hennlng v. Toronto R. Co., 11 Ont. L. 142, 7 OntWR 1.<br /><br />
'''[a] Where copies of contracts differ.'''-A contract employing an attorney failed as to the amount of compensation for want of meeting of minds, where the copies of the agreement held by the parties respectively stated different amounts, and the attorney is entitled to recover the reasonable value of his services. Thayer v. Harblean, 71 Wash. 278, 126 P 625.<br /><br />
'''[b] Change after signature.''' Where a written instrument was signed by one party, with the intention that the other should later sign it, and a stranger changed some its terms, and it was signed in its altered condition, it was held not binding on the ftrst signer. McGavock v. Morton, 57 Nebr. 385, 77 NW 785.</ref> If any portion of the proposed terms is not settled, or no mode is agreed on by which it may be settled, there is no agreement,<ref>U. S.-Kielnhans v. Jones, 68 Fed. 742, 15 CCA 644; Gill Mfg. Co. 't". Hurd, 18 Fed. 873.<br /><br />
Ala.-Feore v. Avent, 4 .A1&. A.. 551, 58 s 727.<br /><br />
Fla.--strong v. Baars, flO FlA. US. 54 s 92.<br /><br />
Ida.-Phelps v. Good, 16 Ida. 76, 77, 96 P 216 [cit Cyc].<br /><br />
La.-Peet v. M:e:rer, 41 La. Ann. 1034, 8 s 534.<br /><br />
Mass.-Sibley v. Felton, Uil M&SB. 273. 31 NE 10.<br /><br />
Mich.-Central Bltullthlc Pav. Co. v. Highland Park, 164 Mich. IZll. 1%! NW 46, AnnCas1912B 719; Wardell v. Williams, 62 Mich. 60, 28 NW 716, 4 AmSR 814.<br /><br />
Minn.-Lombard v. Rahilly. l!T Minn. 449, 149 NW 950.<br /><br />
N. Y.-Barrow SS. Co. v. Mextcaa Cent. R. Co .. 134 N. Y. 15, U NE IlL 17 LRA 359; Mayer v. McCreery, ' NYSt 114 [atr 119 N. Y. 434, U NE 1046].<br /><br />
Oh.-Columbus, etc., R. Co. •· Gatrney, 65 Oh. St. 104, 61 NE l&ll.<br /><br />
Pa.-Zoeblsch v. Rauch. US Pa. 632, 19 A 415.<br /><br />
S. C.-Burns v. Mills, 31 S. C. 51. 9 SE 689.<br /><br />
Tex.--o'Neal v. Knippa, 19 SW 1020; Wade v. Cohen. (Ctv. A.) 173 SW 1168; Hubbard City Cotton OU. etc., Co. v. Nichols. (Civ. A.) 89 SW 795.<br /><br />
Wash.-Weldon v. Degan, 86 Wash.. 442, 150 P 1184, 1187 [cit Cyc); Watson v. Bayliss, 71 Wash. 499, 1!8 P 1061, 1063 [quot Cyc].<br /><br />
Can.--Oppenheimer v. Brackman, etc., Milling Co., 32 Can. S. C. 199.<br /><br />
B. C.-Frewen v. Hayes, 16 B. C. 143, 14 WestLR 632; Llttle v. Hanbury, 14 B. c. 18.<br /><br />
Man.-Pearson v. O'Brien. 22 llan. 175. t DomLR 413.<br /><br />
Ont.--Gnam v. McNeil, 6 OutWN 223.<br /><br />
{{Quote|Where it is apparent that one party has not consented to the several terms to which the other bu agreed, no contract is formed. If the divergence is of anything which partakes of the substance of the contract at all, there is no legal agreement; and the court is not at liberty to speculate upon the question whether some stipulation which it might think of minor importance, or some variation which it might think would not have influenced the parties in making the contract, can be dispensed with, and the parties held, in disregard of them.}} Kleinhans v. Jones, 68 Fed. 742, 749, 15 CCA 644.<br /><br />
'''[a] Application of rule.'''--A declaration framed on the theory that an agreement which looked to a permanent unity of the interests of the parties, but left the plan therefor to be prepared, was a completed contract was bad on demurrer. Sibley v. Felton, 156 Mass. 273. 31 NE 10.<br /><br />
'''[b] Price.'''--Since an offer to form the basis of a legal obligation must be so complete that on acceptance an agreement is formed which contains all the terms necessary to determine whether the contract has been performed or not, there is no contract where the price is not determined. Butler v. Kemmerer, 218 Pa. 242. 67 A 332.</ref> although it is not necessary that all of the terms of the contract be settled by a single act,<ref name="C.W. Hull">C. W. Hull Co. v. Marquette Cement Mfg. Co., 208 Fed. 260, 125 CCA 460.</ref> but the parties may settle on one term, at a time, and their contract becomes complete when the last term is agreed on.<ref name="C.W. Hull" /> The fact that differences subsequently arise between the parties as to the construction of the contract is not in itself sufficient to show that the minds of the parties did not meet.<ref>Southern Oil Co. v. Wilson, 22 Tex. Civ. A. 534, 56 SW 429.</ref><br />
<br />
====Expressed Intention and Secret Intention Differing====<br />
The apparent mutual assent of the parties, essential to the formation of a contract, must be gathered from the language employed by them,<ref>Williams v. Burdick, 63 Or. 41. 125 P 844, 126 P 603.</ref> and the law imputes to a person an intention corresponding to the reasonable meaning of their words and acts.<ref>Dybvig v. Minneapolis Sanatorium 128 Minn. 292, 294. 150 NW 05 (eft Cyc]; Coleman v. Roberts, o. 97; Wilbur Stoc k Food Co. v. BrUges. 160 Mo. A. 122, 131, 141 SW 105 [cit Cyc]; Embry v. Hargadlne, 1!7 Mo. A. 383, 38 9 , 105 SW 777 quot Cyc]; Haubelt v. Rea, etc 'fOI Co .• 77 Mo. A. 672: Esterly Har; estlcg :Mach. Co. v. Criswell, 58 Mo. 471; Brewington v. Meskeer. 51 Ko. ..... 348; In re East Engl and Ranking Co., L. R. 4 Ch. 14: S hepra v. Glllespie, L. R. 3 Ch. 764: Cox v. Troy, 6 B. & Ald. 474, 7 ECL .5 . 1()6 Reprint 1264: Cornish v.' bill«ton. 4 H. & N. 649. 157 Reprint 956; Browne v. Hare, 3 H. & N 484 157 Reprint 561; Leake Contr. -· And see Smith v. Hughes, L. R. Q. B. 597. 607 (where Blackburn, said: "The rule of law is that stated In Freeman v. Cooke, 2 Exch. 654, 154 Reprint 652, 11 ERC 82. If, whatever a man's real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that other party upon that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party's terms").<br />
<br /> '''[a] An undisclosed purpose''' or intention of one party to a contract, not embodied in the contract, and not communicated to the other party, cannot affect the rights or obligations of the parties under the contract. Delaware, etc., R. Co. v. Monroe County Water Power, etc., Co., 227 Pa. 639, 76 A 425.</ref> It judges of their intention by their outward expressions and excludes all questions in regard to unexpressed intention. If their words or acts, judged by a reasonable standard, manifest an intention to agree in regard to the matter in question, that agreement is established, and it is immaterial what may be the real but unexpressed state of their mind on the subject.<ref>'''[a] Conflicting views.'''-Holland, criticizing Savigny's analysis of contract in including "an agreement of the wills" of the parties as a necessary element, maintains that the law does not require that contracting parties have a common intention, but only that they shall seem to have one; that the law looks not at the will itself but at the will as voluntarily manifested. He holds that the law does not require a union of wills but only that it shall appear so. Holland EL Jur. p 228. On the other hand, English and American writers generally, in defining agreement as the meeting of minds, require the wills of the parties to be the same. But if either party has manifested his agreement either by words or by conduct, he is not allowed to say that he did not really agree. "A contract," says Anson, {{Quote|as a legal transaction, can exist only in such a form as may be perceptible to a court of law. It is only from the words and conduct of the parties that a court can form any conclusion as to their intention. If their words or their acts are inconsistent with any supposition but that they meant to agree, or if one has so spoken or acted as to lead the other necessarily to that conclusion, the court will not permit the obvious construction of words or conduct to be denied. But, after all, it is the intention of the parties which the courts endeavour to ascertain; and it is their intention to agree which is regarded as a necessary inference from words or conduct of a certain sort.}} Anson Contr. p 11.</ref> On the other hand, if one sought to be held as having agreed dissented in the ordinary language of business intercourse, it is an absurdity to say that he did agree merely because the other party insists that she did not understand the language.<ref>Dunning v. Thomas, 10 Colo. 84, 14 p 49.</ref><br />
<br />
====Communication of Intention====<br />
=====Necessity for=====<br />
To constitute an agreement, the intention of the parties must in some way or form be communicated, for a person's intention can be ascertained by another only by means of outward expressions, such as words and acts. An intention not expressed, not communicated, or withdrawn before communicated, is in general inoperative and immaterial to the question of agreement.<ref>Cal-American Can Co. v. Agricultural Ins. Co . . 12 Cal. A. 133, 106 p 720.<br /><br />
Conn.-McGarrigle v. Green, 76 Conn. 3 98, 56 A 609.<br /><br />
Kan.-Troustlne v. Sellers, 35 Ka.n. 447. 11 p 441. . Mass.-Farnum v. Whitman, 187 Mass. 381, 73 NE 473; Stoddard v. Ham, 129 Mass. 38 3, 37 AmR 369.<br /><br />
Mo.-Coleman v. Roberts. 1 i1!2' Stone v. St. Louis Trust Co .. 150 Mo. A. 331. 333. 130 SW 825 Jclt Cyc]; Haubel t v. Rea, etc . . Mill o .. 77 Mo. A. 672; Cangas v. Rumsey Mfg. Co.·, 37 Mo. A. 297: Lancaster v. Ellliott, 28 Mo. A. 86.<br /><br />
N. H.-Prescott v. Jones, 69 N. ·H. 305, 41 A 352.<br /><br />
Tex.-Bolt v. Manchester State Sav. Bank, (Civ. A.) 179 SW 1119.<br /><br />
Eng.-Leake Contr. p 2.<br /><br />
'''Communication of offer''' see [[Contracts/Offer#Communication of Offer|Offer § Communication of Offer]].<br /><br />
'''Communication of acceptance''' see [[Contracts/Acceptance#Communication of Acceptance|Acceptance § Communication of Acceptance]].</ref> The same is true of an intention communicated only to a third person.<ref>Harvey v. Du!Tey, 99 CaL 401, 33 P 897; Horton v. New York L. Ins. Co .. 151 Mo. 604, 52 SW 356; Fiedler v. Tucker, 13 HowPr (N. Y . ) 9; fn re National Sav. Bank Assoc. , 4 Eq. 9; Felthouse v. BlndleyL, . R.11. C. B. N. S. 869, 103 ECL 869, 142 Reprint 1037; Browne v. Hare; 3 H. & N. 484, 157 Reprint 561. See also [[Contracts/Acceptance#Acceptance by Promise|Acceptance § Acceptance by Promise]].</ref><br />
<br />
=====Intention Communicated Informally=====<br />
Where the intention is communicated, it does not matter what is the medium of communication, or how informal the words used may be.<ref>Pendill v. Neuberger, 67 Mich. 562, 35 NW 249; Stobie v, Earp, ItO Mo. A. 73, 83 SW 1 0 97. See Tyler v. Stone, 81 Cal. 236. 22 P 598 (holding promise established); Taylor v. Hotchkiss, 81 App. Div. 470. 80 NY·s 1042 [aff 179 N. Y. 546 mem, 71 NE 1140 mem] (holding that the finding of a promise is justified); Zitske v Grohn, 128 Wis. 159, 107 NW 20 (holding that, although to constitute a contract the minds of the parties must meet on the same proposition, it is not necessary that they meet "on express words clearly expressed").</ref> It may be orally or in writing, by an advertisement, placard, handbill, letter, messenger, or telegram.<ref>The Palo Alto, 18 F. Cas. No. 10,700, 2 Ware 344; Whaley v. Hinchman, v. 22 Mo. A 483; College Mill Co. v. Fidler, (Tenn. Ch.) 58 SW 382; Dubie v. Batts, 38 Tex. 3f2; Short v. Treadglll, 3 Tex . A. Civ. Cas. § 267. See Purdom Naval Stores Co. v. Western Union Tel Co., 153 Fed. 327 (telegrams); Francis v. Barry, 69 Mich. 311, 37 NW 353 (letters or other writings); Bradley v. Bower, 5 Nebr. (Unoff.) 542, 99 NW 490 (letters); Beggs v. James Hanley Brewing Co., 27 R. I. 385, 62 A 373, 114 AmSR 44 (letters and telegrams).<br /><br /><br />
"It is now well-settled law that binding contracts for the sale and delivery of property may be entered into by letters sent through the mall, or by correspondence by means of the telegraph, or by the conjoint use of both these agencies." College Mill Co. v. Fidler, (Tenn. Ch.) 58 SW 382.<br /><br /><br />
'''Offer and acceptance by mail or telegraph''' see [[Contracts/Offer#Offer by Post, Telegraph, or Telephone|Offer § Offer by Post, Telegraph, or Telephone]] and [[Contracts/Acceptance#Acceptance by Post, Telegraph, or Telephone|Acceptance § Acceptance by Post, Telegraph, or Telephone]].</ref> So a valid contract may be made by a telephone oonversation.<ref>St. Louis Maple, etc., Flooring Co. v. Knost 148 Mo. A. 563, 128 SW 532.</ref><br />
<br />
===Promissory Expressions===<br />
The intention to bind oneself must appear, for all promissory expressions do not by acceptance constitute an agreement.<ref>Carson v. Lucas, 13 B, Mon. 213; Stagg v. Compton, 81 In. 171; Westervelt v. Demarest, 46 N. J. (L.), 37, 60 Am. Rep. 409, 9 Cyc. 276; 13 c. J. 287.</ref> They may have the form of an offer and yet not be such as the law will enforce. The case of a mere jest is clear.<ref>[[#Intention Must Be Serious|Intention Must Be Serious]]</ref> If A, for example, is riding a broken down horse and B in a spirit of badinage calls out, "I say, will you take $1,000 for your horse?" B's reply, "I will," could by no possibility be considered as the conclusion of a contract to sell the horse for $1,000. But suppose a man, who believes his life in danger from a disease or an injury, says to his physician, "O doctor, I will give all I have if you will save my life," and the physician says, "I'll try," and does, by his surgical skill, save his patient's life. Is this a contract?<br />
<br />
The reports do not give much light; the few adjudicated cases are hard to reconcile. In a Tennessee case,<ref>Stamper v. Temple, 6 Humph. 296, and see Higgins v. Lessig, 49 Ill. (App.) 461, where as to similar language as to one whom he suspected of having stolen an old harness from him, the court said: "It was indicative or a state of excitement so out of proportion to the supposed cause of it that it should be regarded rather as the extravagant exclamation of an excited man than as manifesting an intention to contract."</ref> where defendant and his family were in deep affliction over the murder of his son; he himself was laboring under the effect of severe wounds received from the person who had killed the son and when his arrest was spoken of, he said he would give two hundred dollars to have him arrested. Plaintiff, who was present, made the arrest and claimed the reward. But the Court held that there was no offer.<br />
<br />
"What is called an offered reward was nothing but a strong expression of his feelings of anxiety for the arrest of those who had so severely injured him, and this greatly increased by the distracted state of his own mind, and that of his family; as we frequently hear persons exclaim, 'Oh! I would give a thousand dollars if such an event were to happen,' or vice versa. No contract can be made out of such expressions; they are evidence of strong excitement, but not of a contracting intention."<br />
<br />
So in an old case where A told B that he would give $100 to anyone who married his daughter with his consent and B did so and sued for the $100, it was ruled not to be reasonable that a man should be bound by general words spoken to excite suitors.<ref>Weeks v. Tybald, Noy 11</ref> On the other hand, in a Wisconsin case, where a man standing in front of a burning building shouted to the crowd, "I will give $5,000 to any person who will bring the body of my wife out of that building dead or alive," this was held to be a binding agreement with one of the firemen who entered the house and brought out the woman;<ref>Relf v. Page, 55 Wis. 731.</ref> and in Illinois, where at a public meeting, during the war, a man declared that he would give $400 to get his sons relieved from the draft, this was held a binding promise · to pay that amount to anyone who should accomplish that object.<ref>McClure v. Wilson, 43 Ill. 356, 50 III. 366; Patton v. Hassinger, 69 Pa. St. 311.</ref><br />
<br />
"If I have valuable property in imminent danger and I make proclamation that I will give $50 to save it and a stranger undertakes the labor and does save it, on what principle of law or justice is it that I should not pay. So here the defendant declared he would give $400 to save his sons from the draft and put the declaration in writing. The plaintiff incurred the expense and trouble necessary to save his sons and did save them, why th en should he not be paid the amount promised."<br />
<br />
In an English case the defendants, the proprietors of a medical preparation called The Carbolic Smoke Ball, issued an advertisement in which they promised to pay £100 to any person who contracted influenza after having used one of their smoke balls in a certain specified manner and for a certain specified period. The plaintiff sued for £100 alleging that on the faith of the advertisement she purchased one of the smoke balls, used it in the manner and for the time specified, but nevertheless contracted the influenza. It was contended by the defendants that this was not an offer at all or at least not one that any any sensible person would take to be a bona fide offer. But all the judges of the Court of Appeals pointed out that the advertisement contained this clause: "£1,000 is deposited in the Alliance Bank, Regent street, showing our sincerity in the matter," and that this must have been for the very purpose of leading those who read the advertisement to believe that the defendants were serious in their proposal and intended to fulfill their promise.<br />
<br />
"It may be, that of the many readers of the advertisement very few sensible ones would have entertained expectations that in the event of the smoke balls failing to act as a preventive against the disease the defendants had any intention to fulfill their attractive and alluring promise; but it must be remembered that such advertisements do not appeal so much to the wise and thoughtful as to the credulous and weak portions of the community; and if the vendor of an article, whether it be medicine smoke or anything else, with a view to increase its sale or use, thinks fit publicly to promise to all who buy or use it, that to those who shall not find it as efficacious as it is represented by him to be, he will pay a substantial sum of money, he must not be surprised if occasionally he is held to his promise."<ref>''[[Carlill v Carbolic Smoke Ball Co.]]'', L.R.Q. B.D. (1892-1893) 484, 260.</ref><br />
<br />
It is not easy to state any definite rule by which such cases should be governed, but it may be said broadly that the question is whether the terms of the offer and the circumstances under which it is made are such as to give a person a right to act upon it as a real and intentional offer.<br />
<br />
===Statements of Intention===<br />
Of a similar character are mere statements of intention, though they be accepted or acted upon by the party to whom they are made.<ref>Lakeside Land Co. v. Dromgoole, 89 Ala. 505, 7 So. 444; Erwin v. Erwin, 25 Ala. 236; Miller v. Mackay, 204 Pa. St. 345, 54 Atl. 171. Statements of intention made to third persons cannot be considered as offers. Kenan v. Holloway, 16 Ala. 53, 50 Am. Dec. 162; Dunning v. Thomas, 10 Colo. 84, 14 Pac. 49; Crane v. Critton, 54 Iowa 738, 6 N. W. 79, 7 N. W. Rep. 138; Morris v. Brightman, 143 Mass. 149, 9 N. E. 512; Henderson Bridge Co. v. McGrath, 134 U. s. 260.</ref> Where a father writing to a man who was going to marry his daughter said, "She will have a share of what I leave after the death of her mother," this was held not a promise.<ref>Farina v. Ficus, 1 Ch. 331 (1900).</ref> So where another parent, in answer to a suitor for his daughter, wrote, "I shall allow her the interest on £2,000, whether she remains single or marries. If the latter, I may bind myself to do it, and pay the principal at my death to her and her heirs," this was held not to create a contract, because it did not import an intention to make a binding promise.<ref>Randall v. Morgan, 12 Vesey, Jr. 67.</ref> So there was no contract where a person to whom a proposal was made replied, "I am prepared to make the arrangements with you on the terms you name."<ref>Havens v. Ins. Co., 11 Ind. App. 315, 39 N. E. 40.</ref><br />
<br />
Here, as before, it is a question of fact whether what was said was a mere statement of intention or was intended as a definite offer or acceptance.<ref>Thurston v. Thornton, 1 Cush. 79; Henderson Bridge Co. v. MeGrath, 134 U.S. 260.</ref> Where A, on opening a number of bids, said to B, one of the bidders, "I guess it is up to you, yours is the lowest bid," it was held that this was acceptance of B's bid.<ref>Lane v. Warren, 53 Tex. Civ. App. 122, 115 S. W. 903.</ref><br />
<br />
An advertisement of a sale by auction is not an offer, so as to bind the advertiser, to persons attending the sale, to sell the property or to sell it on the terms advertised.<ref>Hanes v. Nickerson, L. R. 8. Q. B. 280, 9 Cyc. 280.</ref> An announcement that an examination for a scholarship will be held does not imply a condition that the scholarship will be given to the competitor obtaining most marks; and consequently there is no contract.<ref>Rooke v. Dawson, 1 Ch. 489.</ref><br />
<br />
===Invitations to Deal===<br />
{{Main article|Contracts/Invitation to deal{{!}}Invitation to deal}}<br />
<br />
A mere invitation to deal is not such an offer as may be turned into an agreement by acceptance. Thus in ''[[Moulton v. Kershaw]]'',<ref>Wis. 3 1 6 ; 48 Am. Rep. 5 1 6 ; 18 N. W. Rep. 172; Clark v. Atlantic<br />
S . Co . • 163 Fed. 423.</ref> A wrote to B: "We are authorized to offer Michigan fine salt in full carload lots of 80 to 95 barrels delivered in your city at 85 cents per barrel." B telegraphed: "Your letter of yesterday received and noted. You may ship me 2,000 barrels of Michigan fine salt as offered in your letter." This was held not a binding contract, A's letter was only a notice to those dealing in salt that he was in a position to supply that article for the prices named, and requesting offers from the person or persons addressed.<br />
<br />
Where defendants sent out a circular: "We are instructed to offer to the wholesale trade for sale by tender the stock in trade of A", amounting to so-and-so, "and which will be sold at a discount in one lot. Payment to he made in cash," it was held that this did not amount to a contract or promise to sell to the person who made the highest tender, but was, "a mere proclamation that the defendants are ready to chaffer for the sale of the goods and to recieive offers for the purchase of them."<ref>Spencer v. Harding, L. R. 5 C. P. 561.</ref><br />
<br />
Business circulars sent by mail or distributed by hand and advertisements in newspapers of goods for sale, fall under this head. They are merely invitations to trade; they go no further than what occurs when anyone asks another what he will give or take for certain goods. Such inquiries may lead to agreements, but do not make them.<ref>Zeltner v. Irwin, 25 N. Y. App. Dlv. 228, 49 N. Y. Suppl. 337; Spencer v. Hard ing, L. R. 5 C. P. 561; Walsh v. St. Louis Ex. Co., 90 Mo. 457. 1 6 Mo. (App.) 502; Anson, Contr. 10; Ward v. Johnson, 209 Mass. 89, 95 N. E. 290.</ref><br />
<br />
"A bookseller's catalogue, with prices stated against the names of the books, would seem to contain a number of offers. But if the bookseller receives by the same post five or six letters asking for a particular book at the price named, to whom is he bound? To the man who first posted his letter of acceptance? How is this to be ascertained? The catalogue is clearly an invitation to do business, and not an offer."<ref>Anson , Contr. 40. A circular sent out by a manufacturer of arms setting forth the terms and con ditions on which orders will be filled Is n o t a n offer; Montgomery Ward Co. v . Johnson, 209 Mass. 89.</ref><br />
<br />
So where a person or a corporation advertises for bidders for property to be sold or for work to be done, the advertisement is simply an invitation to make offers and the advertiser is not bound to accept the highest, the lowest or any of the bids.<ref>Spencer v. Harding , L. R. 5 C. P. 661 ; Leskle v. Hazeltine, 165 Pa. St. 98, 25 At!. Rep. 866; Anderson v. Public Schools, 122 MD. 65, 27 S. W. 610. But where an Exposition Company asked certain architects to submit plans for a building, each architect except the suc cessful one to receive $500, but the latter to be employed as architect and superintendent, the one having been declared the most meritorious, was held entitled to recover on a contract to make him architect and superintendent; Walsh v. St. Louis Ex. Co., 90 Mo. 459.</ref><br />
<br />
The mere statement of the lowest price at which a vendor will sell is not an offer to sell at that price to the person making the inquiry. A telegraphed, "Will you sell us B. H. P.? Telegraph lowest cash price." B telegraphed in reply, "Lowest price for B. H. P. 900''l''." and then A telegraphed, "We agree to buy B. H. P. for 900''l''. asked by you. Please send us your title-deed in order that we may get early possession," but received no reply. Here there was no contract, as the final telegram was not the acceptance of an offer to sell, for none had been made, but was itself an offer to buy, the acceptance of which must be expressed.<ref>Harvey v. Facey, A. C. 552 (1893), 211 Mass. 398. 97 N. E. 780.</ref> <br />
<br />
Exposing goods in the window of a store, with a price attached is generally merely an invitation to trade, while the displaying them on a stand in the street where the passerby may pick one up--as for example a fruit stand--would seem to be an offer.<br />
<br />
If the proposal can be construed as a definite offer, then a communicated acceptance makes the contract. If A had written, "We will sell you all the Michigan salt you may order at the price named," the contract would have been complete upon B notifying him of the quantity he desired, as in a California case,<ref>Kellar v. Ybarru, 3 Cal. 147; U. S. v. P. J. Carlin Cons. Co., 224 Fed. 859, 138 C. C. A. 449.</ref> where defendant had a crop of growing grapes and he offered to pick from the vines and deliver to plaintiff, at his vineyard, so many grapes then growing in said vineyard, as plaintiff should wish to take during the present year at ten cents per pound. When plaintiff, while the offer was in force, named the quantity, the contract was held to be complete and both parties bound as to the quantity named.<br />
<br />
An invitation to deal is not an offer, but an indication of a person's willingness to negotiate a contract. It's a pre-offer communication. In the UK case ''[[Harvey v. Facey]]'',<ref>''[[Harvey v. Facey]]'' [1893] A.C. 552</ref> an indication by the owner of property that he or she might be interested in selling at a certain price, for example, has been regarded as an invitation to treat. Similarly in the English case ''[[Gibson v Manchester City Council]]''<ref>''[[Gibson v Manchester City Council]]'' [1979] 1 W.L.R. 294</ref> the words "may be prepared to sell" were held to be a notification of price and therefore not a distinct offer, though in another case concerning the same change of policy (Manchester City Council underwent a change of political control and stopped the sale of council houses to their tenants) ''Storer v. Manchester City Council'',<ref>''Storer v. Manchester City Council'' [1974] 3 All E.R. 824</ref> the court held that an agreement was completed by the tenant's signing and returning the agreement to purchase, as the language of the agreement had been sufficiently explicit and the signature on behalf of the council a mere formality to be completed. Statements of invitation are only intended to solicit offers from people and are not intended to result in any immediate binding obligation. <br />
The courts have tended to take a consistent approach to the identification of invitations to treat, as compared with offer and acceptance, in common transactions. The display of goods for sale, whether in a shop window or on the shelves of a self-service store, is ordinarily treated as an invitation to treat and not an offer.<br />
<br />
The holding of a public [[auction]] will also usually be regarded as an invitation to treat. Auctions are, however, a special case generally. The rule is that the bidder is making an offer to buy and the auctioneer accepts this in whatever manner is customary, usually the fall of the hammer.<ref>''British Car Auctions Ltd v. Wright [1972] 1 W.L.R. 1519''.</ref><ref>the British Sale of Goods Act 1979 s.57(2).</ref> A bidder may withdraw his or her bid at any time before the fall of the hammer, but any bid in any event lapses as an offer on the making of a higher bid, so that if a higher bid is made, then withdrawn before the fall of the hammer, the auctioneer cannot then purport to accept the previous highest bid. If an auction is without reserve then, whilst there is no contract of sale between the owner of the goods and the highest bidder (because the placing of goods in the auction is an invitation to treat), there is a collateral contract between the auctioneer and the highest bidder that the auction will be held without reserve (i.e., that the highest bid, however low, will be accepted).<ref>''Warlow v. Harrison'' (1859) 1 E. & E. 309.</ref> The U.S. Uniform Commercial Code provides that in an auction without reserve the goods may not be withdrawn once they have been put up.<ref>U.C.C., s2-328(3)</ref><br />
<br />
===Intention Must Refer to Legal Relations===<br />
The intention of the parties must refer to legal relations; it must have reference to the assumption of legal rights and duties. One may accept a proposal to dine with another or to take a walk or go to a baseball match with him, and may even incur trouble and expense in keeping the engagement, yet no action will lie for the breach of the mere social engagement.<ref>Pollock, Contr. 2; Anson, Contr. 19; Erwin v. Erwin. 25 Ala. 236; Topping v. Swords, 1 E. D. Smith 609; Tucker v. Sheeran, 155 Ky. 670, 160 S. W. 176.</ref> The reason in all these cases is that the promise was neither intended nor understood to create between the parties rights and duties enforceable by law. "If, at a ball a young lady promises a gentleman to dance with him, say the sixth dance on the program, and afterwards dances it with someone else, no one would suppose that he could sue her for breach of contract. So if A agrees to join B tomorrow at a certain hour to take a bicycle ride together, this is not a promise creating a contract. So if in the playing of a charade a man and a woman go through the form of a betrothal there is no promise creating a contract so as to furnish the foundation for an action of breach of promise of marriage. . . . It is only those promises which as between the parties to them create or alter rights and duties, which the law treats as of binding obligation, that constitute contracts."<ref>Wald (G. H.) Lecture Introductory to the Study of the Law of Contract, Cincinnati, 1896.</ref><br />
<br />
===Intention Must Be Serious===<br />
<br />
An offer cannot be the foundation of an agreement where it is made or accepted, not with the intention to contract, but as a mere jest or joke.<ref>Theiss v. Weiss, 166 Pa. St. 9, 31 At!. 63; Armstrong v. McGhee, Add. (Pa.) 261; Bruce v. Bishop, 43 Vt. 161.</ref> Where one gave a three-hundred dollar check for a fifteen-dollar watch by way of mere frolic and banter, not expecting to buy the watch and the other not expecting to sell it, it was held that there was no contract;<ref>''[[Keller v. Holderman]]'', 11 Mlch. 248, 83 Am. Dec. 737.</ref> and where two young people went through the marriage ceremony before a person authorized to celebrate marriages without really intending to marry, it was held that there was no marriage.<ref>''[[McClung v. Terry]]'', 21 N. J (Eq.) 225.</ref> But one is not permitted to say that he was jesting if his conduct and words would warrant a reasonable person in believing that he was serious.<ref>''[[McKenzie v. Stretch]]'', 53 Ill. (App,) 184; ''[[Plate v. Durst]]'', 42 W. Va.<br />
63, 24 S. E. 580.</ref> Thus in an Australian case:<br />
<br />
"The question is raised whether there was any evidence upon which the judge might reasonably act that the defendant did at that time really, and not by way of banter only, request the plaintiff not to sell his shares or place them on the market. We are of opinion that there was such evidence. The defendant's answer to the plaintiff's claim was that having been asked by a friend of the plaintiff who was anxious and distressed by the falling state of the market to comfort him, he gave him an unreal and false promise without intending to perform it. The defendant admits that the plaintiff did not seem to take his words of comfort as a joke. Now the judge has found upon evidence amply sufficient that this defense is untrue."<ref>''[[Nyulasy v. Brown]]'', 7 Viet. L. R. 663, 1 Willst, Cas. 57.</ref><br />
<br />
===Preliminary Negotiations===<br />
Where parties a re negotiating as to the terms of an agreement to be entered into between them, there is no meeting of minds while such agreement is incomplete. Where they intend that their verbal negotiations shall be reduced to writing and signed by them as the evidence of the terms of their agreement, there is nothing binding on them until the writing is executed.<ref>9 Cyc. 280 ; 13 C. J. 289: ''[[Hammon v. Winchester]]'', 82 Ala. 470, 2 South. Rep. 892; ''[[Edge Moor Bridge Works v. Bristol County]]'', 170 Mass. 528, 49 N. E. Rep. 918; ''[[Sanders v. Pottlizer Bros. Fruit Co.]]'', 144 N. Y. 209, 39 N. E. Rep. 75. 43 Am. St. Rep. 757; ''[[Nolan v. O'Sullivan]]'', 148 Ill. App. 316: ''[[N. E. Lumber Co. v. Gray's Harbor & Ry. Co.]]'', 221 Fed. 8071 137 C. C. A. 365.</ref> On the other hand if the parties intend that their oral agreement shall be put in writing simply as a memorial of it, the contract is binding, although it is never written out.<ref>''[[Jenkins Co. v. Alpena Co.]]'', 147 Fed. 641. 77 C. C. A. 625; ''[[Conner v. Plank]]'', 25 Cal. App. 516, 144 Pac. 295; ''[[U.S. v. Carlin Con. Co.]]'', 224 Fed. 859; ''[[Green v. Cole]]'', 127 Mo. 587, 30 S. W. 135.</ref> An agreement is very often made by correspondence, but care must be taken not to construe as an agreement letters which the parties intended only as a preliminary negotiation. The question in such cases always is, did they mean to contract by their correspondence, or were they only settling the terms of an agreement into which they proposed to enter after all its particulars were adjusted, which was then to be formally drawn up and by which alone they designed to be bound.<ref>''[[Lyman v. Robinson]]'', 14 Allen 242; ''[[Strobridge Lithographing Co. v. Randall]]'', 73 Fed. Rep. 619, 622; ''[[Lynn v. Richardson]]'', 151 Ia. 284, 130 N. W. 1097.</ref><br />
<br />
The principle is well expressed in a .Maine case.<ref>''[[Miss. etc. Steam Co. v. Swift]]'', 86 Me. 248.</ref><br />
<br />
"From these expressions of courts and jurists it is quite clear that after all the question is one of intention. If the party sought to be charged intended to close a contract prior to the formal signing of a written draft or if he signifies such an intention to to other party he will be bound by the contract actually made, though the signing of the written draft be omitted. If on the other hand such party neither had nor signified such an intention to close the contract until it was fully expresed in a written instrument and attested by signatures then he will not be bound until the signatures are affixed. The expression of the idea may be attempted in other words: if the written draft is viewed by the parties merely as a convenient memorial or record of their previous contract its absence does not affect the binding force of the contract; if however it is viewed as the consummation of the negotiation there Is no contract until the written draft is finally signed." <br />
<br />
===Certainty Required===<br />
<br />
The promise must be certain in its terms, and not so indefinite and illusory as to make it impossible to say just what was promised.<ref>Cyc. 248, 249; 13 C. J. 266; ''[[Bauman v. Binzen]]'', 16 N. Y. S. 342; ''[[Woods v. Evans]]'', 113 Ill. 186, 55 Am. Rep. 419: ''[[Erwin v. Erwin]]'', 25 Ala. 236; Wall's App., 111 Pa.. St. 460, 56 Am. Rep. 258; ''[[U.S. v. McMullen]]'', 222 U. S. 460; ''[[Wineburgh v. Gay]]'', 27 Cal. App. 603; 105 Pac. 1003; ''[[De Bearn v. De Bearn]]'', 126 Md. 629; 95 A. 476; ''[[Rhyne v. Rhyne]]'', 151 N. C. 400: 66 S. E. 348; ''[[Natl. E. Signaling Co. v. Fessender]]'', 207 Fed. 915. 125 C. C. A. 363.</ref> Therefore, where A bought a horse from B, promising that "if the horse was lucky to him, he would give $25 more for the buying of another horse," it was held that this was too loose and vague to be considered in a court of law.<ref>''[[Guthlng v. Linn]]'', 2 B. & Ad. 232; Burks v. Stam, 65 Mo. (App.) 455 .</ref><br />
<br />
"In another case A promised B to give up his business 'so far as the law allows'; it was held that parties must fix the limits of their agreement and not leave it to be fixed by the courts;<ref>''[[Davies v. Davies]]'', 36 Ch. Dic. 359.</ref> in another B promised C that if satisfied with him as a customer, he 'would favorably consider' an application to renew the contract; this was ruled to create no legal obligation;<ref>''[[Montreal Gas Co. v. Vasey]]'', A. C. 595 (1900).</ref> in another where the parties attempting to make an agreement by a telegraphic code had, by using too few words, made it so ambiguous as to be unintelligible even to them,<ref>''[[Falck v. Williams]]'', A. C. 176 (1900); ''[[Gale v. Kennard]]'', 182 Mo. App. 498, 165 S. W. 842.</ref> the Court said that it was for the plaintiff, in an action for breach of contract, to show that his construction was the true one, and to prove that his proposal was so clear and unambiguous that the defendant could not be heard to say that he misunderstood it."<br />
<br />
So where A promised B that if she, a single woman, would live with him until her marriage, he would give her one hundred acres of land, without any reference to locality or value, it was held void for uncertainty.<ref>''[[Sherman v. Kitsmiller]]'', 17 Serg. & R. 45; ''[[Cheney, etc. Wks. v. Sorrell]]'', 142 Mass. 442, 8 N. E. 332.</ref> Where an employer engages a servant, promising to give him such remuneration as he, the employer, shall think right, there is no legal liability to pay anything.<ref>''[[Taylor v. Brewer]]'', 1 Maule & S. 290; ''[[Roberts v. Smith]]'', 4 Hurl. & N. 315, 28 L. J.; Ex. 164; ''[[Parker v. Ibbetson]]'', 4 Com. B. (N. S.) 346, 27 L. J. Com. P. 236.</ref> A promise by a school trustee to a teacher to pay "good wages" was held too indefinite to found an action upon,<ref>''[[Fairplay School Tp. v. O'Neil]]'', 127 Ind. 95, 26 N. E. Rep. 686; ''[[Smith v. Crum & Co.]]'', 208 Pa. 462, 57 A. 953.</ref> as was one to give a child a "good share" of property<ref>''[[Adams v. Adams]]'', 26 Ala. 272.</ref> and a stipulation in a contract that it might be canceled by either party for "good cause"<ref>''[[Cummer v. Butts]]'', 40 Mich. 322, 29 Am. Rep. 530. A written agreement may be void for uncertainty because of blanks left therein, or failure to name the parties, or because it is so misspelled or ungrammatical, etc., that it has no meaning at all. ''[[Chumasero v. Gilbert]]'', 24 Ill. 293; ''[[Atkins v. Van Buren School Tp.]]'', 77 Ind. 447; ''[[Shepard v. Carpenter]]'', 54 Minn. 153, 55 N. W. 906.</ref> and one giving the "use" of land for a certain purpose.<ref>''[[Carr v. Aco]]'', 141 Ga. 219, 80 S. E. 716.</ref><br />
<br />
Persons must make their own agreements and not leave it to the courts to make them for them from the language they have used.<br />
<br />
If an agreement is uncertain, it is because the offer was so, because the acceptance must be identical with the offer or there is no meeting of minds. If the offeree sees the uncertainty and proposes a change that will make the agreement certain, this is a new offer which puts an end to the other.<ref>''[[Meixel v. Meixel]]'', 161 App. Div. 518, 146 N. Y. S. 687.</ref><br />
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An agreement, however, will not be considered uncertain if the court can see what the parties intended. Absolute certainty is not required, for that is certain which may be rendered certain, according to the maxim ''id certum est quod certum reddi potest''.<ref>''[[Enshwiller v. Tyner]]'', 54 Ohio St. 214, 44 N. E. 84; ''[[Caldwell v. School Dist.]]'', 55 Fed. Rep. 372; ''[[Leffler Co. v. Dickerson]]'', 1 Ga. App. 63, 57 S. E. 911; ''[[Lewis v. Creech]]'', 162 Ky. 763, 173 S. N. 133; ''[[Voorhees v. Louisiana Purchase Co.]]'', 243 Mo. 418, 149 S. W. 783; ''[[Ramey Lbr. Co. v. Schrader Lbr. Co.]]'', 237 Fed. 39, 150 C. C. A. 241.</ref> Thus a contract is not uncertain because it is silent as to the damages for its breach.<ref>''[[Dugger v. Kelly]]'', 168 Ia. 129; 150 N. W. 127</ref> An ambiguous contract is not necessarily uncertain.<ref>''[[Wisconsin Farm Co. v. Watson]]'', 160 Wis. 638, 152 N. W. 449; ''[[Ramey Lbr. Co. v. Schroeder Lbr. Co.]]'', 237 Fed. 39, 150 C. C. A. 241.</ref><br />
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===Intention Must Be Communicated===<br />
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The intention of the parties must be communicated, for one's intention can be ascertained by another only by means of outward expressions, as words and acts.<ref>9 Cyc. 246; 13 C. J. 265; ''[[Troustine v. Sellers]]'', 35 Kan. 447, 11 Pac. Rep. 441; ''[[Prescott v. Jones]]'', 69 N. H. 305, 41 Atl. Rep. 352; ''[[James v. Marion Fruit Jar Co.]]'', 69 Mo. (App.), 207.</ref> "It is a trite law," said an old judge, "that the thought of man is not triable, for even the devil does not know what the thought of man is."<ref>Brian, C. J., quoted in ''[[Brogden v. R. Co.]]'', 2 App. Cas. 692; ''[[Farnum v. Whitman]]'', 187 Mass. 381, 73 N. E. 473.</ref><br />
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Telling an intention to a third person is of no more effect than noting it in one's memorandum book, which is no more than though it existed solely in one's mind.<ref>Bramwell, B., in ''[[Browne v . Hare]]'', 3 H. & N. 484, 27 L. J. Exch. 372.</ref> The communication is absolutely essential and is not sufficient that two minds coincide at the same moment.<ref>[[Contracts/Offer#Communication of Offer|Communication of Offer]]</ref><br />
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But if the intention is communicated the mode is immaterial. It may be by mail, by telegraph, by special messenger or the like, as well as by words written or spoken or the acts or conduct of the one who makes it.<ref>''[[Howard v. Daly]]'', 61 N. Y. 362; ''[[Trevor v. Wood]]'', 36 N. Y. 307; ''[[Perry v. Iron Co.]]'', 15 R. I. 12, 2 Am. St. Rep. 903; ''[[Stoble v. Earp]]'', 110 Mo. App. 73, 83 S. W. 1097.</ref><br />
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Thus where two letters, each containing an offer identical in terms, cross each other, there can be no contract.<ref>''[[Broadnax v. Ledbetter]]'', 100 Tex. 375, 99 S. W. 1111; ''[[Kleinhaus v. Jones]]'', 68 Fed. 742. Thus where two letters. each containing an offer identical in terms, cross each other, there can be no contract. ''[[James v. Marion Fruit Jar Co.]]'', 69 Mo. App. 207; ''see [[Tim v. Hoffman & Co.]]'', (1873), 29 L. T. R. ( N. S.) 271; Contra. ''[[Asinoff v. Freudenthal]]'', 186 N. Y. S. 383. See an interesting case of lack of communication where the parties were in the presence of each other, but one did not hear what the other said at [[Contracts/Acceptance#Acceptance by Silence|Acceptance by Silence]] .</ref><br />
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===Representation on Which Another Acts--Estoppel===<br />
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A representation concerning a matter of fact may be made to another, without any expressed or intended warranty of the truth, yet with the intention of inducing him to act upon it; and if the latter acts upon it, and suffers loss by reason of it not being true, the party making the representation may be held responsible in law for the consequences; or he may be estopped from denying the truth of the representation.<br />
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"Where a person makes to another the representation, 'I take upon myself to say such and such things do exist,' and the other man does really act upon that basis, it seems to me that it is of the very essence of justice that between these two parties their rights should be regulated, not by the real state of facts, but by that conventional state of facts which the two parties agree to make the basis of their action."<ref>Lord Blackburn, in ''[[Burkinshaw v. Nicolls]]'', 36 L. T. Rep., N. S. 312; 3 App. Cas. 1026.</ref><br />
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Estoppel in contract law may be described as a rule of evidence which will not permit a person to deny an inference that a reasonable man would necessarily draw from his words and conduct.<br />
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===Agreement Results from Offer and Acceptance===<br />
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Every agreement necessarily results from an offer on one side and an acceptance on the other.<ref>''[[White v. Corlies]]'', 46 N. Y. 467; ''[[Connor v. Renneker]]'', 25 C. S. 514.</ref> Sometimes they are by words, sometimes by acts, sometimes by both words and acts.<ref>''[[Crook v. Cowan]]'', 64 N. C. 763; ''[[Fogg v. Portsmouth Atheneum]]'', 44 N. H. 115, 82 Am. Dec. 191; ''[[Banning Co. v. California]]'', 240 U. S. 142, 36 Sc. T. 388.</ref><br />
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'''To illustrate''':<br />
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(a) At a sale by auction each bid is an offer of a price for the article put up for sale, which bids are successively. made until one is accepted by the fall of the hammer, when the agreement is complete.<ref>''[[Payne v. Cave]]'', 3 Term. Rep. 148; Ives v. Tregent, 29 Mich 390. An auctioneer who advertises a sale of certain goods does not by that advertisement alone enter Into any contract or warranty with t hose who attend the sale that the goods shall be actually sold. Harri s v. Nickerson, 8 Q. B. 286. But where a sale Is advertised as without reserve, and a lot Is put u p and bid for, there Is a binding contract between the auctioneer and the highest bidder that the goods shall be knocked down to him. Warlow v. Harrison, E. & E . 295 ; Davis v. Petway, 3 Head. 664. An auctioneer may refuse a bid tendered in bad faith or proffered b y a person who is insolvent or otherwise disabled from completing the purchase; or refuse to accept trifling advances offered by bidders, especially where that kind of bidding is initiated at the outset and the sum so offered Is utterly incommensurate with the actual known value of the property. It Is reasonable to In fer that bidding of that kind would have a depressing effect on the sale and tend to induce a belief on the part of others In attendance that the value of the property had been approximately reached. It Is within the legitimate bounds of the discretion of the auctioneer to refuse to accept a bid which is little more than a nominal advance, and. considering the surrounding circumstances, is, in hi s judgment, l ikely to affect the sale lnjuriously. Taylor v. Harnett, 26 N. Y. (Misc.) 36 .</ref><br />
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(b) The time-tables published by a railroad company are an offer made to all persons who apply for carriage that the trains will run as advertised.<ref>9 Cyc. 279 ; Denton v. Great North. R. Co., 6 E. & B. 860 ; Sears v. R. Co., 14. Allen 433, 92 Am. Dec. 780.</ref><br />
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(c) The publication of an advertisement of a reward for information, respecting a loss or a crime, or an oral announcement to the same effect, is an offer to any person who is able to give the information asked, and on its acceptance by giving the information the agreement is complete.<ref>Williams v. Cawardine, 4 B. and Ad. 621 ; Reif v. Page, 56 Wis. 476, 42 Am. Rep. 7 3 1 ; Ryer v. Stockwell, 1 4 Cal . 134, 73 Am. Dec. 634 ; Janvrin v. Exeter, 4 8 N. H. 83, 2 Am. Rep. 186 ; Hayden v. Souger, 56 I n d . 4 2 , 26 Am' Rep. 1. The terms of the offer must all be compiled with or there can be no recovery. Wllliams v. West Chicago R. Co., 191 Ill. 610.</ref><br />
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(d) The sending of an order to a merchant or manufacturer is an offer to purchase and the sending of the goods is an acceptance of the offer and creates a contract of sale.<ref>''[[Harvey v. Johnson]]'', 6 C. B. 295 ; Briggs v. Sizer, 30 N. Y. 652; Dent v. Steamship Co., 49 N. Y. 370 ; Crook v. Cowan, 64 N. C. 743.</ref> <br />
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(e) An agreement by B to sell A his farm for $5,000, must be the result of an offer by B to sell it for that price and an acceptance by A or an offer by A to give that sum for it and an acceptance by B. <br />
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(f) The purchase of a book or a basket of fruit or other article displayed for sale i'! the result of the displaying his wares by the seller, who impliedly says, "Will you buy my goods at my price T" and the customer, taking up the article with his cognizance, says, "I will." <br />
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(g) The presence of a running street car is a constant offer by the company to perform a service upon its usual terms, and one who enters the car accepts the offer and agrees to pay the usual fare for the service.<br />
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(h) A person who takes a seat at the dining table of a hotel offers to take a meal for the usual price charged to guests, and the proprietor accepts the proposal by furnishing the meal. <br />
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(i) A man with the full knowledge of another does work for him, the latter knowing that he expects to be paid for it; the doing the work is a proposal and the receiving the service without dissent is the acceptance.<ref>''[[DeWolf v . Chicago]]'', 26 Ill 443; ''[[Huck v . Flentye]]'', 80 Ill. 262; ''[[Day v. Caton]]'', 119 Mass. 513; ''[[Painter v. Ritchey]]'', 43 Mo. (App.) 111.</ref><br />
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(j) A offers B to pay him a certain sum of money on a future day if B will promise to perform certain services for him before that day. When B makes the promise asked for he accepts the promise offered, and both parties are bound, the one to do the work, the other to allow him to do it and to make the payment. <br />
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(k) A sends goods to B's house and B accepts or uses the goods; B is liable on an implied contract to pay what the goods are worth. The offer is made by sending the goods, the acceptance by their use or consumption, which is in fact a promise to pay their price. <br />
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(l) A requests B to work for him for hire. On B going to work as requested, the offer is accepted unless A had prescribed in his offer some particular form of acceptance. Or A writes to B offering to reimburse him if he will pay the taxes on certain land. B pays the taxes. This is a sufficient acceptance of the offer.<ref>''[[Allen v. Chouteau]]'', 102 Mo. 302; ''[[Agricultural Soc. v. Bromfield]]'', 102 Ind. 146.</ref><br />
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(m) Whether the manager of a theater who advertises that at a certain time a particular piece will be performed, stating the price of admission, contracts with one who comes to the theater door that he will be admitted on payment of the price, and that the piece advertised will be performed, is a question on which there is no judicial authority.<ref>''See [[Pearce v. Spaulding]]'', 12 Mo. App. 114.</ref><br />
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From these examples it will be seen that a ''proposal'' may assume two forms, the ''offer of a promise'' and the ''offer of an act'', and that ''acceptance'' may assume two forms also, ''the giving of a promise'' or the ''doing of an act''. And that therefore an agreement may arise in three ways, being:<br />
#In the offer of an act for a promise, as in illustrations (f), (g), (i), (k).<br />
#In the offer of a promise for an act, as in illustrations (c), (d), (h), (l).<br />
#In the offer of a promise for a promise, as in illustrations (a), (b), (e), (j).<br />
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The unusual case of an offer of an act for an act, may be seen in the continuing offer made by the proprietor of an automatic machine distributing candy, chewing gum, postage stamps, and other articles, to persons who put in a coin to obtain something contained in the machine.<br />
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===Time of contract formation===<br />
A contract will be formed (assuming the other requirements for a legally binding contract are met) when the parties give objective manifestation of an intent to form the contract.<br />
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Because offer and acceptance are necessarily intertwined, in [[California]] (US), offer and acceptance are analyzed together as subelements of a single element, known either as consent of the parties or mutual assent.<ref>''[[Lopez v. Charles Schwab & Co., Inc.]]'', 118 Cal. App. 4th 1224] (2004).</ref><br />
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==References==<br />
{{Reflist|30em}}</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=Contracts/Acceptance&diff=41936Contracts/Acceptance2022-03-16T05:38:44Z<p>Rezsue: </p>
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<div>{{:Contracts/TOC}}<br />
'''Acceptance''' is a promise or act on the part of an offeree indicating a willingness to be bound by the terms and conditions contained in an '''[[Contracts/Offer|offer]]'''. Also, the acknowledgment of the drawee that binds the drawee to the terms of a draft.<br />
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==Test of acceptance==<br />
For the acceptance, the essential requirement is that the parties had each from a subjective perspective engaged in conduct manifesting their assent. Under this meeting of the minds theory of contract, a party could resist a claim of breach by proving that he had not be intended to be bound by the agreement, only if it appeared subjectively that he had so intended. This is unsatisfactory, as one party has no way to know another's undisclosed intentions. One party can only act upon what the other party reveals objectively (''[[Lucy v Zehmer]]'', 196 Va 493 84 S.E. 2d 516) to be his intent. Hence, an actual meeting of the minds is not required. Indeed, it has been argued that the "meeting of the minds" idea is entirely a modern error: 19th century judges spoke of "consensus ad idem" which modern teachers have wrongly translated as "meeting of minds" but actually means "agreement to the [same] thing".<ref>R. Austen-Baker, "Gilmore and the Strange Case of the Failure of Contract to Die After All" (2000) 18 ''Journal of Contract Law'' 1.</ref><br />
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The requirement of an objective perspective is important in cases where a party claims that an offer was not accepted and seeks to take advantage of the performance of the other party. Here, we can apply the test of whether a reasonable bystander (a "fly on the wall") would have perceived that the party has impliedly accepted the offer by conduct.<br />
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== General rules of acceptance ==<br />
It must be an absolute and unqualified acceptance of all the terms of the offer: Sec.7(1). If there is any variation, even on an unimportant point, between the terms of the acceptance, there is no contract.<br />
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===Communication===<br />
There are several rules dealing with the communication of acceptance:<br />
* The acceptance must be communicated.<ref>[[Powell v Lee]] (1908) 99 L.T. 284</ref><ref>[[Robophone Facilities Ltd v. Blank]] [1966] 3 All E.R. 128.</ref> Theisger LJ said in ''[[Household Fire and Carriage]]'' that "an acceptance which remains in the breast of the acceptor without being actually and by legal implication communicated to the offeror, is no binding acceptance".<ref>[[Household Fire and Carriage]], (1879) 4 Exch Div 216</ref> Prior to acceptance, an offer may be withdrawn.<br />
* As acceptance must be communicated, the offeror cannot include an Acceptance by Silence clause. This was affirmed in ''[[Felthouse v Bindley]]'',<ref name="Felthouse v Bindley">[1862] 142 ER 1037.</ref> here an uncle made an offer to buy his nephew's horse, saying that if he didn't hear anything else he would "consider the horse mine". This did not stand up in court, and it was decided there could not be acceptance by silence.<br />
* An exception exists in the case of unilateral contracts, in which the offeror makes an offer to the world which can be accepted by some act. A classic instance of this is the case of ''[[Carlill v Carbolic Smoke Ball Co.]].'' [1893] 2 Q.B. 484 in which an offer was made to pay £100 to anyone who having bought the offeror's product and used it in accordance with the instructions nonetheless contracted influenza. The plaintiff who was Mrs Carlill bought the smoke ball and used it according to the instructions but she contracted influenza. She sued the Carbolic Smoke Ball Co. for £100. The court held that the inconvenience she went through by performing the act amounted to acceptance and therefore ordered £100 to be given to Mrs. Carlill. Her actions accepted the offer - there was no need to communicate acceptance. Typical cases of unilateral offers are advertisements of rewards (e.g., for the return of a lost dog).<br />
* An offer can only be accepted by the offeree, that is, the person to whom the offer is made. <br />
* An offeree is not usually bound if another person accepts the offer on their behalf without his authorisation, the exceptions to which are found in the law of agency, where an agent may have apparent or ostensible authority, or the usual authority of an agent in the particular market, even if the principal did not realise what the extent of this authority was, and someone on whose behalf an offer has been purportedly accepted may also ratify the contract within a reasonable time, binding both parties: see [[agent (law)]].<br />
* It may be implied from the construction of the contract that the offeror has dispensed with the requirement of communication of acceptance (called waiver of communication - which is generally implied in unilateral contracts).<ref>[[Re Selectmove Ltd]] [1994] BCC 349.</ref> <br />
* If the offer specifies a method of acceptance (such as by post or fax), acceptance must be by a method that is no less effective from the offeror's point of view than the method specified. The exact method prescribed may have to be used in some cases but probably only where the offeror has used very explicit words such as "by registered post, and by that method only".<ref>[[Yates Building Co. Ltd v. R.J. Pulleyn & Sons (York) Ltd]], (1975) 119 Sol. Jo. 370.</ref><br />
* However, acceptance may be inferred from conduct.<ref>[[Brogden v. Metropolitan Railway Company]] (1877) 2 App. Cas. 666</ref><ref>[[Rust v. Abbey Life Assurance Co. Ltd]]</ref><br />
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===Counter-offers and correspondence===<br />
The "mirror image rule" states that if you are to accept an offer, you must accept an offer ''exactly'', without modifications; if you change the offer in any way, this is a counter-offer that kills the original offer and the original offer cannot be accepted at a future time.<ref>[[Hyde v. Wrench]] (1840) 3 Beav 334.</ref><br />
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However, a mere request for information about the terms of the offer is not a counter-offer and leaves the offer intact.<ref>[[Stevenson v. McLean]] (1880) 5 QBD 346.</ref> It may be possible to draft an enquiry such that it adds to the terms of the contract while keeping the original offer alive.<br />
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Under the [[Uniform Commercial Code]] (UCC) Sec. 2-207(1), a definite expression of acceptance or a written confirmation of an informal agreement may constitute a valid acceptance even if it states terms additional to or different from the offer or informal agreement. The additional or different terms are treated as proposals for addition into the contract under UCC Sec. 2-207(2). Between merchants, such terms become part of the contract unless:<br />
* a) the offer expressly limits acceptance to the terms of the offer,<br />
* b) material alteration of the contract results,<br />
* c) notification of objection to the additional/different terms are given in a reasonable time after notice of them is received.<br />
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Material is defined as anything that may cause undue hardship/surprise, or is a significant element of the contract.<br />
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If there is no contract under 2-207(1), then under UCC Sec. 2-207(3), conduct by the parties that recognize there is a contract may be sufficient to establish a contract. The terms for this contract include only those that the parties agree on and the rest via gap fillers.<br />
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==Acceptance by Assent==<br />
The simplest form of offer and acceptance, viz., the offer of a promise and its acceptance by simple assent, is not applicable to the law of contracts except in the single case of contracts under seal. The reason is that in our law no promise, which is not under seal, is binding unless the promisor obtains some benefit in return for his promise, and this benefit is called "consideration." Therefore, if a man says to another, "I will give you $100." or "I will do such and such a thing for you." the other by simply assenting to the proposal without doing something in return for the promise can not create a binding contract. But if A promises B under seal that he will do a certain act or pay a certain sum, when B has assented to the proposal both are bound, and there is a contract. Until B has assented there is an offer, which is irrevocable so far as A is concerned,<ref>[[O'Brien v. Boland]], 166 Mass. 48l, 44 N. E. Rep. 602; [[McMillan v. Ames]], 33 Minn. 257; [[Williams v. Forbes]], 114 Ill. 167, 28 N. E. 463.</ref> owing to the particular form in which it was made, though it cannot bind B until he has assented to it. For a man cannot be forced to accept a benefit, though acceptance is sometimes presumed when the thing is clearly for his benefit.<br />
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==Acceptance by Promise==<br />
An offer may be accepted by giving a promise, as where a person offers to pay another a certain sum if he will do something for him on a future day, and the other accepts by promising to do so according to the conditions of the offer. The promise may be either express or implied. It is express where it is proved by what the offeree said; and implied where it is proved that he so acted as to raise an inference that he had made the promise alleged. If a person sends goods to another, and the latter uses the goods, or deals with them as his, he will be liable on an implied promise to pay what the goods are worth, unless he had a right to suppose, and did suppose, that a gift was intended. The acceptance by their use raises an implied promise to pay for them.<ref>See [[Contracts/Implication-in-fact|Implied Contracts]]</ref><br />
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==Acceptance by Act==<br />
Where the offer is made conditional on the offeree doing something, the doing of the thing required completes the agreement.<ref>[[Dick v. Fuller]], 213 Fed. 98.</ref><br />
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"If A promises B to pay him a sum of money if he will do a particular act, and B does it, the promise thereupon becomes binding, although B at the time of the promise does not engage to do the act. In the intermediate time the obligation is inert or the promise suspended, and until the performance of the condition there is no consideration and the promise is ''nudum pactum''; but on the performance of the condition by the promisee it is clothed with a valid consideration which relates back to the promise, and it then became obligatory. So if a reward be offered for the apprehension of a culprit or for the doing of any other lawful act, the promise when made is ''nudum pactum'', but when any one relying upon the promised reward performs the condition this is a good consideration for the previous promise and it thereupon becomes binding on the promisor."<ref>[[Tram v. Gould]], 5 Pick. 30.</ref><br />
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Pothier mentions many cases in the Civil law where A promises to do something, if B will do something else. There is nothing binding on B, but when he does the act it becomes binding on A.<ref>See [[Fishmongers Co. v . Robertson]], 5 M. & G. 171.</ref> So<br />
{{Quote|when a person says, "In case you choose to employ this man for a week, I will be responsible for all sums, as he shall receive, during that time and neglect to pay over to you," the party indemnified is not therefore bound to employ him, but if he do employ him, then the guaranty attaches and becomes binding on the party who gave it.<ref>[[Kennaway v . Treleavan]], 5 M. & W. 498.</ref>}}<br />
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So if<br />
{{Quote|I say, "if you will furnish goods to a third person, I will guarantee the payment," there you are not bound to furnish them, yet if you do furnish them, in pursuance of the contract, you may sue me on my guaranty.<ref>[[Morton v. Burn]], 7 Ad. & Ell. 23.</ref><br />
<br /><br />So if a reward be offered for the apprehension of a culprit or for the doing of any other lawful act, the promise when made is ''nudum pactum''; but when any one relying upon the promised reward performs the condition, this is a good consideration for the previous promise, and it thereupon becomes binding on the promisor.}}<br />
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The everyday case of a written order for goods is in point. A man mails an order for certain goods to be sent to him; he receives no reply; the first intimation that the vendor intends to accept the order is the arrival of the goods. If the order is a positive direction to send the goods, it will be enough that the vendor has done so without his having previously notified the vendee of his intention to send them, and to accept the offer. Thus, in ''[[Cooper v. Altimus]]'',<ref>62 Pa. St. 486.</ref> C wrote to A inquiring if he had staves to sell, and A answered : "If you would let me know how much you would give I could get four thousand at $50 per thousand." C replied: "If they are rift staves and good, I will give $35 per thousand delivered at the station." A sent the staves without answering, but they were rejected by C on the ground that his last letter was an offer which should have been accepted in order to complete the contract. The court held that the letter was an order which did not call for a reply, and became obligatory on him when the staves were tendered in accordance with its terms.<br />
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Another apt illustration of the principle is where a university, in its advertisement for 1892-93, announced that applicants for admission to the law department were required to pay $50 for the first year and $40 for each successive year. Plaintiff in 1892 paid $50 and was admitted to the junior class. The catalogue for 1893-94 stated that law students in all classes were required to pay $50 a year. In 1893 plaintiff tendered $40 as the fee for admission to the senior class, which was refused, and he paid the $50 under protest. It was held that he was entitled to recover the $10. The student by entering the junior class and paying the $50 accepted defendant's offer, and no other notice was essential. It was the offer of a promise for an act. No one was obliged to accept defendant's offer; but anyone was entitled by its very terms to do so, and plaintiff having done so the contract was complete and binding on defendant. Plaintiff was not under any obligation to take the second year's course, but defendant had not required any promise from him of this kind. Defendant's offer might have said that any person entering the junior class and ''agreeing'' to take the whole course would be entitled to the stated terms, and in such a case this would have been an offer of a promise for a promise, and if no promise had been made before the withdrawal of the offer there would be no contract. But defendant chose to make its promise in consideration of plaintiff's doing something, i.e., entering the junior class and paying $50.<ref>[[Niedermeyer v. Curators]], 61 Mo. App. 654.</ref><br />
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==Acceptance by Silence==<br />
Where conduct is relied upon as constituting acceptance it must be something more than mere silence, it must be silence under such circumstances as to amount to acquiescence. Consent can never be presumed from silence when the offer is not communicated to the party to whom it was intended to be made.<ref>See [[Contracts/Offer#Communication of Offer|Communication of Offer]]</ref> Nor can a person make another a purchaser in spite of himself by sending goods to him, and demanding the price if the latter does not go to the trouble and expense of returning them and telling him he does not want them.<ref>[[Hobbs v. Massasoit Whip Co.]], 158 Mass. 194, 33 N. E. 495; [[Royal Ins. Co. v. Beatty]], 119 Pa. St. 6, 12 Atl. 607, 4 Am. St. 622; [[Orcutt v. Roxbury]], 17 Vt. 524; [[Day v. Eaton]], 119 Mass. 513, 20 Am. R. 347.</ref> So an offer either by word of mouth or in writing cannot be turned into an agreement simply because the person to whom it is made makes no reply,<ref>[[Slaymaker v. Irwin]], 4 Whart. 369; [[Raysor v . Berkeley County R. Co.]], 26 S. C . 610, 2 S. E. 119; [[Titcomb v. U.S.]], 14 Ct. Cl. 263; [[Cincinnati Equipment Co. v. Big Muddy Co.]], 158 Ky. 247; 164 S. W. 794.</ref> and this even though the offer states that silence will be taken as consent, for the offerer cannot prescribe conditions of rejection so as to turn silence on the part of the offeree into acceptance.<ref>[[Prescott v. Jones]], 69 N. H. 305, 41 Atl. 352.</ref> In ''[[Felthouse v. Bindley]]'',<ref>11 C. B. (N. S.) 698.</ref> an uncle offered by letter to buy his nephew's horse for £30 15s., adding, "if I hear no more about him I consider the horse is mine at £30 15s." No answer was returned to the letter, and it was held that there was no contract.<br />
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Circumstances may exist which will impose a contractual obligation by mere silence,<ref>[[Royal Ins. Co. v. Beatty]], supra.</ref> but such circumstances are exceptional and rare; and no legal liability can arise from the silence of the party sought to be affected, unless he was subject to a duty of speech which was neglected to the injury of the other party.<br />
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In ''[[Royal Ins. Co. v. Beatty]]'',<ref>119 Pa. St. 6.</ref> B had two policies of insurance which expired January 6. The day before, his agent went into the office of the company and said to the clerk: "Will you renew the B policies?" The clerk made no reply, but the agent supposed he went to his books to do so. The clerk in an action for the loss of the property by fire on January 10 testified that he did not hear the request and therefore did nothing. It was held that there was no agreement to renew.<br />
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{{Quote|How is it possible to make a contract out of this? It is not as if one declares or states a fact in the presence of another and the other is silent. If the declaration imposed a duty of speech on peril of an inference from silence, the fact of silence might justify the inference of an admission of the truth of the declared fact. It would then be only a question of hearing which would be chiefly if not entirely for the jury. But here the utteranee was a question and not an assertion and there was no answer to the question. Instead of silence being evidence of an agreement to do the thing requested, it is evidence either that the question was not heard or that it was not intended to comply with the request. Especially is this the case when if a compliance was intended the request would have been followed by an actual doing of the thing requested. But this was not done; how then can it be said it was agreed to be done? The whole of the plaintiff's case is an unanswered request to the defendant to make a contract with the plaintiff and no further attempt by the plaintiff to obtain an answer and no actual contract made. Out of such facts it is not possible to make a legal inference of a contract. Nor do I concede that if the defendant heard plaintiff's request and made no answer an inference of assent should be made. For the hearing of a request and not answering it is as consistent, indeed, more consistent, with a dissent than an assent. If one is asked for alms on the street and hears the request but makes no answer, it certainly cannot be inferred that he intends to give them. In the present case there is no evidence that defendant heard the plaintiff's request, and without hearing there was of course no duty of speech.}}<br />
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There are cases holding that where a wholesale merchant sends out agents to solicit orders, if he declines to accept the orders, he must notify the persons who have given them to his agents within a reasonable time, or he will be bound.<ref>[[Peterson v. Graham Shoe Co.]], 210 S. W. 737; [[Blue Grass Cordage Co. v. Luthy]], 98 Ky. 583, 33 S. W. 835; [[Cole Co. v. Holloway]], 141 Tenn. 679, 214 S. W. 817. But contra, [[Gould v. Cates Chair Co.]], 147 Ala. 629, 41 South 675; [[Metzler v. Harry Kaufman Co.]], 3 2 App. D. C. 434; [[Senner Co. v. Gera Mills]], 173 N. Y. Supp, 265.</ref> In another case, a shoe manufacturer had sent to a dealer a lot of shoes, but there was a disagreement as to the terms, whereupon the former wrote: "If our terms are not satisfactory, please return the goods." The dealer not doing so within a reasonable time, it was held an acceptance of the offer."<ref>[[Wheeler v. Kiaholt]], 178 Mass. 197.</ref><br />
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==Acceptance by Signing Paper==<br />
Where a person signs a document he is not permitted to show that he did not know its terms and, in the absence of fraud, will be bound by all its provisions.<ref>[[Gaither v. Dougherty]], 18 Ky. 709, 38 S. W. 2; [[Barber v. Brooks]], 18 La. 463; [[Phelps v. Clasen]], Woolw. 204; [[Robertson v. Ins. Co.]], 123 Mo. App. 238, 100 S. W. 686.</ref> When an action is brought on a written agreement which is signed by defendant, the agreement is proved by proving his signature, and, in the absence of fraud, it is wholly immaterial that he has not read the agreement and does not know its contents.<ref>[[Parker v . R. Co.]], 2 C. P. D. 416.</ref> Again the parties may reduce their agreement to writing so that the writing constitutes the sole evidence of the agreement without signing it; and here of course there must be evidence outside the agreement itself to prove that the parties have assented to it; but if this assent be proved, then it is immaterial that one of the parties had not read the agreement and did not know its contents.<br />
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==Acceptance by Accepting Paper==<br />
A written offer may be accepted by word of mouth or by acts,<ref>[[Springer v. Cooper]], 11 Ill. App. 267; [[Graves v. Smedes]], 7 Dana (Ky.), 344; [[Woodlock v. Meyerstein]], 5 Mo. App. 591; [[Hoyt v. Schillo Motor Co.]], 186 Ill. App. 628.</ref> and a contract signed by one only of the parties is binding on both if it is assented to by the other.<ref>[[Sellers v. Greer]], 172 Ill. 549, 50 N. E. 246; [[Manufacturers Co. v. Eberncar Co.]], 152 Mo. 73, 138 N. W. 624.</ref><br />
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{{Quote|A great number of contracts are in the present state of society made by the delivery by one of the contracting parties to the other of a document in a common form stating the terms on which the person delivering it will enter into the proposed contract. Such a form constitutes the offer of the party who tenders it. If the form is accepted without objection by the person to whom it is tendered, this person is as a general rule bound by its contents and his act amounts to an acceptance of the offer made to him, whether he reads the document or otherwise informs himself of its contents or not.<ref>[[Sellers v. Greer]], 172 Ill. 549, 50 N. E. 246; Manufacturers Co. v. Eberncar Co., 152 Mo. 7 3, 138 N. W. 624.</ref>}}<br />
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This has been frequently held in the case of bills of lading and receipts issued by express companies and telegraph blanks, because persons are presumed to understand that such well-known documents contain the terms of the offer,<ref>"It is quite possible that a person who is neither a man of business nor a lawyer might on some particular occasion ship goods without the least knowledge or what a b111 of lading was, but such a person must bear the consequences of his own exceptional ignorance, it being plainly impossible that business could be carried on if every person who delivers a bill of lading had to stop to explain what a bill of lading was." Mellish, L. J., in [[Parker v . R. Co.]], 2 C. P. D. 425.</ref> while on the other hand ordinary railroad tickets, baggage checks, or receipts of a similar character have been held not to bind the receiver to the conditions printed on them, for the reason that he may reasonably have supposed that they contained no special terms but were simply to identify himself or his property.<br />
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Nor is one bound by accepting a paper, where the conditions are not readily discernable, as where they are printed on the back of the document or in very small type or are delivered in a dark car or are ambiguous or unreasonable. And terms brought to the acceptor's notice after the agreement is complete will not bind him.<ref>[[Brittain Dry Goods Co. v. Bakersfield]], 61 Pac. 253.</ref> The reason for this is that the general offer of the carrier is to carry on the usual terms and therefore special terms must be brought to the acceptor's notice in a reasonable manner.<br />
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But beyond public agencies like common carriers the presumption of assent does not go. Thus where a collecting agency, which A had employed on several occasions, received a claim from him to collect; and it sent a receipt therefor, on the back of which was printed a clause stating that they did not guarantee clients against loss from the dishonesty of an attorney or the suspension of a bank, but the conditions were never brought to A's attention, he was held not bound by them.<br />
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{{Quote|The appellant calls our attention to a class of cases clearly distinguishable from the one under review. They relate to the construction placed upon the conditions in telegraph blanks, bills of lading, shipping, and express receipts, and other eommercial instruments of like description. In such it has been held that the uniform character of those instruments, and the nature of the business to which they relate, create a presumption of knowledge of the attendant conditions and limitations, or that, by using certain blank forms upon which the terms and restrictions confront the subscribing party, he is deemed to have assented to them. No such presumption exists respecting a paper purporting to be an ordinary receipt; hence the necessity of proof to establish notice to the plaintiff of the undisclosed clause of exemption from liability, which the defendant inserted in a manner not calculated to attract attention.<ref>[[Neuman v. Nat. Shoe Co.]], 54 N. Y. S. 942, 56 Id. 193.</ref>}}<br />
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==Acceptance--by Whom==<br />
A particular offer, i. e., one made to a specified person, can be accepted by him only.<ref>[[Schmaling v. Thomlinson]], 1 Marsh. 560, 6 Taunt. 147; [[Boston Ice Co. v. Potter]], 123 Mass. 28, 25 Am. Rep. 9; [[Quincy First Nat. Bank v. Hall]], 101 U. S. 43; [[Equitable L. Assur. Soc. v. McElroy]], 83 Fed. Rep. 631.</ref> An offer by A to sell to B cannot be accepted by C, so as to establish an agreement with A.<ref>[[Meynell v. Surtees]], 3 Sm. & G. 101. Laborers employed by contractors and subconstractors to build a railroad stopped work and were creating a disturbance fearing they would not be paid. The president of the railroad came out and sa!d to them: "Go back to your work and I will see that you are paid." One of the subcontractors who was present and heard the offer brought action for his pay. It was held that the offer was not made to him, and that there was no agreement with him. [[Indianapolis R. Co. v. Miller]], 71 Ill. 463.</ref> Such an offer is not assignable.<ref>[[Boulton v. Jones]], 2 H. & N. 564; [[British Wagon Co. v. Lee]], 5 Q. B. D. 149; [[Boston Ice Co. v. Potter]], 123 Mass. 28, 26 Am. Rep. 9.</ref><br />
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But an offer may be general, and then it may be accepted by any one, as where a carrier advertises that he will run his vehicles at certain hours, where a person offers a prize for a design for a public building,<ref>''[[Walsh v. St. Louis Ex. Co.]]'', 90 Mo. 459.</ref> or a bonus to any one who will make a certain improvement,<ref>[[Bull v. Talcot]], 2 Root 119, 1 Am. Dec. 62.</ref> or where a bank advertises that it will redeem all bills of a certain class presented to it,<ref>[[Tarbell v. Stevens]], 9 Iowa 168.</ref> or in the very common case of the offer of a reward for the recovery of property or the arrest of a criminal;<ref>''[[Morrell v . Quarles]]'', 35 Ala.; ''[[Ryer v. Stockwell]]'', 14 Cal. 134, 73 Am. Dec. 634; [[Montgomery County v. Robinson]], 85 Ill. 174; [[Loring v. Boston]], 7 Metc. 409; [[Reif v. Paige]], 55 Wis. 496, 13 N. W. Rep. 473, 42 Am. Rep. 731.</ref> though, as said by Pollock: "We have no special term of art for the proposal thus made by way of general request or invitation to all men to whose knowledge it comes."<ref>A person may offer a reward orally as well as by handbill, poster, or newspaper advertisement. The latter modes are more likely to become generally known, but they are no more efficacious as offers than a public offer orally made. [[Hayden v. Singer]], 56 Ind. 42.</ref><br />
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Such offers, made to an unascertained person or persons, cannot be turned into an agreement until they have been accepted by an ascertained person, but as soon as there is an acceptance by a person within the offer there is a binding agreement.<ref>See cases In last notes. [[Bull v. Talcot]], 2 Root 119, 1 Am. Dec. 62; [[Walsh v. St. Louis Ex. Co.]], 70 Mo. 459; [[Long v. Battle Creek]], 39 Mich. 323, 33 Am. Rep. 384; [[Babcock v. Raymond]], 2 Hilt. 61; [[Patton v. Hassinger]], 69 Pa. St. 305.</ref><br />
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==Acceptance Must be Absolute and Unconditional==<br />
The acceptance must be absolute and unconditional.<ref>[[Roberts v. Cox]], 91 Neb. 653, 136 N. W. 831; [[Pike Co. v. Spencer]], 192 Fed. 11, 112 C. C. A. 433; [[Seymour v. Armstrong]], 62 Kas. 720.</ref> If A offers B to do a certain thing and B accepts conditionally or introduces some new term into his acceptance, his answer is either an expression of a willingness to negotiate or it is in the nature of a counter-proposal on his part.<ref>[[Borland v. Gutfey]], 1 Grant's Cas. 394; [[Egger v. Nesbitt]], 122 Mo. 667, 27 S. W. Rep. 385, 43 A. M. St. Rep. 596; [[Kvale v. Keane]], 39 N. D. 660, 168 N. W. Rep. 74; [[Hartford Life Ins. Co. v. Milet]], 106 S. W. 144 (Ky.); [[Wheaton Building Co. v. Boston]], 204 Mass. 218, 90 N. E. 598.</ref> A counter proposal is not binding until it is accepted (and communicated) by the original proposer.<ref>[[Briggs v. Sizer]], 30 N. Y. 647; [[Slaymaker v. Irwin]], 4 Whart. 367; [[Nundy v. Matthews]], 34 Hun. 74; [[McLean v. Gymnasium Assn.]], 64 Mo. (App.) 55.</ref><br />
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==Acceptance Must be Identical to Offer==<br />
The offer must be accepted exactly as it is made. The acceptance must in every respect meet and correspond with the offer, neither falling within nor going beyond the terms proposed, but exactly meeting them at all points and closing them just as they stand:<ref>[[Eliason v. Henshaw]], 4 Wheat. 226; [[Corcoran v. White]], ll7 Ill. 118, 67 Am. Rep. 858; [[Northwest Iron Co. v. Meade]], 21 Wis. 474, 94 Am. Dec. 657; [[U. S. v. Carlin Co.]], 224 Fed. 869, 138 C. C. A. 449.</ref> for there is no contract if there is a variance between the terms of the offer and the acceptance.<ref>9 Cyc. 267, 13 Cyc. 279, 13 C. J. 281.</ref> In ''[[Jordan v. Norton]]'',<ref>4 M. & W. 155.</ref> the defendant offered by letter to buy a mare of the plaintiff if he would warrant her quiet in harness, and the plaintiff replied that he warranted her sound and quiet in double harness. In an action for the price Baron Parke said:<br />
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"The correspondence merely amounts to this: that the defendant agrees to give twenty guineas for the mare if there is a warranty of her being sound and quiet in harness generally, but to that the plaintiff has not assented. The parties have never contracted in writing ''ad idem.''"<br />
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Like the conditional acceptance, the acceptance at variance with the terms of the offer is a counter-proposal which to bind the party by whom the original offer was made, must be accepted by him.<ref>[[Sawyer v. Brossart]], 67 Ia. 678, 56 Am. Rep. 371; [[Moulton v. Kershaw]], 59 Wis. 316, 48 Am. Rep. 616; [[Esmay v. Gorton]], 18 Ill. 483.</ref> So if one makes an offer and accepts acceptance not responsive to the proposal, he is bound by the agreement thus made, and cannot fall back on his proposal in case of subsequent disagreement.<ref>[[Iron Works v. Douglass]], 49 Ark. 355; [[Treat v. Ullman]], 69 N. Y. (S.) 974; [[Tilt v. La Salle Silk Co.]], 5 Daly, 19.</ref><br />
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==Communication of Acceptance==<br />
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An acceptance, which does not go beyond an uncommunicated mental determination, cannot create a binding agreement simply because the intention to accept did in fact exist.<ref>1 Cyc. 274. 13 C. J. 284; [[Felthouse v. Bindley]], 11 C. B. (N. S.) 869; [[Brogden v. R. Co.]], L. R. 2 App. Cas. 691; [[Mactier v. Frith]], 6 Wend. 103, 21 Am. Dec. 262; [[New v. Ins. Co.]], 171 Ind. 33, 85 N. E. 703; [[Kentucky Portland Co. v. Steckel]], 164 Ky. 420, 175 S. W. 663.</ref> If A writes to B and offers to buy B's horse and B makes up his mind to accept, but never tells A of his intention to do so, he has no remedy if A buys a horse elsewhere. In ''[[White v. Corlies]]''<ref>46 N. Y. 467; [[Cleveland, etc., R. Co. v. Shea]], 174 Ind. 303, 91 N. E. 1081.</ref> C wrote W, "Upon agreeing to finish the fitting up of offices 57 Broadway in two weeks from date, you can commence at once." W immediately purchased lumber for the work and began to prepare it. The next day the proposition was countermanded. It was held that the acceptance was not binding on C, as it was a mere mental determination, unaccompanied by any act indicating to C that his proposal was accepted. <br />
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A guaranty like every other contract requires notice of acceptance. It has been laid down by the Supreme Court of the United States that if the guaranty is signed by the guarantor at the request of the other party, or if the latter's agreement to accept is contemporaneous with the guaranty, or if the receipt from him of a valuable consideration, however small, is acknowledged in the guaranty, the mutual assent is proved, and the delivery of the guaranty to him or for his use completes the contract. But if the guaranty is signed by the guarantor without any previous request of the other party, and in his absence, for no consideration moving between them except future advances to be made to the principal debtor, the guaranty is in legal effect an offer or proposal on the part of the guarantor, needing an acceptance by the other party to complete the contract.<ref>[[Davis Sewing Machine Co. v. Richards]], 116 U. S. 514. But the first sentence in this rule is disapproved in Pennsylvania, where the Court says:{{Quote|Indeed it is difficult to imagine how precedent request alone can supply the place of subsequent notice, since after request made and proffer of guaranty, the merchant may refuse the credit or advance craved, and without notice the surety cannot know whether he has or has not. So far is this insisted on, that it is said without notice there can be no contract; for like all other contracts, that of guaranty requires both a proposal and acceptance thereof. The reasoning of the Supreme Court of this State is convincing, while for the doctrine of the United States Court no reason is offered, and we feel bound to follow the decisions of our own courts.}} [[Evans v. McCormick]], 167 Pa. St. 247.</ref> <br />
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But in the rule that acceptance of an offer must be communicated, the word "communicated" does not mean actual notice, for "acceptance is communicated when it is made in a manner prescribed or indicated by the offerer," put in a proper channel to reach the offerer.<ref>[[Cleveland R. Co. v. R. Co.]], 174 Ind. 303, 91 N. E. 1081.</ref> An offer is never communicated until it is brought to the knowledge of the offeree, but it is not always necessary that an acceptance should come to the knowledge of the offerer in order to make a binding agreement.<br />
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{{Quote|As notification of acceptance is required for the benefit of the person who makes the offer, the person who makes the offer may dispense with notice to himself if he thinks it desirable to do so; and I suppose there can be no doubt that where a person in an offer made by him to another person expressly or impliedly intimates a particular mode of acceptance as sufficient to make the bargain binding, it is only necessary for the other person to whom such offer is made to follow the indicated mode of acceptance; and if the person making the offer expressly or impliedly intimates in his offer that it will be sufficient to act on the proposal without communicating acceptance of it to himself, performance of the condition is a sufficient acceptance without notification.<ref>Bowen, L. J. In [[Carlill v Carbolic Smoke Ball Co.]], 1 Q.B. 256 (1893), 2 Q.B. 484 (1892).</ref>}}<br />
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The mental resolve to accept is not enough, as for example to write a letter, seal it and put it in a drawer. The law recognizes only an overt act, which may assume a variety of forms. It may be by the fall of the hammer, by words spoken, by mailing a letter, by sending a telegram, by remitting the article ordered or by the signing and delivery of a paper. <br />
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Therefore, we must look to the nature and the terms of the offer if any question should arise as to the adequacy of the method adopted to communicate the acceptance and here a distinction must be made where the offer is '''(a)''' of a promise for an act and where it is '''(b)''' of a promise for a promise.<br />
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'''(a)''' In this class of cases it is not intended that the offeree shall express his acceptance otherwise than by performance. An offer of reward for the supply of information or for the recovery of a lost article does not contemplate a notice from every person who sees the offer that he intends to search for the information or for the article. This is especially true in the case of general offers made to unascertained persons, wherein performance is expressly or impliedly indicated as a mode of acceptance. As very well said, if I advertise that I will give any one five dollars who finds and restores my dog, I do not expect that people will come to me and tell me they intend to hold me to my offer and will try to earn the five dollars. I expect them to go to work and look for the dog.<ref>[[Carlill v Carbolic Smoke Ball Co.]], supra. In this case defendants, proprietors of a medical preparation, issued an advertisement in which they offered to pay a certain sum to any person who should contract a certain disease after having used their preparation in a specified manner and for a specified period, and it was held that the plaintiff accepted the offer contained in the advertisement and rendered the defendants' promise binding by purchasing the preparation and using it as specified in the advertisement. [[Allen v. Chouteau]], 102 Mo. 307, 14 S.W. Rep. 869; [[Niedermeyer v. Curators]], 61 Mo. (App.), 654; [[Ahern v. Ins. Co.]], 2 Sweeny, 441.</ref> <br />
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The same is true of the everyday case of a written order for goods. A mails an order to B for certain goods in which B deals to be sent to him. He receives no reply; the first intimation that the vendor intends to accept the order is the arrival of the goods. Yet if the order is a positive one, it is not required that B shall first notify A that he accepts his offer and will send the goods--for A's offer is to pay him the price if he will send the goods, not promise to send them.<ref>[[Cooper v. Altimus]], 62 Pa. St. 486; [[Maugher v. Crosby]], 117 Mass. 330; [[Briggs v. Sizer]], 30 N. Y. 648; [[Harvey v. Johnson]], 6 C . B. 295.</ref><br />
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'''(b)''' Where A offers B to do something if B will promise to do something, it is always essential that A shall be notified of B's acceptance and until such acceptance is communicated there is no agreement. But this as we have just seen does not mean that A shall have actual personal notice of the acceptance. If A sends the offer by an agent, notice of the acceptance given to that agent is sufficient; it is "communicated" to A in the eye of the law.<br />
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In a variety of ways an acceptance may be communicated without the offerer actually receiving notice of it; and it is always sufficient that the offer be accepted in the mode either expressly or impliedly required by the offerer, and if the offerer requires or suggests a mode of acceptance which turns out, so far as giving actual notice to the offerer is concerned, to be insufficient or entirely nugatory, it is the fault of the offerer and the agreement is complete.<br />
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{{Quote|Suppose that X sends an offer to A by messenger across a lake with a request that A, if he accepts, will at certain hour fire a gun or light a fire. Why should A suffer if a storm render the gun inaudible, or a fog intercept the light of the fire? If X sends an offer to A by messenger with a request for a written answer by bearer, is it A's fault if the letter of acceptance is stolen from the bearer's pocket? If X has asked for a verbal answer and the messenger who is told to say "yes" is struck with paralysis on the way home, it would seem unreasonable to say that no contract has been made.<ref>Anson, Contr., 30, 31.</ref>}}<br />
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In ''[[Howard v. Daly]]'',<ref>61 N.Y. 362; [[Brooks v. Ostrander]], 158 Ill. App. 78.</ref> plaintiff, an actress, received from defendant, the manager of a theatre, an offer to engage her for a year. She wrote a note accepting the offer, which she placed in a letter box on the door of his office. It was proved that this box was used for depositing contracts between the management and the actors. Defendant denied that he had ever received the letter.<br />
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{{Quote|This is immaterial. The minds of the parties met when the plaintiff complied with the usual or even occasional practice and left the acceptance in a place of deposit recognized as such by the defendant. This doctrine is analogous to that which has been adopted in the case of communication by letter or by telegraph. The principle governing these cases is that there is a concurrence of the minds of the parties upon a distinct proposition manifested by an overt act. The deposit in the box is such an act.}}<br />
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If one writes to another, "If you choose to employ A, I will be responsible for him," or "If you will sell goods to C, I will guarantee their payment," ordinarily it is not necessary to notify the offerer of the acceptance, the doing of the act being sufficient. But where A wrote B, "If Harry needs more money, let him have it or assist him to get it, and I will see you paid," the Court said:<br />
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"But if the act is of such a kind that knowledge of it will not quickly come to the promisor, the promisee is bound to give him notice of his acceptance within a reasonable time, after doing that which constitutes the acceptance."<ref>[[Bishop v. Eaton]], 161 Mass. 498.</ref><br />
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==Acceptance by Post, Telegraph, or Telephone==<br />
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===Postal Rule===<br />
{{Main article|Contracts/Mailbox rule{{!}}Mailbox rule}}<br />
As a rule of convenience, if the offer is accepted by post, the contract comes into existence at the moment that the acceptance was posted.<ref>[[Adams v Lindsell]] (1818) 106 ER 250</ref> This rule only applies when, impliedly or explicitly, the parties have post in contemplation as a means of acceptance.<ref>[[Henthorn v Fraser]] [http://www.austlii.edu.au/cgi-bin/LawCite?cit=1892%202%20Ch%2027 &#91;1892&#93; 2 Ch 27].</ref> It excludes contracts involving land, letters incorrectly addressed and instantaneous modes of communication. The relevance of this early 19th century rule to modern conditions, when many quicker means of communication are available has been questioned, but the rule remains good law for the time being.<br />
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==Acceptance by Agent==<br />
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From the foregoing sections we draw these conclusions: That the acceptance of an offer must be communicated to the offerer; that it is communicated to him when it is delivered to his agent or messenger; that the post office and telegraph are his agents respectively when he expressly makes them so by requesting a reply by mail or telegraph or when he impliedly makes them so by using these agencies to make his offer or when the circumstances are such that it must have been within the contemplation of the parties that according to the usages of mankind the post might be used as a means of communicating the acceptance, but that the offerer may choose to make the acceptance conditional upon its actual receipt by offerer.<br />
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A few simple illustrations will suffice:<br />
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'''(1)''' A sends an offer to B by A's messenger, into whose hands B delivers the acceptance. '''(2)''' A makes B an offer by mail, requesting a reply by mail. B mails the acceptance. '''(3)''' A makes an offer to B by mail saying nothing as to how the acceptance is to be made. B mails an acceptance. '''(4)''' A makes an offer to B in the City of L by handing her a letter containing the offer, and giving her 14 days in which to accept. B lives in the City of B. Within the time dictated, B mails an acceptance to A.<br />
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In all of the above illustrations, the acceptance is "communicated" to A and the contract is complete, even if A never receives any of the acceptances. <br />
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'''(5)''' C sends an offer to D by her, C's messenger. D examines it and immediately sends his own clerk or servant with his acceptance to C. '''(6)''' C sends an offer to D by her servant and D immediately mails his acceptance. '''(7)''' C makes an offer by advertisement in a newspaper. D mails an acceptance. '''(8)''' C makes an offer to D by mail, and D dispatches his clerk to C with his acceptance. '''(9)''' C makes an offer to D by mail conditional on the acceptance being received by him by a certain day. D mails his acceptance to C.<br />
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In these cases, there is no communication of the acceptance to C until she actually receives it, and if it is lost on the way there is no contract.<br />
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==Acceptance Makes Irrevocable Contract==<br />
An offer binds no one and may be revoked or lapse before acceptance. But acceptance by promise or act duly communicated before revocation or lapse supplies the element of agreement and binds both parties to the fulfillment of the terms of the contract. It changes the character of the offer, making it an irrevocable promise.<ref>9 Cyc. 283, 295, 13 C.J. 293; [[#Revocation of Acceptance|Revocation of Acceptance]]</ref><br />
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Where an offer is accepted before it is revoked, the contract is as obligatory as if both promises were simultaneous. Here, as in other like cases, if both parties meet, one prepared to accept and the other to retract, whichever speaks first will have the law with them; and this question is one of fact to be decided by the jury.<ref>[[Martin v. Hudson]], 81 Cal. 42, 22 Pac. Rep. 296; [[Quick v. Wheeler]], 78 N.Y. 300.</ref><br />
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==Revocation of Acceptance==<br />
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==Time and Place==<br />
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==Last shot rule==<br />
Often when two companies deal with each other in the course of business, they will use standard form contracts. Often these standard forms contain terms which conflict (e.g. both parties include a liability waiver in their form). The 'last shot rule' refers to the resulting legal dispute arising where both parties accept that a legally binding contract exists, but disagree about whose standard terms apply. Such disputes may be resolved by reference to the 'last document rule', i.e. whichever business sent the last document, or 'fired the last shot' (often the seller's delivery note) is held to have issued the final offer and the buyer's organization is held to have accepted the offer by signing the delivery note or simply accepting and using the delivered goods.<br />
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== References ==<br />
{{Reflist|30em}}</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=Contracts/Offer&diff=41935Contracts/Offer2022-03-16T05:37:18Z<p>Rezsue: </p>
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<div>{{:Contracts/TOC}}<br />
'''Offer''' and '''[[Contracts/Acceptance|acceptance]]''' analysis is a traditional approach in [[contract law]]. The offer and acceptance formula, developed in the 19th century, identifies a moment of formation when the parties are [[mirror image rule|of one mind]]. This classical approach to contract formation has been modified by developments in the law of [[estoppel]], misleading conduct, [[misrepresentation]], [[unjust enrichment]], and [[power of acceptance]].<br />
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Treitel defines an offer as "an expression of willingness to contract on certain terms, made with the intention that it shall become binding as soon as it is accepted by the person to whom it is addressed", the "offeree".<ref>{{cite book |author=Treitel, GH |author-link2=Guenter Treitel |title=The Law of Contract |edition=10th |page=8}}</ref> An offer is a statement of the terms on which the offeror is willing to be bound. It is the present contractual intent to be bound by a contract with definite and certain terms communicated to the offeree.<br />
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The expression of an offer may take different forms and which form is acceptable varies by jurisdiction. Offers may be presented in a letter, newspaper advertisement, fax, email verbally or even conduct, as long as it communicates the basis on which the offeror is prepared to contract.<br />
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Whether the two parties have reached agreement on the terms or whether a valid offer has been made is an issue which is determined by the applicable law. In certain jurisdictions, courts use criteria known as 'the objective test' which was explained in the leading English case of ''[[Smith v. Hughes]]''.<ref>''[[Smith v. Hughes]]'' (1871) LR 6 QB 597</ref><ref name=Ermogenous>{{cite AustLII |litigants=[[Ermogenous v Greek Orthodox Community of SA Inc]] |year=2002 |court=HCA |num=8 |parallelcite=(2002) 209 [[Commonwealth Law Reports|CLR]] 95}}.</ref> In Smith v. Hughes, the court emphasised that the important thing in determining whether there has been a valid offer is not the party's own (subjective) intentions, but how a reasonable person would view the situation. The objective test is largely superseded in the UK since the introduction of the [[Brussels Regime]] in combination with the [[Rome I Regulation]]. <br />
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==Certainty of Offer==<br />
{{Main article|Contracts/Uncertainty{{!}}Uncertainty}}<br />
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An offer can only be the basis of a binding contract if it contains the key terms of the contract. For example, as a minimum requirement for sale of goods contracts, a valid offer must include at least the following 4 terms: Delivery date, price, terms of payment that includes the date of payment and detail description of the item on offer including a fair description of the condition or type of service. Unless the minimum requirements are met, an offer of sale is not classified by the courts as a legal offer but is instead seen as an advertisement. <br />
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==Communication of Offer==<br />
Whether the offer be by (a) acts or by (b) words it is essential that the offer be communicated.<ref>[[Contracts/Intention to Bind#Intention Must Be Communicated|Intention Must Be Communicated]]</ref><br />
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'''(a)''' If A does work for B without B's request or knowledge, B can not be held liable to pay for it, because here it is clear that A has not communicated his offer to do the work to B and a man ought not to be forced to pay for what he has no opportunity to reject.<ref>[[Boston v. Dist. of Columbia]], 19 Ct. of Cl. 31; [[Seals v. Edmonson]], 73 Ala. 295, 49 Am. Rep. 51; [[Chadwick v. Knox]], 31 N. H. 226. 44 A. M. Dec. 329; [[Mumford v. Brown]], 6 Cow. 475, 16 Am. Dec. 440.</ref> In ''[[Bartholomew v. Jackson]]'',<ref>20 Johns, 28, 11 Am. Dec. 237.</ref> a farmer, seeing his neighbor's stack of wheat in danger of fire, took upon h imself to remove it to a safe place, and then sued for his services. But it was ruled that as the offer to remove the stack was never communicated to the defendant there was no contract on which he could be held. In ''[[Taylor v. Laird]]'',<ref>25 L. J . Ex. 329.</ref> plaintiff, who had been engaged to command defendant's ship, threw up his command in the course of the expedition but helped to work the vessel home, and then claimed reward for services thus rendered. It was held that he could not recover. Evidence of a recognition or acceptance of services may be sufficient to show an implied contract to pay for them, ''if at the time defendant had power to accept or refuse the services''. But in this case defendant never had the option of accepting or refusing the services while they were being rendered, and did in fact repudiate them when he became aware of them. Plaintiff 's offer, being uncommunicated, did not admit of acceptance, and could give him no rights against the party to whom it was addressed.<br />
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'''(b)''' If A promises to do something if B will do something and B does the act in ignorance of the offer, he can not claim performance of the promise, for the offer was not communicated to him when he accepted it by doing the act.<ref>[[Ball v. Newton]], 7 Cush. 599.</ref> In ''[[Fitch v. Snedeker]]'',<ref>38 N. Y. 242.</ref> defendant had published a notice offering a reward of $200 to any person who would give information leading to the apprehension and conviction of the person or persons guilty of the murder of a certain female. Through the efforts of plaintiff one F was arrested and convicted, but it appeared that he had done so not knowing of the reward or before it was offered. The court held that there was no agreement.<br />
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{{Quote|To the existence of a contract there must be mutual assent or in another form offer and consent to the offer. The motive inducing consent may be immaterial, but the consent is vital. How can there be consent or assent to that of which the party has never heard?"<ref>See In accord with this case: [[Williams v. West Chicago St. R. Co.]], 191 Ill. 610, 61 N. E. Rep. 456, 85 Am. St. Rep. 278; [[Stamper v. Temple]], 6 Humph. 113, 44 Am. Dec. 296; [[Hewitt v. Anderson]], 56 Cal. 476, 38 Am. Rep. 65. There are opinions to the contrary. Some or these admit that they are contrary to principle, but think that it is in furtherance of public policy to allow rewards for the recovery of property or the apprehension of a criminal, to be recoverable where the plaintiff did not know of it at the time of rendering the service. Others are based on the old English case of [[Williams v. Carwardine]], 4 B. & Ad. 621, which they misunderstand. Here the plaintiff gave information as to a murder "believing that she had not long to live, and to ease her conscience." Afterwards, she recovered and sued for the reward, and was held entitled to recover. It was not objected to the recovery that she did not know of the offer when she gave the information (for the report is silent as to her knowledge of it), but that the reward was not the motive for her act. The court held simply that the motive was immaterial. [[Eagle v. Smith]], 4 Houst. 293; [[Dawkins v. Sappington]], 26 Ind. 199; [[Auditor v. Ballard]], 9 Bush 572. 15 Am. Rep. 728; [[Russell v. Stewart]], 44 Vt. 170. In a New York case motive was considered material, the court saying: "It is a contract obligation. This being so, it must be the voluntary giving up of the information by the person. If corkscrewed out of him by threats, inducing fear or prosecution, no recovery could be had. That would destroy the contract element." [[Vitty v. Ely]], 51 N. Y. 44.</ref>}}<br />
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==Offer May Prescribe Time, Place, and Condition of Acceptance==<br />
The offeror has the right to prescribe the time,<ref>The offer may require that it be accepted within a certain time, in which case an acceptance after that time will be of no effect. [[Longworth v. Mitchell]], 26 Ohio St. 342; [[Potts v. Whitehead]], 20 N. J. (Eq.) 55; [[Britton v. Phillipp]], 24 How. Pr. 111; [[Union Nat. Bk. v. Mills]], 106 N. C. 347, 11 S. E. 321; [[Horne v. Niver]], 168 Mass. 4, 46 N. E. 393. An offer by letter may be made conditional upon an acceptance being sent by return mail and the offer must then be accepted within that interval. [[Maclay v. Harvey]], 90 Ill. 525, 32 Am. Rep. 35; [[Carr v. Duval]], 14 Pet. 77; [[Dunlop v. Higgins]], 1 H. L. Cas. 381. The words "by return mail" have been held to give a reasonable time for acceptance, and an answer mailed on the same day the offer was received, though not by the first mail leaving the city after it was received, has been considered sufficient. [[Palmer v. Phoenix Ins. Co.]], 84 N. Y. 63; [[Taylor v. Rennie]], 35 Barb. 272. But a delay of three or four days is different. [[Maclay v. Harvey]], supra; [[Taylor v. Rennie]], 35 Barb. 272. An offer requiring acceptance "by return mail" might be accepted by telegram or messenger reaching the offeror as early as the reply would have reached him if sent by return mail, for the words used in the offer would be construed as fixing the time for acceptance and not the manner or accepting. [[Tinn v. Hoffman]], 29 L. T. Rep. N. S. 271; [[Bernard v. Torrance]], 5 G. & J. 383; [[Taylor v. Rennie]], 1l5 Darb. 272; [[Minnesota, etc., R. Co. v. Columbus R. Mill Co.]], 119 U. S. 149, 7 Sc. T. 168</ref> place,<ref>In [[Eliason v. Henshaw]], 4 Wheat. 225, E. & Co. offered to buy flour of H., the answer to be sent by the wagon which carried the offer. H. sent a letter of acceptance by mall to another place which was not the destination of the wagon, having reason to believe that his answer would in this way reach E. & G. Co. more speedily. The Supreme Court of the United States decided that E. & Co. were not bound by the acceptance, as they had a right to dictate the terms on which they would purchase, and of the importance of which they were the sole judges.</ref> form or other condition of acceptance,<ref>[[Wilcox v. Cline]], 70 Mich. 617, 38 N. W. Rep. 666; [[Perry v. Mt. Hope Iron Co.]], 15 R. I. 380, 5 Atl. Rep. 632, 2 Am. St. Rep. 902. An offer which requires that it shall be accepted in writing cannot be accepted verbally. [[Briggs v. Sizer]], 30 N. Y. 647; [[Bosshardt, etc. Co. v. Crescent Oil Co.]], 171 Pa. St. 109, 32 Atl. Rep. 1120. A person making a proposal may make it a condition that the contract be reduced to writing and signed by both parties, and in such case there is no contract until the written contract is drawn up and signed. [[The Governor v. Betch]], 28 Eng. L. & Eq. 470; [[McDonald v. Bewick]], 61 Mich. 79; [[Bourne v. Shapleigh]], 9 Mo. (App.) 64; [[Spinney v. Donnerig]], 108 Cal. 666. 41 Pac. 797; [[Sanders v. Pottlitzer Bros.]], 144 N. Y. 209, 39 N. E. 76.</ref> in which case the offer can be accepted only in the way prescribed by the offer.<br />
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==Offer by Post, Telegraph, or Telephone==<br />
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===Offer Made by Post===<br />
{{Main article|Contracts/Mailbox rule{{!}}Mailbox rule}}<br />
As a rule of convenience, if the offer is made by post, the contract comes into existence at the moment that the acceptance was posted.<ref>[[Adams v Lindsell]] (1818) 106 ER 250</ref> This rule only applies when, impliedly or explicitly, the parties have post in contemplation as a means of acceptance.<ref>[[Henthorn v Fraser]] [http://www.austlii.edu.au/cgi-bin/LawCite?cit=1892%202%20Ch%2027 &#91;1892&#93; 2 Ch 27].</ref> It excludes contracts involving land, letters incorrectly addressed and instantaneous modes of communication. The relevance of this early 19th century rule to modern conditions, when many quicker means of communication are available has been questioned, but the rule remains good law for the time being.<br />
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== Unilateral contract ==<br />
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A [[unilateral contract]] is created when someone offers to do something "in return for" the performance of the act stipulated in the offer.<ref name=Woollen>{{cite AustLII |litigants=[[Australian Woollen Mills Pty Ltd v The Commonwealth]] |year=1954 |court=HCA |num=20 |parallelcite=(1954) 92 [[Commonwealth Law Reports|CLR]] 424}}.</ref> In this regard, acceptance does not have to be communicated and can be accepted through conduct by performing the act.<ref name=Carbolic>{{Cite BAILII |litigants=[[Carlill v Carbolic Smoke Ball Company]] |year=1892 |court=EWCA |num=1 |parallelcite=[1893] 1 QB 256}}.</ref> Nonetheless, the person performing the act must do it in reliance on the offer.<ref name="R v Clarke">{{cite AustLII |litigants=[[R v Clarke]] |year=1927 |court=HCA |num=47 |parallelcite=(1927) 40 [[Commonwealth Law Reports|CLR]] 227}}.</ref><br />
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A unilateral contract can be contrasted with a [[bilateral contract]], where there is an exchange of promises between two parties. For example, when (A) promises to sell her car and (B) promises to buy the car.<br />
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The formation of a unilateral contract can be demonstrated in the English case ''[[Carlill v Carbolic Smoke Ball Co]]''.<ref name=Carbolic/> In order to guarantee the effectiveness of the Smoke Ball remedy, the company offered a reward of 100 pounds to anyone who used the remedy and contracted the flu. Once aware of the offer, Carlill accepted the offer when she purchased the Smoke Ball remedy and completed the prescribed course. Upon contracting the flu, she became eligible for the reward. Therefore, the company's offer to pay 100 pounds "in return for" the use of the Smoke Ball remedy and guarantee not to contract the flu was performed by Carlill.<br />
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==Rejection of an offer or lapse of time==<br />
Since an offer may be turned into a contract by acceptance, it is important to know how this liability may be terminated. And the modes in which an offer may lapse or be determined before acceptance are: '''(a)''' by revocation, '''(b)''' by rejection, '''(c)''' by efflux of time, '''(d)''' by breach of condition, '''(e)''' by death, '''(f)''' by change of circumstances.<br />
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===Revocation of offer===<br />
An offeror may revoke an offer before it has been accepted, but the revocation must be communicated to the offeree (although not necessarily by the offeror,<ref>[[Dickinson v. Dodds]] (1876) 2 Ch.D. 463; [[Bennett v. Potter]], 16 Cal. App, 183, 116, p. 681; [[Prior v. Hilton Co.]], 141 Ga. 117, 80 S. E. 559</ref>). If the offer was made to the entire world, such as in Carlill's case,<ref name=Carbolic/> the revocation must take a form that is similar to the offer. However, an offer may not be revoked if it has been encapsulated in an [[option (law)|option]] (see also option contract), or if it is a "[[Contracts/Firm offer|firm offer]]" in which case it is irrevocable for the period specified by the offeror.<br />
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If the offer is one that leads to a unilateral contract, the offer generally cannot be revoked once the offeree has begun performance.<br />
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At an auction sale the bid is not binding until assented to, which assent is signified on the part of the seller by knocking down the hammer. Therefore a bid may be withdrawn at any time before the<br />
hammer goes down.<ref>[[Payne v. Cave]], 3 Term. Rep. 148; [[Ives v. Tregent]], 29 Mich. 390; [[Fisher v. Seltzer]], 23 Pa. Rt. 308.</ref><br />
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A party may revoke his offer even if the offer gives a definite time for acceptance, for the agreement to keep the offer open is without consideration.<ref>9 Cyc. 285, 13 C.J. 295; [[Minneapolis, etc., R. Co. v. Mill Co.]], 119 U.S. 149, 151</ref> But where the agreement is itself founded on a valuable consideration--as where in consideration of a certain sum of money an option to purchase is given to another for a certain time--the offer cannot be retracted during that time. This has been criticized on the ground that there can be no meeting of the minds of the parties after the offer has been withdrawn and the retraction communicated to the other party, and there can be no contract of sale in such a case, though the retraction would be a breach of the contract to leave the offer open and the measure of damages would be the same.<ref>Tiedeman, Sales, § 41.</ref> But the proper rule would seem to be that an offer of this kind should be treated as a conditional covenant to convey and subject on the performance of the condition within the time limited, to specific performance.<ref>[[Zimmerman v. Brown]], 36 Atl. 676; [[Hayes v. O'Brien]], 149 Ill. 403, 37 N.E. Rep. 73; [[Mansfield v. Hodge]], 147 Mass. 304.</ref><br />
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An offer under seal cannot be revoked, at common law. Even though it is not communicated to the offeree it remains open for acceptance when the oferee becomes aware of its existence. This results from the common law rule that a grant under seal is binding on the grantor and those who claim under him, although it has never been communicated to the grantee, if it has been duly delivered; and any obligation created by deed is on the same footing. The promisor is bound, but the promisee need not take advantage of the promise unless he chooses.<ref>Cyc. 288, 289, 13 C.J. 295; [[Xenos v. Wickam]], L.R., 2 H.L. 296; [[Kershaw v. Kershaw]], 102 Ill, 307; [[Wing v. Chase]], 35 Me. 260; [[Wlllard v. Tayloe]], 8 Wall, 557</ref> The rule that where an offer is made under seal it cannot be revoked applies to options given under seal<ref>[[McMillan v. Ames]], 33 Minn. 257, 22 N.W. Rep. 612; [[O'Brien v. Boland]], 166 Mass. 481, 44 N.E. Rep, 602; [[Thomason v. Bescher]], 176 N.C. 622, 97 S.E. Rep. 654; and see 1 A.L.R. Am. 631.</ref><br />
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The revocation of the offer must be communicated to the person to whom the offer was made before or at the time of his communicating the acceptance.<ref>9 Cyc. 288, 13 C. J. 295. Where the offer is made by mail, a second letter sent by the same post and delivered at the same time with the first letter ([[Sherman v. National Cash-Register Co.]], 5 Colo. App. 162, 38 Pac. 392; [[Dunsmore v. Alexander]], 9 Shaw D.&B. 190), or a letter or telegram received by the offeree before he has posted his acceptance would be sufficient. ([[Re London, etc., Bank]], 81 L.T. Rep. N.S. 512.)<br />
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The case of [[Cooke v. Oxley]], 3 T. R. 653, 1 Rev. Rep, 783, has been often criticized. In this case the declaration was that the defendant proposed to sell and deliver a certain number of hogsheads of tobacco to the plaintiff at a certain price, whereupon the plaintiff desired the defendant to give him time to agree to or dissent from the proposal till the hour of four in the afternoon of that day, to which the defendant agreed, and thereupon promised the plaintiff to sell and deliver the tobacco upon the terms aforesaid, if the plaintiff would agree to purchase the same and give notice to the defendant before four in the afternoon of that day. The plaintiff then averred that he agreed to purchase the tobacco and give notice thereof to the defendant before the hour of four arrived, and offered to pay the price, but that the defendant refused to comply with his promise. A verdict having been rendered for the plaintiff, the judgment was arrested. Some American judges, construing the decision to be that where an offer gives a specified time for acceptance, an acceptance within that time does not make a binding agreement, have ruled, citing it as authority, that notice of the revocation of an offer is not necessary. See [[Bean v. Burbank]], 16 Me. 458, 33 Am. Dec. 681; [[Tucker v. Woods]], 12 Johns, (N.Y.) 190, 7 Am. Dec. 305; [[Gillespie v. Edmonston]], 11 Humph. (Tenn.) 553. But the decision turned on a point of pleading. The contract declared on that the defendant would give the plaintiff until four in the afternoon to decide, was clearly not a binding contract at all, and the declaration did not show with sufficient distinctness that the defendant had not withdrawn the offer before the plaintiff notified him of the acceptance. The case is explained In a later English case where the court says in substance: All that [[Cooke v. Oxley]], 3 T.R. 653. 1 Rev. Rep. 783, affirms is that a party who gives time to another to accept or reject a proposal is not bound to wait till the time expires. The offer may be revoked before acceptance. If the offer is not retracted, it is in force as a continuing offer until the time for accepting or rejecting it has arrived. [[Stevenson v. McLean]], 5 Q.B.D. 346. And in [[Boston, etc., R. Co. v. Bartlett]], 3 Cush. 224, 228, Fletcher, J. says:<br />
{{Quote|The case of [[Cooke v. Oxley]], 3 T.R. 653, 1 Rev. Rep. 783, . . . has been supposed to be inaccurately reported; and that in fact there was in that case no acceptance. But, however, that may be, if the case has not been directly overruled, it has certainly in later cases been entirely disregarded, and can not now be considered as of any authority.}}</ref><br />
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Where the negotiations are by mail, the offer is presumed to have been renewed during every moment of the time limited, and upon this presumption the acceptor has the right to rely and conclude the contract by acceptance at any time before receiving notice of a withdrawal.<ref>[[Larmon v. Jordan]], 56 Ill. 204; [[Moore v. Pierson]], 6 Iowa 278; [[Hamilton v. Lycoming Ins. Co.]], 5 Pa. St. 339.</ref> Therefore, a revocation of the offer which is not notified to the person to whom the offer has been made, or which is brought to his knowledge after he has communicated his acceptance of the offer, is altogether inoperative; as in the case of a letter of revocation not delivered until after the offer contained in a former letter has been accepted by posting the letter of acceptance, although it may have been posted before the acceptance of the offer was mailed.<ref>9 Cyc. 288, 13 C.J. 295; Kempner v. Cohn, 47 Ark. 519; [[Moore v. Pierson]], 6 Iowa 279, 71 Am. Dec. 409; [[Wheat v. Cross]], 31 Md. 99, 1 Am. Rep. 28; [[Contracts/Mailbox rule|Mailbox rule]]</ref><br />
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In ''[[Bryne v. Van. Tienhoven]]''<ref>C.P.D. 344.</ref> defendant, writing from C on October 1st, made an offer to plaintiff asking for a reply by cable. Plaintiff received the offer on the 11th, and at once accepted in the manner requested. On the 8th defendant had posted a letter revoking his offer. It was held that an acceptance made by post is not affected by the fact that a letter of revocation is on its way.<br />
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{{Quote|If the defendant's contention were to prevail, no person who had received an offer by post and had accepted it, would know his position until he had waited such time as to be quite sure that a letter withdrawing the offer had not been posted before his acceptance of it. It appears to me that both legal principle and practical convenience require that a person who has accepted an offer not known to him to have been revoked, shall be in a position safely to act upon the footing that the offer and acceptance constitute a contract binding on both parties.}}<br />
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A formal notice is not, however, necessary to constitute a comununicated revocation. It is sufficient that the person making the offer does some act inconsistent with it and making performance on his part impossible, as, for example, selling the property in question to another purchaser, and that the person to whom the offer was made has knowledge of such act.<ref>[[Kempner v. Cohn]], 47 Ark. 519, 1 S. W. Rep. 869, 58 Am. Rep. 775; [[Coleman v. Applegarth]], 68 Md. 21, 11 Atl. Rep. 284, 6 Am. St. Rep. 417; [[Wheat v. Cross]], 31 Md. 99, 1 Am. Rep. 28; [[Peck v. Freeze]], 101 Mich. 321, 59 N.W.R. 600; [[Dickinson v. Dodds]], 2 Ch. D. 463; [[Craig v. Harper]], 3 Cush. 158.</ref><br />
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{{Quote|It is usually said that an offer does not bind the offeror and this is true in the sense that he may withdraw the offer by taking timely and proper steps. But it is not true that it places no responsibility upon him. Everyone is responsible for his actions and if he makes an offer he must take the consequences. No matter what diligence he may use in striving to recall such offer it will not avail unless he actually succeeds in doing what the law requires for a revocation. If after such endeavor he fails, the offer which thus continues may be accepted and a contract arise in spite of the offeror's efforts. Thus if one makes an offer to another designating one year as the time it shall continue and such offeree goes to the wilds of Africa, it may well happen that the offeror may be unable to communicate a change of mind and a contract arise in spite of attempts to make known such change of intention.<ref>Ashley, Contr. § 20.</ref>}}<br />
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A general offer to the public may be revoked without actual notice to the party who may afterwards accept it without knowing of its revocation or withdrawal, if the revocation be made in the same way as the offer was made.<ref>[[Shuey v. United States]], 92 U.S. 73.</ref> In ''[[Shuey v. United States]]''<ref>Supra.</ref> the government by a published proclamation had offered a reward for information which would lead to the arrest of a certain criminal. It was afterwards withdrawn by the same kind of notice. S afterrwards, and not knowing of the revocation, gave the information. But it was held that there was no agreement to pay the reward.<br />
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{{Quote|There was no contract until its terms were complied with. Like any other offer of a contract, it might therefore be withdrawn before rights had accrued under it. . . . True it is found that then, and at all times until the arrest was actually made, he was ignorant of the withdrawal; but that is an immaterial fact. The offer of the reward not having been made to him directly, but by means of a published proclamation, he should have known that it could be revoked in the manner in which it was made.}}<br />
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For the same reason, offers contained in time tables published by railroads may be withdrawn by notice to that effect given in such subsequent publications.<ref>[[Sears v. R. Co.]], 14 Allen 433, 92 Am. Dec. 780; [[Thayer v. Burchard]], 99 Mass. 508.</ref><br />
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But the revocation must be in good faith. Thus where the defendant offered a share of his profits to any employe who should have been in his service 4500 hours during 100 consecutive days and should not be discharged during the year and the plaintiff worked all the year until Decemher 30, when he was dismissed by the defendant, it was held that he was entitled to recover his share of the profits for that year.<ref>[[Zwolaneck v. Baker Co.]], 150 Wis. 517.</ref><br />
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===Rejection or Conditional Acceptance===<br />
If the offer made is rejected, the party making it is relieved from liability on that offer and one who has rejected it cannot afterwards convert the same offer into an agreement by acceptance; to do so he must. have the renewed consent of the person who made the offer.<ref>[[James v. Darby]], 100 Fed. Rep. 228, 229, 40 C.C.A. 341; [[Sheffield Canal Co. v. R.R. Co.]], 3 Rail & Canal Cas. 132; [[Davis v. Parrish]], Litt. Sel. Cas. 153, 12 Am. Dec. 287.</ref> A conditional acceptance or an acceptance not in accordance with the terms of the offer has the same effect; it is a counter-proposal and a virtual rejection of the original offer.<ref>[[Gallagher v. Gas Light Co.]], 141 Cal. 699, 75 Pac. 329; ''[[Wittner v. Hurwitz]]'', 216 N.Y. 259, 110 N.E. 433; ''[[Poel v. Brunswick Co.]]'', 216 N.Y. 310, 110 N.E. 619; ''[[McRae v. Ross]]'', 170 Cal. 74, 148 Pac. 216.</ref> Therefore a subsequent acceptance of the original proposal operates only as a new counter-proposal which the original proposer may either accept or reject.<ref>9 Cyc. 290, 13 C.J. 296; [[Carr v. Duval]], 14 Pet. 77; [[Minn., etc., R. Co. v. Mill Co.]], 119 U.S. 147; [[Jenness v. Mt. Hope Iron Co.]], 53 Me. 20; [[Northwestern Iron Co. v. Meade]], 21 Wis. 474, 94 Am. Dec. 557; [[Clay v. Ricketts]], 66 Ia. 362, 23 N.W. Rep. 755.</ref> In ''[[Hyde v Wrench]]''<ref>3 Beav. 334.</ref> A proposed to sell a farm to B for £1,000; B said he would give £950. A refused this offer, and then B said that he was willing to give £1,000. A was no longer ready to adhere to his original proposal and B endeavored to obtain specific performance of the alleged contract. But it was held that his offer to buy at £950 in answer to A's offer to sell for £1,000 was a refusal of the offer of A and a counter-proposal, and that he could not after this, without A's consent, hold him to his original offer.<br />
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To constitute a rejection of the offer there must be a distinct counter-proposition.<ref>"It Is believed that this position is sound. . . . Singularly enough, there appears to be no decision involving the point and the various textbooks do not refer to it." Ashley, Contr. § 18.</ref> A mere inquiry whether the offeror would change his terms will not be a rejection of the original offer so as to prevent a subsequent acceptance of it.<ref>[[Stevenson v. McLean]], 5 Q.B.D. 346; [[Portage Rubber Co. v. Fruin]], 186 Ill. App. 11. Or expressions of hope or suggestions or requests. Id.</ref> Nor will an inquiry as to how remittance shall be made,<ref>[[Clark v. Dales]], 20 Barb. 42.</ref> or a suggestion that the business shall be transacted through a bank instead of a person.<ref>[[Brisban v. Boyd]], 4 Paige (N.Y.) 17, and see [[Stotesbury v. Massengale]], 13 Mo. (App.) 221; [[Brown v. Cairns]], 63 Kan. 393, 66 Pac. Rep, 1033</ref> An immaterial condition does not constitute a rejection,<ref>9 Cyc. 291, 13 C. J, 297; [[Bonnerve v. Jenkins]], 8 Ch. D. 70. In this case the agent of an intending purchaser having made an offer for the property received in reply a letter from the vendor's agent accepting the offer and fixing a time for signing the contract. The purchaser's agent not appearing at the time named, the vendor refused to complete. But it was held that this was no defense. The naming of the time did not make the acceptance a conditional one. So if the letter shows a complete contract, it will take effect in spite of a statement in the acceptance that a formal contract will be drawn up. [[Green v. Cole]], 103 Mo. 76; [[Bonnerve v. Jenkins]], L.R. 8 Ch. D. 70; [[Blaney v. Hope]], 14 Ohio St. 292; [[Mackey v. Mackey]], 29 Gratt. 158; [[Bell v. Offut]], 10 Bush. 632; [[Allen v. Chouteau]], 102 Mo. 309. When land is offered for sale by letter, acceptance specifying that payment is to be made at the place of the purchaser's residence is not unconditional, the terms of the offer entitle the vendor to payment at his own place of residence. [[Baker v. Holt]], 56 Wis. 100; [[Sawyer v. Brossart]], 67 Iowa 678; [[Northwestern Iron Co. v. Meade]], 21 Wis. 474; [[Gilbert v. Baxter]], 32 N.W. Rep. (Ia.) 364: [[Maynard v. Tabor]], 53 Me. 511; [[Fenno v. Weston]], 31 Vt. 345; [[Siebold v. Davis]], 67 Ia. 660; [[Langellier v. Schaefer]], 36 Minn. 361, 31 N.W. Rep, 690.</ref> nor a condition which the law implies.<ref>As a condition in response to an appllcatlon for a loan that the acceptor will make the loan when his attorney advises him that the title is good. [[Morse v. Tillitson Co.]], 253 Fed. Rep. 340, and see 1 A.L.R. Am. 1508.</ref><br />
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===Lapse of Time===<br />
Upon making an offer, an offeror may include the period in which the offer will be available. If the offeror has prescribed the time within which it is to be in force, on the expiration of that time it comes to an end without any further act or notice on the part of the offeror.<ref>19 Cyc. 291, 13 C. J. 297; [[Longworth v. Mitchell]], 26 Ohio St. 334; [[Potts v. Whitehead]], 20 N.J. Eq. 55, 59; [[Maclay v. Harvey]], 90 Ill. 525, 32 Am. Rep. 35; [[Ackerman v. Maddox]], 26 N. D. 50, 143 N. W. 147; [[Richardson v. Harding]], 106 U.S. 252, 1 Sc. T. 213.</ref><br />
<br />
If no time is fixed within which the offer is to be accepted, it will lapse after the expiration of a reasonable time.<ref>9 Cyc. 291, 13 C.J. 297. Offer to sell real estate; delay of five days in accepting not unreasonable. [[Kempner v. Cohn]], 47 Ark. 519; delay of two weeks unreasonable. [[Ortman v. Weaver]], 11 Fed. 358. Delay of six days in offer to sell manufactured goods unreasonable. [[Hargadine v. Reynolds]], 64 Fed. 560.</ref> The person who makes the offer is presumed to act in view of existing circumstances, and the person to whom it is addressed ought not to lie by until these have changed. The oferee must therefore decide forthwith; otherwise an offer might be accepted after the lapse of months or years, and when the state of things was no longer the same. <br />
<br />
What is a reasonable time will depend on the nature of the offer and the surrounding circumstances.<ref>9 Cyc. 292; [[Averlll v. Hedge]], 12 Conn. 424; [[Morse v. Bellows]], 7 N.H. 549, 28 Am. Dec. 752; [[Crabtree v. St. Paul Opera House Co.]], 39 Fed. 746; [[Minnesota Linseed Oil Co. v. Collier White Lead Co.]], 4 Dill. 431; [[Ramsgate Hotel Co. v. Montefiore]], L.R., 1 Exch. 109.</ref> An offer to buy or sell land would not require so prompt an acceptance as an offer to buy or sell chattels, corporate stock, etc., of a perishable character or of fluctuating value<ref>[[Kempner v. Cohn]], 47 Ark. 519, 1 S.W. Rep. 869, 48 Am. Rep. 775; [[Hill v. Mathews]], 78 Mich. 377, 44 N.W. Rep. 286.</ref> So if an article is offered for sale today at a certain price, and the buyer does not agree and goes away, a larger sum may be asked tomorrow when he returns prepared to buy.<ref>[[Johnson v. Fessler]], 7 Watts, 48, 32 Am. Dec. 738.</ref> <br />
<br />
An offer to sell goods through the mail must be accepted by a post (not necessarily the first) which leaves during business hours of the day after it is received.<ref>[[Maclay v. Harvey]], 90 Ill. 525, 32 Am. Rep. 38; [[Bernard v. Torrance]], 5 Gill & J. 383; [[Eagle Mill Co. v. Caven]], 76 Mo. App, 468; [[Batterman v. Morford]], 76 N. Y. 622; [[Ortman v. Weaver]], 11 Fed. 358; [[Dunlop v. Higgins]], 1 H.L. Cas. 381, 12 Jur. 295.</ref> The use of the telegraph to make the offer implies a still shorter limitation of time, and hence it has been held that an offer made by wire on one day could not be accepted by letter nor by a telegram the next day.<ref>[[Quenerduaine v. Cole]], 32 Wkly. Rep. 185; [[James v. Marion Fruit Jar & Bottle Co.]], 69 Mo. App. 207.</ref><br />
<br />
The rule is the same where the offer is for an act and not for a promise.<ref>[[Ramsgate Hotel Co. v. Montefiore]], L.R. Ex. 101; [[Loring v. Boston]], 7 Mete. 407.</ref> A reward for the arrest of a criminal ''ipso facto'' expired after a reasonable time, although never actually withdrawn, and one who had arrested a criminal three years after its publication is not entitled to avail himself of the offer.<ref>[[Loring v. Boston]], supra. Ten years was held not too long ([[Drummond v. U.S.]], 35 Ct. Cl. 236), and twelve years too long ([[Mitchell v. Abbott]], 25 Me. 338). to accept a published offer of a reward. In Connecticut it is held that an offer of a reward for a particular crime does not lapse until the statute of limitations bars the conviction. [[Re Kelly]], 39 Conn. 159.</ref><br />
<br />
An offer may have expired by a reasonable time having elapsed, yet if the offeree, in good faith, makes known his acceptance within any period which he could have fairly believed to be reasonable, good faith, it is said, requires the offeror, if he intends to set up the delay, to make known that intention promptly; otherwise he may be regarded as having assented to the offer made ''de novo'' in the late acceptance.<ref>[[Phillips v. Moore]], 71 Me. 78.</ref><br />
<br />
===Death or Insanity===<br />
The death<ref>9 Cyc. 293, 13 C. J. 298; [[Holfenstein's Estate]], 77 Pa. St. 328, 18 Am. Rep. 449; [[Wallace v. Townsend]], 43 Ohio St. 637, 64 Am. Rep. 829; [[Frith v. Lawrence]], 1 Paige 434; [[Twenty-third Street Baptist Church v. Cornell]], 117 N.Y. 601, 23 N.E. Rep. 177, 28 N.Y. St. 482; [[Mactier v. Frith]], 6 Wend. 103; [[Union Sawmill Co. v. Mitchell]], 122 La. 900, 48 South 317; [[Jordan v. Dobbins]], 122 Mass. 168.</ref> or insanity<ref>[[Beach v. First M. E. Church]], 96 Ill. 177.</ref> of either party before acceptance of the offer terminates it. The continuance of an offer is in the nature of a constant repetition of it, which necessarily requires someone capable of making a repetition.<ref>[[Pratt v. Trustees]], 93 lll. 478.</ref> Hence an acceptance communicated to the representatives of the maker of an offer cannot bind him. And since an offer unaccepted creates no rights, it can transmit none to the representatives of the person to whom the offer is made, and they have no power to accept it on behalf of his estate.<ref>[[Sutherland v. Perkins]], 76 Ill. 338.</ref> But in the case of contracts made through the mail where, as we have seen, the offerer, by using the post office, makes it his agent to receive the acceptance, the death of either party after the acceptance was mailed but before the letter could reach the offerer, would not affect the case, the contract being complete the moment the acceptance was mailed.<ref>[[Mactler v. Frith]], 6 Wend. 103. 21 Am. Dec. 262.</ref><br />
<br />
====Death of offeror====<br />
Generally death (or incapacity) of the offeror terminates the offer. This does not apply to option contracts.<br />
<br />
The offer cannot be accepted if the offeree knows of the death of the offeror.<ref>[[Fong v. Cilli]] (1968) 11 FLR 495</ref> In cases where the offeree accepts in ignorance of the death, the contract may still be valid, although this proposition depends on the nature of the offer. If the contract involves some characteristic personal to the offeror, the offer is destroyed by the death.<br />
<br />
====Death of offeree====<br />
An offer is rendered invalid upon the death of the offeree.<ref>[[Re Irvine]].</ref><br />
<br />
===Change of Circumstances===<br />
An offer may lapse from a change of the circumstances under which it was made. The destruction of the subject matter of the contract;<ref>See [[Contracts/Consent|Consent]].</ref> the dissolution of a partnership to whom or by whom it was made;<ref>[[Goodspeed v. Wiard Plow Co.]], 46 Mich. 322, 7 N.W. 902.</ref> a change in the physical condition of one to whom an offer to insure his life has been made;<ref>[[Equitable L. Assur. Co. v. McElroy]], 83 Fed. 631; [[Canning v. Farquhar]], 16 Q.B.D. 727, 66 L.J.Q.B. 225.</ref> and the bankruptcy of one of the parties which transfers all his property to trustees<ref>[[Meynell v. Surtees]], 1 Jur. N.S. 737, 25 L.J. Ch. 257.</ref> have been held to cause the offer to come to an end.<br />
<br />
== See also ==<br />
*[[wikisource:1911 Encyclopædia Britannica/Acceptance|1911 Encyclopædia Britannica definition of Acceptance]]<br />
*[[:fr:Bataille des conditions générales|Bataille des conditions générales]] (The Battle of the Forms in France)<br />
*[[Harris v Nickerson]]<br />
*[[Implied in fact contract]]<br />
*[[Last shot]] rule<br />
*[[Proposal (business)]]<br />
*[[Wolf v Forfar Potato Co]]<br />
<br />
== References ==<br />
{{Reflist|30em}}</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=Contracts/Parties&diff=41934Contracts/Parties2022-03-16T05:34:11Z<p>Rezsue: </p>
<hr />
<div>{{:Contracts/TOC}}<br />
<br />
==Two or More Parties Essential==<br />
Since a person cannot enter into an agreement with herself nor maintain an action against herself, it follows that two or more parties are essential to every contract. One cannot enter into a contract with herself, or with herself and others,<ref>Faulkner v. Lowe, 2 Exch. 595, 597, 154 Reprint 628 (holding, where defendant borrowed money from a fund in which he and others were jointly interested and covenanted to repay the money to the joint account, that he could not be sued on the covenant. Pollock, C. B., saying: "The covenant to my mind, is senseless. I do not know what is meant, in point of law, by a man paying himself").</ref> even though she acts in different capacities. It is not necessary, however, that both parties shall be ascertained or in existence at the time the offer is made, if the offer is accepted by one who is within its terms.<br />
<br />
==Capacity to Contract==<br />
To render a contract binding the parties must have the capacity to contract.<ref>'''Distinction between testamentary and contracting capacity''': One may be capable of making a will and yet incapable of making a contract. In making the latter, his mind and will power necessarily come In contact with that or the other contracting party, and may be unduly influenced or entirely overcome by it. A contract, therefore, made by one of impaired mental and wil1 power with one standing in confidential relations with him should be closely scrutinized to see that no improper advantage has been taken or undue influence exerted. The exertion of undue influence in such case may be pronounced from the nature of the contract and from the unfair and unreasonable advantage secured by it. Jones v. Belshe, 238 Mo. 524, 141 SW 1130. To same effect Ennis v. Burnham, 169 Mo. 494, 60 SW 1103.</ref> Some persons in the law are altogether incapable of contracting or of entering into particular contracts, while others are under a partial or qualified incapacity. The question of mental capacity to make a contract is elsewhere treated; it is sufficient to say here that, as a general rule, a contract will not be set aside for incapacity of a party, if he was competent to make the particular contract, and there was no fraud or concealment and no advantage taken;<ref>1206); Cyc es. Sands v. Potter, 165 Ill. 397, 46 NE 282, 56 AmSR 253; Taylor v. Patrick. 1 Bibb <K[.> 168; Loman v. Paullin, (Okl.) 16 P 73; Mays v. Prew ett. 98 Tenn. 474, 40 SW 483.</ref> and that neither age, sickness, extreme distress, nor debility of body will affect the capacity to make a contract or a conveyance, if sufficient intelligence remains to understand the transaction.<ref>U. S.-Bowdoln College 1'.<br />
Merritt. 75 Fed. UO [app dtam 1U<br />
U. S. 651. 17 SCt 416, 42 L. ed. 850j.<br /><br />
Del.-Rofers v. Rogers, 22 De.<br />
267 66 A 74.<br /><br />
'''Ill'''.-Perry v. Pearson, 135 Ill. 218. 26 NE 636; ''[[Kimball v. Cuddy]]'', 117 Ill. 213, 7 NE 689; ''[[Pickerell v. Moru]]'', 97 Ill. 220; ''[[Willem v. Dunn]]'', 93 Ill. 511; ''[[Rogers v. Higgins]]'', 57 Ill. 244; ''[[Lindsey v. Lindsey]]'', 50 Ill. 79, 99 AmD 4891; Baldwin v. Dunton, 40 Ill. 188; Mil er v. Craig, 36 Ill. 109; Johnson v. Watson, 169 Ill. A. %18.<br /><br />
'''Ind'''.-Graham v. Castor, 56 Ind 659.<br /><br />
Iowa.-Nason v. Ch icago, etc .. R.<br />
Co., 149 Iowa 608, 128 NW 854· Mer·<br />
chants' Nat. Bank v. Soesbe, US Iowa<br />
364, 116 NW 123; Harris v. Wamsley,<br />
41 Iowa 671.<br /><br />
Ky.-Bevins v. Lowe, 169 Ky. 43S.<br />
167 SW 422; Chrisman v. Quick. 174<br />
Ky. 846, 848, 193 SW U [quot Cycl.<br /><br />
Md.--caln v. Warford. 33 Md. !!i.<br /><br />
Mlch.-Mason v. Dunbar, 4S Mich.<br />
407, 6 NW 432, 38 AmR 2t1.<br /><br />
N. J.-Lodge v. Hultnga, U N. J. Eq. 159, 61 A 1016 [aff 64 N. J. Eq.<br />
761, 63 A 564).<br /><br />
N. Y.-Tulte v. Hart. 71 App. DIY.<br />
619, 76 NYS 1098; Jennings v. Hent8,<br />
neesy, 26 Misc. 265. 55 NYS 833 [a!f<br />
40 Af.P· Dtv. 633 mem, 58 NYS 1142<br />
mem .<br /><br />
N. C.-Rippy v. Gant. 39 N. C. 443.<br /><br />
Pa.--colonlal Trust Co. v. Hotfstot.<br />
21i Pa. 497, 69 A 62; A lman v. Stout,<br />
42 Pa. 114; Nance v. Boyer. 30 Pa. 99.<br /><br />
R.I.--cooney v. ·Lincoln. 21 R. 1.<br />
246, 42 A 867. 79 AmSR 799.<br /><br />
S. C.-Devall v. Devall. 4 S. C. Eq.<br />
79.<br /><br />
Utah.--chadd v. Moser. 2li Utah<br />
369, 71 P 870.<br /><br />
Wls.-Boardman v. Loren tzen, 165<br />
Wis. 666, 146 NW 760, 62 LRANS<br />
476; Henderson v. McG regor, SO Wis. 78.<br /><br />
B. C.-Baxter v. Roolo, 6 DomLR<br />
764, 21 WestLR 892.<br /><br />
'''Undue influence''' see [[Contracts/Consent#Undue Influence|Undue Influence]].</ref> Where, however, the party has not sufficient mental capacity to comprehend the effect of his contract, it may be set aside.<br />
<br />
==Designation and Certainty==<br />
''Construction of contract as to parties see '''[[Contracts/Construction and Operation#Parties|Construction and Operation § Parties]]'''.''<br />
<br />
''Parties against whom contract may be enforced see '''[[Contracts/Parties to Action#Parties against Whom Contracts May be Enforced|Parties against Whom Contracts May be Enforced]]'''.''<br />
<br />
It is necessary to the validity of a written contract that the contracting parties be described, and the rules of certainty applicable to other essentials of the contract<ref>See [[Contracts/Offer|Offer]]</ref> are applicable to the specification and determinability of the parties thereto.<ref name="Clark">Clark v. Great Northern R. Co., 81 Fed. 282.</ref> Hence a promise by an indefinite and unidentified number of persons to do a particular thing jointly cannot be enforced, as the promisee will not be permitted to proceed against selected persons to compel them to do by themselves what they have only promised to assist others in doing.<ref name="Clark" /><br />
<br />
==References==<br />
{{reflist}}</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=User_talk:Lost_Student/Archive_1&diff=41929User talk:Lost Student/Archive 12022-03-16T04:39:03Z<p>Rezsue: /* message test */ new section</p>
<hr />
<div>Welcome to my talk page. Feel free to drop me a note. Just click "Start a new section" (the plus sign) to open up a new thread.<br />
[[User:Lost Student|Lost Student]] 15:46, January 25, 2012 (CST)<br />
<br />
== message test ==<br />
<br />
This is a test--[[User:Rezsue|Rezsue]] ([[User talk:Rezsue|talk]]) 00:39, March 16, 2022 (EDT)</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=Anthony_Vincent_Baker&diff=41919Anthony Vincent Baker2022-03-11T06:11:10Z<p>Rezsue: </p>
<hr />
<div>{{Infobox Professor<br />
|image=[[File:Default avatar.jpg]]<br />
|title=Associate Professor of Law<br />
|law_school=Campbell University Norman Adrian Wiggins Law School<br />
|subjects=Criminal Justice<br />
|website=http://law.campbell.edu/Faculty/Baker.htm<br />
|outlines=NAWLS Baker Criminal Justice<br />
}}<br />
{{Professor stub}}</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=Gray_v._Martino&diff=41794Gray v. Martino2022-02-23T00:34:23Z<p>Rezsue: </p>
<hr />
<div>{{Infobox Case Brief<br />
|subject=Contracts<br />
|case_treatment=No<br />
|facts=Plaintiff was a police officer who had information that would help recover some stolen jewelry. Plaintiff agreed to share that information in exchange for the reward of the stolen goods. After the items were recovered, the reward wasn't paid.<br />
|procedural_history=Plaintiff brought suit to recover the promised reward. District court awarded Plaintiff amount of reward. Defendant appealed.<br />
|issues=Was the plaintiff acting in performance to his public duty as a police officer?<br />
|holding=Plaintiff was just doing his job and could not collect the reward.<br />
|judgment=Reversed.<br />
}}</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=KGM_Harvesting_Co._v._Fresh_Network&diff=41793KGM Harvesting Co. v. Fresh Network2022-02-22T23:56:40Z<p>Rezsue: </p>
<hr />
<div>{{Infobox Case Brief<br />
|subject=Contracts<br />
|case_treatment=No<br />
|facts=KGM Harvesting Co. sold lettuce, under contract, in large quantities to Fresh Network. Fresh, in turn, sold the lettuce to other buyers. When the price of lettuce more than doubled, KGM made a profit by selling to other buyers and not selling to Fresh. Fresh covered by buying elsewhere, but at a loss of approx. $700,000.<br />
|procedural_history=Jury determined that KGM breached contract, and the buyer was entitled to $655,906.22 with interest accruing from 30 days before trial. Seller appealed.<br />
|issues=Is Fresh entitled to the damages awarded?<br />
|holding=Yes<br />
|judgment=Affirmed and reversed (damage was increased to add interest starting at the time of the filing of the original complaint).<br />
|reasons=Buyer should be in same position as if contract had been performed on both sides.<br />
}}</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=Holman_Erection_Co._v._Orville_E._Madsen_%26_Sons,_Inc.&diff=41792Holman Erection Co. v. Orville E. Madsen & Sons, Inc.2022-02-22T23:53:21Z<p>Rezsue: </p>
<hr />
<div>{{Infobox Case Brief<br />
|citation=330 N.W.2d 693 (Minn. 1983)<br />
|date=1983<br />
|subject=Contracts<br />
|case_treatment=No<br />
|facts=Defendant used subcontractor Plaintiff’s bid and listed Plainiff as the sub. D. had to use minority business, so they choose a different sub. Held for D.<br />
|issues=Was there a contract between the general contractor and subcontractor?<br />
|holding=No.<br />
|reasons=The general contractor relies on the subcontractor's bid, but subcontractor does not rely on the general contractor’s bid. More leeway and flexibility are granted to a general contractor.<br />
|rule=Use of a subcontractor's bid in submitting the prime bid does not (by itself) constitute acceptance of subcontractor’s offer.<br />
}}</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=Hill_v._Gateway_2000&diff=41791Hill v. Gateway 20002022-02-22T23:47:32Z<p>Rezsue: </p>
<hr />
<div>{{Infobox Case Brief<br />
|court=U.S. Court of Appeals, 7th Circuit<br />
|citation=105 F.3d 1147 (7th Cir. 1997)<br />
|date=1997<br />
|subject=Contracts<br />
|case_treatment=No<br />
|facts=The plaintiff ordered a computer on the phone from the defendant. Enclosed in the box of the computer was a list of terms to govern the purchase, including an arbitration clause and the statement that if the buyer did not agree to the terms then they should return the product. The plaintiff argued that they never truly read the terms, and that the terms do not constitute a valid contract, and filed a suit in federal court.<br />
|procedural_history=Defendant asked the court to enforce the arbitration clause, but the judge wrote that the record was insufficient to support a finding of a valid arbitration agreement between the parties and that the plaintiffs were not given an adequate notice of the arbitration clause.<br />
|issues=Whether an arbitration clause can be included in the terms of a contract when the terms are never explicitly mentioned at the time of contract formation, but instead are enclosed in the purchased product with an offer to refund the purchase should the buyer disagree with the terms.<br />
|holding=The decision of the district court is vacated and the decision is remanded with instructions to compel the plaintiffs to submit their dispute to arbitration.<br />
|reasons=Because they did not seek to discover the terms in advance and knew that the carton would contain some important terms, the plaintiffs must be bound to the arbitration clause when they did not return the product within the allotted time, for their acceptance of the product and enclosed terms represented an acceptance of the contract.<br />
}}</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=Harrell_v._Sea_Colony,_Inc.&diff=41790Harrell v. Sea Colony, Inc.2022-02-22T23:45:30Z<p>Rezsue: </p>
<hr />
<div>{{Infobox Case Brief<br />
|court=Court of Special Appeals of Maryland<br />
|citation=35 Md. App. 300, 370 A.2d 119 (1977)<br />
|date=1977<br />
|subject=Contracts<br />
|case_treatment=No<br />
|facts=By a written contract, the plaintiff agreed to buy from the defendant, Sea Colony, a condo to be constructed by defendant. The contract called for a deposit of $11,235, which consisted of $5,000 cash and a promissory note for $6,235, payable at settlement. The contract also stated that if there was a default by purchaser, the defendant could keep the cash deposit and enforce the note. Mr. Harrell then stated that he wanted to cancel the contract based on his personal financial situation, but only if he could retain his cash deposit. The company replied that he had cancelled his contract, but they could not refund his deposit.<br />
|procedural_history=Plaintiff filed a suit for anticipatory breach of contract against the company and Freeman, one of the company’s agents, claiming that defendant had repudiated the offer and sold the condo to another buyer. He claimed his deposit as well as the difference between the contract price and the sold price to the other buyer. The trial court found for both defendants.<br />
|issues=#Whether an agent is liable if he fully discloses the identity of his principle to the third party.<br />
#Whether an attempt to convert a request for a mutual rescission of the contract is an anticipatory breach or repudiation.<br />
|holding=Remanded because there was not breach of contract against Sea Colony, but judgment for defendant Freeman because he was not a party of the contract.<br />
|reasons=#Generally, if an agent fully discloses the identity of his principle to the third party, absent an agreement to the contrary he is insulated from liability.<br />
#In order to constitute anticipatory breach of contract, there must be a definite manifestation of intention on the part of the repudiator that he will not render the promised performance when the time fixed for it in the contract arrives.<br />
}}</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=Jones_v._U.S.&diff=41789Jones v. U.S.2022-02-22T22:47:05Z<p>Rezsue: </p>
<hr />
<div>{{Infobox Case Brief<br />
|subject=Criminal Law<br />
|case_treatment=No<br />
|facts=Jones was supposed to be caring for a 10-month-old infant. Jones neglected to do so and the baby died.<br />
|procedural_history=D was found guilty initially<br />
|issues=can Jones be found liable?<br />
|holding=Only if he was being paid to care for the infant.<br />
|judgment=Reversed and remanded<br />
|reasons=Legal duty for care must be found. There are 4 possible scenarios in which this legal duty can be found:<br />
#statute imposes duty<br />
#one stands on a certain status relationship to another<br />
#one has assumed a contractual duty to care for another<br />
#one has voluntarily assumed the care of another and so secluded the helpless person as to prevent others from rendering aid.<br />
<br />
Scenario #3 is the only possible one under which Jones could be found liable. If trial ct. finds that he was in a contract to care for the infant, then he is liable for its death.<br />
|comments=Lower court must find out if there was a contract (written, oral, or implied) to care for the infant.<br />
}}</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=Commonwealth_v._Sherry&diff=41788Commonwealth v. Sherry2022-02-22T22:21:45Z<p>Rezsue: </p>
<hr />
<div>{{Infobox Case Brief<br />
|subject=Criminal Law<br />
|case_treatment=No<br />
|facts=Victim was a nurse at a hospital at which the three defendants were doctors. They were at a party for some hospital staff during which the victim danced with the defendants. Some time during the party, one of the defendants grabbed the victim and said, "we're going to Rockport." The victim verbally protested, but didn't physically protest because she thought the defendants were "horsing around." They climbed in a car and drove to Rockport, where some of them smoked marijuana. The defendants began to undress themselves and the victim. The defendants had sex with the victim one at a time.<br />
|procedural_history=Defendants were charged with rape and kidnapping. Jury acquitted on kidnapping and convicted on rape. Appealed.<br />
|arguments=Ds argued that to be found guilty, they had to have knowledge of the victim's lack of consent.<br />
}}</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=Texas_Tech_University_School_of_Law&diff=41787Texas Tech University School of Law2022-02-22T22:19:55Z<p>Rezsue: </p>
<hr />
<div>{{Infobox Law School<br />
|type=Public<br />
|established=1947<br />
|dean=Walter Huffman<br />
|street_address=1802 Hartford Ave<br />
|city=Lubbock<br />
|state=TX<br />
|country=US<br />
|geocode_fail=No<br />
|website=http://www.law.ttu.edu/<br />
|class_canceled=Yes<br />
|online_classes_offered=Yes<br />
|online_finals_offered=Yes<br />
|canceled_graduation=Yes<br />
|temp_pass_fail_grading=Optional<br />
|pass_fail_grading_notes=Optional “Credit/No Credit” after grades are received.<br />
|pass_fail_grading_url=https://www.reddit.com/r/LawSchool/comments/fjp4kt/complete_list_of_grading_changes_corona_spring/fmulf06/<br />
}}<br />
[[Image:TTlaw.jpg|thumb|right|262px|School of Law|link=Special:FilePath/TTlaw.jpg]]<br />
The '''Texas Tech University School of Law''' is an [[American Bar Association|ABA]]-accredited law school located on the campus of [[Texas Tech University]] in [[Lubbock, Texas]].<br />
<br />
==Centers==<br />
*[http://www.ttu.edu/biodefense/ Center for Biodefense, Law and Public Policy]<br />
*[http://www.law.ttu.edu/lawWeb/centersprograms/centers/military/index.shtm Center for Military Law and Policy]<br />
*[http://www.law.ttu.edu/lawWeb/centersprograms/centers/water/index.shtm Center for Water Law and Policy]<br />
<br />
==Degree and certificate programs==<br />
*J.D.<br />
*Joint programs<br />
**J.D./MBA<br />
**J.D./MPA<br />
**J.D./M.S. in Agriculture and Economics<br />
**J.D./M.S. in Accounting<br />
**J.D./M.S. in Biotechnology<br />
**J.D./M.S. in Crop Science/Horticulture/Soil Science/Entomology<br />
**J.D./M.S. in Environmental Toxicology<br />
**J.D./M.S. in Personal Financial Planning<br />
*Law and Science Certificate Program<br />
*Legal Practice Program<br />
<br />
==Publications==<br />
*''[http://www.studentweb.law.ttu.edu/tbl/ Texas Bank Lawyer]''<br />
*''[http://www.studentweb.law.ttu.edu/alj/index.htm Texas Tech Administrative Law Journal]''<br />
*''[http://www.texastechlawreview.org/ Texas Tech Law Review]''<br />
*''[http://www.studentweb.law.ttu.edu/lawyer/ Texas Tech Lawyer]'' (alumni magazine)<br />
<br />
==External link==<br />
*[http://www.law.ttu.edu/ Texas Tech University School of Law]</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=Feist_v._Rural&diff=41786Feist v. Rural2022-02-22T22:18:29Z<p>Rezsue: </p>
<hr />
<div>{{Infobox Case Brief<br />
|subject=Intellectual Property*Copyright<br />
|case_treatment=No<br />
|facts=Facts: Rural is a local telephone company. Per regulation, Rural publishes an annual telephone directory. Feist wanted to publish an area-wide directory and got permission from all other local telephone companies in the area to license listings, Rural being the only one that withheld permission. Feist took directory listings straight from Rural's directory. Rural sued for copyright infringement.<br />
|holding=The directory listings are not copyrightable. No infringement.<br />
|reasons=Facts are not copyrightable because they were discovered rather than created. The facts are not "original" in that the fact-finder did not originally create them, but copied them from the world around them. Compilation of facts are protectable only to the extent that the arrangement or selection of facts into a compilation is an act of creativity. Only original expression is protected by copyright law. That anything created by the "sweat of the brow" is copyrightable is an old, fallacious idea.<br />
}}</div>Rezsuehttps://www.wikilawschool.net/w/index.php?title=Securities_Regulation&diff=40870Securities Regulation2021-01-30T01:35:14Z<p>Rezsue: </p>
<hr />
<div>{{Infobox General Outline<br />
| subject = Securities Regulation<br />
| book_one = Securities Regulation casebook<br />
| book_two = Securities Regulation (University Casebook Series)<br />
| book_three = Securities Regulation nutshell<br />
| book_four =<br />
| related = <br />
}}<br />
<div class="mceNonEditableOverlay"></div><p></p><p class="mw_paragraph"></p><p><br></p><ol><li style="font-weight: 400;" aria-level="1"><h1>Materiality</h1></li><ol><li style="font-weight: 400;" aria-level="2"><h2>Definition of Material&nbsp;</h2></li><ol><li style="font-weight: 400;" aria-level="3"><h3>Test: The Substantial Likelihood Test</h3></li><ol><li style="font-weight: 400;" aria-level="4">Information is material if there would be a substantial likelihood that a reasonable investor would consider the information important in deciding whether to buy or sell the security, because the information significantly alters the total mix of information available that is relevant to that decision. Basic v. Levinson (1988).</li></ol><li style="font-weight: 400;" aria-level="3"><h3>The Reasonable Investor</h3></li><ol><li style="font-weight: 400;" aria-level="4">Rule: The standard is objective. The reasonable investor in a market in which many individual investors trade will be deemed less schooled and sophisticated than a market containing only experienced traders and institutions using complex computer algorithms. United States v. Litvak (2d Cir. 2018).</li><ol><li style="font-weight: 400;" aria-level="5">Litvak (holding that the standard applies to the reasonable investor in a particular market, not all markets; therefore, testimony that purchaser’s representative believe Litvak was acting as purchaser’s agent was not objectively reasonable in the residential-mortgage backed securities market)</li></ol></ol></ol><li style="font-weight: 400;" aria-level="2"><h2>Analyzing the Materiality Test</h2></li><ol><li style="font-weight: 400;" aria-level="3"><h3>Courts use a variety of analyses and tests to analyze Basic’s rule for materiality:</h3></li><li style="font-weight: 400;" aria-level="3"><h3>The Probability/Magnitude Test: Speculative Information</h3></li><ol><b><li aria-level="4">Exclusive for M&amp;As</li></b><li style="font-weight: 400;" aria-level="4">Under the probability/magnitude test, materiality depends “upon a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the even in light of the totality of the company activity.” Basic v. Levinson</li><ol><li style="font-weight: 400;" aria-level="5">Basic’s Facts:</li><ol><li style="font-weight: 400;" aria-level="6">Basic made a series of statements about a merger. The merger info leaked. Basic said to the news that no negotiations were ongoing several times. A few weeks later, Basic announced that a takeover was imminent. Plaintiff sued under 10b-5. Court held that using the probability/magnitude test, such actions were material and basic committed a misstatement even though securities law prevented them from disclosing the acquisition.</li></ol><li style="font-weight: 400;" aria-level="5">Probability in the M&amp;A context depends on an “indicia of interest in the transaction at the highest corporate levels.”</li><ol><li style="font-weight: 400;" aria-level="6">Board Resolutions</li><li style="font-weight: 400;" aria-level="6">High-level participation in negotiations</li><li style="font-weight: 400;" aria-level="6">Retention of investment bankers</li><li style="font-weight: 400;" aria-level="6">Specificity of deal—e.g., form of transaction, price, identity of surviving company, distribution of officer positions</li><li style="font-weight: 400;" aria-level="6">Possible regulatory roadblocks—e.g., antitrust, banking regs.</li></ol><li style="font-weight: 400;" aria-level="5">Magnitude depends on whether we are considered the acquiror or target.</li><ol><li style="font-weight: 400;" aria-level="6">Always high for the target</li><li style="font-weight: 400;" aria-level="6">Size of acquirer can make a deal a small magnitude for acquirer, but this can be important if the small target produces a product that the acquiring company needs to complete its product line or enter a new market</li><li style="font-weight: 400;" aria-level="6">Premium over market is also relevant</li></ol></ol></ol><li style="font-weight: 400;" aria-level="3"><h3>Quantitative Analysis</h3></li><ol><li style="font-weight: 400;" aria-level="4">Note: Must be comparing apples to apples (revenue to revenue), not revenue to profit.</li><li style="font-weight: 400;" aria-level="4">Step 1: If the error of omission is less than 5% than the error or omission is likely not material.&nbsp;</li><li style="font-weight: 400;" aria-level="4">Step 2: Using the SAB 99 Factors, determine whether the error or omission is material?</li><ol><b><li aria-level="5">SAB 99 Factors include:</li></b><li style="font-weight: 400;" aria-level="5">Whether the misstatement arises from an item capable of precise measurement or whether it arises from an estimate and, if so, the degree of imprecision inherent in the estimate.</li><li style="font-weight: 400;" aria-level="5">Whether the misstatement masks a change in earnings or other trends.</li><li style="font-weight: 400;" aria-level="5">Whether the misstatement hides a failure to meet analysts’ consensus expectations for the enterprise.</li><li style="font-weight: 400;" aria-level="5">Whether the misstatement changes a loss into income or vice versa.</li><li style="font-weight: 400;" aria-level="5">Whether the misstatement concerns a segment or other portion of the registrant’s business that has been identified as playing a significant role in the registrant’s operations or profitability.</li><li style="font-weight: 400;" aria-level="5">Whether the misstatement affects the registrant’s compliance with regulatory requirements.</li><li style="font-weight: 400;" aria-level="5">Whether the misstatement affects the registrant’s compliance with loan covenants or other contractual requirements.</li><li style="font-weight: 400;" aria-level="5">Whether the misstatement has the effect of increasing management’s compensation—for example, by satisfying requirements for the award of bonuses or other forms of incentive compensation.</li><li style="font-weight: 400;" aria-level="5">Whether the misstatement involves concealment of an unlawful transaction.</li></ol></ol><li style="font-weight: 400;" aria-level="3"><h3>Stock Price Movement: Historical Data</h3></li><ol><li style="font-weight: 400;" aria-level="4">Rule: When the stock of an issuer is traded in an efficient market, “the materiality of disclosed information may be measured post hoc by looking to the movement, in the period immediately following disclosure, of the price of the firm’s stock.” In re Merck &amp; Co. (3rd Cir. 2005)</li><li style="font-weight: 400;" aria-level="4">Note:&nbsp;</li><ol><li style="font-weight: 400;" aria-level="5">A fact may be material if disclosure causes the price of the relevant stock to move up or down in a statistically significant way. This test is objective and persuasive at trial; however, stock prices move for many reasons.</li><li style="font-weight: 400;" aria-level="5">When analyzing whether the information changed the stock price, analyze whether nonpublic information changed the stock price or some other information or event affected that price.&nbsp;</li><li style="font-weight: 400;" aria-level="5">Stock price must be immediate—within one day—after the release of nonpublic information.</li></ol></ol><li style="font-weight: 400;" aria-level="3"><h3>Qualitative Analysis: Historical Information &amp; Management Integrity (Non-Financial Numbers)</h3></li><ol><li style="font-weight: 400;" aria-level="4">Covers:&nbsp;</li><ol><li style="font-weight: 400;" aria-level="5">Wrongdoings by directors and top management</li><li style="font-weight: 400;" aria-level="5">Managerial and business ability of directors and top management</li><li style="font-weight: 400;" aria-level="5">Wrongdoing</li><ol><li style="font-weight: 400;" aria-level="6">Lying by mgmt. about matters other than the operation of the issuer may or may not be important</li><li style="font-weight: 400;" aria-level="6">Wrongdoing is presumptively material if its consists of actions by top management to benefit themselves at the expense of the company or shareholders</li><li style="font-weight: 400;" aria-level="6">May implicate quantitative analysis—e.g., where wrongdoing is a violation of the law which, if discovered, threatens business; removes a competitive advantage; or runs the risk of a fine or civil liability.</li></ol><li style="font-weight: 400;" aria-level="5">Management ability and control of the company</li><ol><li style="font-weight: 400;" aria-level="6">Management wrongdoing may cast doubt on ability to manage.&nbsp;</li><ol><li style="font-weight: 400;" aria-level="7">Franchard, where unauthorized withdrawals from business were prompted by the decline of Glickman’s other enterprises, which in turn suggested that he might not have the magic touch that the Glickman Corporation touted as the reason for buying that company’s stock</li></ol><li style="font-weight: 400;" aria-level="6">Facts about directors or top management may be material in a particular case even if SEC rules do not require disclosure of the particular experience</li></ol><li style="font-weight: 400;" aria-level="5">Puffing—general optimistic statements by an issuer, or general self-congratulatory statements, that market participants would not use in valuing the company—is not material</li></ol><li style="font-weight: 400;" aria-level="4">Franchard’s Importance:</li><ol><li style="font-weight: 400;" aria-level="5">Facts showing&nbsp;</li><ol><li style="font-weight: 400;" aria-level="6">misuse of corporate assets for personal benefit of top officers or directors or&nbsp;</li><li style="font-weight: 400;" aria-level="6">self-dealing by top officers or directors at the corporation’s expense&nbsp;</li><li style="font-weight: 400;" aria-level="6">are very likely to be material</li></ol></ol></ol></ol><li style="font-weight: 400;" aria-level="2"><h2>The Context: “Total Mix” Defenses</h2></li><ol><li style="font-weight: 400;" aria-level="3">Rule/Test: Under Basic, the information is only material if it affects the “total mix” of information available&nbsp;</li><li style="font-weight: 400;" aria-level="3">Multiple Variations of the “Total Mix” Test</li><ol><li style="font-weight: 400;" aria-level="4">“Truth on the Market” Defense: The truth on the market defense asserts that a misrepresentation is immaterial if the information is already known to the market because the misrepresentation cannot then defraud the market. Longman v. Food Lion, Inc.</li><ol><li style="font-weight: 400;" aria-level="5">If information is already in the market, repeating it does not change the total mix, so the information, when repeated, is not material.</li><li style="font-weight: 400;" aria-level="5">Longman (holding that Defendants did not have a securities cause of action for Defendant’s unsafe and illegal employment and labor practices because it was known to the market during the time in question and when the information was disclosed during DoL settlement discussions, the stock price was relatively unchanged. Further, D’s sanitation issues were mere puffery and Ps evidence of quantiatively small samples was unavailing as to the business as a whole (quantitative analysis))&nbsp;</li></ol><li style="font-weight: 400;" aria-level="4">Bespeaks Caution: Under this defense, forward-looking statements are rendered immaterial as a matter of law if they are accompanied by disclosure of risks—not boilerplate information--that may preclude the forward-looking projection from coming to fruition. Kaufman v. Trump’s Castle Funding (3rd Cir. 1993). The PLSRA codifies this at Securities Act § 27A; Exchange Act § 21E.</li></ol></ol></ol><li style="font-weight: 400;" aria-level="1"><h1>Definition of a Security</h1></li><ol><li style="font-weight: 400;" aria-level="2"><h2>Opening Rule Statement</h2></li><ol><li style="font-weight: 400;" aria-level="3">In drafting securities laws, Congress enacted statutes to compel full and fair disclosure to the issuance of “many types of instruments that in our commercial world would fall within the ordinary concept of [the definition of] a security.” Landreth Timber Co. (1985). The definition of the word “security” includes, “unless the context otherwise requires,” any note, stock, and investment contract. Sec. Act. Section 2(a)(1); Exchange Act Section 3(a)(10). If the financial product or instrument falls within the scope of a financial product under the definition of the word security, then securities laws apply “unless the context otherwise requires” that it falls outside its scope. Id. In searching for the scope and meaning of any particular word under the definition of security, “form should be disregarded for substance and the emphasis should be on economic reality.” United Housing Fdn., Inc. v. Forman (1975).&nbsp;</li></ol><li style="font-weight: 400;" aria-level="2"><h2>Investment Contract&nbsp;</h2></li><ol><li style="font-weight: 400;" aria-level="3"><h3>Opening</h3></li><ol><li style="font-weight: 400;" aria-level="4">The term “security” includes the words “investment contract.” Sec. Act. Section 2(a)(1); Exchange Act Section 3(a)(10). Investment contract is a catch-all provision and is broad. Under Howey, an investment contract means a “contract, transaction or scheme” that satisfies four elements. SEC v. W.J. Howey Co. (1946).&nbsp;</li></ol><li style="font-weight: 400;" aria-level="3"><h3>First, a person must invest. Howey.&nbsp;</h3></li><ol><li style="font-weight: 400;" aria-level="4">To invest means to give specific consideration in return for a separable financial interest with the characteristics of a security. Int’l Brotherhood of Teamsters v. Daniel (1979). The investment must be voluntary by the investor and for investment purpose (i.e. a financial/monetary reteurn). The investment may be monetary or in-kind. Id. In Daniel, the Court found the involuntary donation to an employee’s pension fund as not a security because the employee was compelled to be in the plan and the employee was providing labor (thereby allowing them to obtain the contribution) for their livelihood—not investment purposes.</li></ol><li style="font-weight: 400;" aria-level="3"><h3>Second, there must be a common enterprise. SEC v. SG Ltd. (1st Cir. 2001)&nbsp;</h3></li><ol><li style="font-weight: 400;" aria-level="4">Circuit Split</li><b><li aria-level="4">Horizontal Commonality involves the pooling of assets from multiple investors so that all share in the profits and risk of the enterprise.&nbsp;</li></b><ol><b><li aria-level="5">Two elements: (1) Pooling of assets, and (2) share in profit and risks</li></b></ol><b><li aria-level="4">Broad Vertical Commonality requires that the well-being of all individual investors be dependent upon the promotor’s efforts and expertise (even if no pooling of funds or pro rata distribution of profits). Under this commonality, investors owning the same percentage of ownership may receive differing returns, and the promoter does not necessarily share the risk with investors.</li></b><b><li aria-level="4">Narrow Vertical Commonality requires that the investors’ fortunes be interwoven with and dependent upon the efforts and success of the promoters. Essentially, this is broad vertical with the promoter assuming some risk along with the investors.</li></b></ol><li style="font-weight: 400;" aria-level="3"><h3>Third, the investor is led to expect profits. United Housing Fdn. v. Forman (1975).</h3></li><ol><li style="font-weight: 400;" aria-level="4">Rule: Led to expect profits means that the investor is attracted to the investment solely by the prospect of a return on his investment. When a purchaser is motivated by a desire to use or consume the item, the securities laws do not apply. United Housing Fdn., Inc. v. Forman (1975)</li><ol><li style="font-weight: 400;" aria-level="5">Forman (finding this element lacking when a purchaser-investor was motivated to invest by a desire to use or consume—“to occupy the land or to develop it”)</li></ol><li style="font-weight: 400;" aria-level="4">Mixed Consumption and Return: An expectation of profits under Howey may exists even if the investor intends the profits to go towards charity or person consumption. Warfield v. Alaniz (9th Cir. 2009) (finding annuities were investment contracts and the fact that proceeds went to charity did not diminish this expectation).</li><li style="font-weight: 400;" aria-level="4">Finding: To determine whether the investor expects profit, the court may look to the promotion materials or oral presentations to see whether they pitched return as a reason for buying.</li></ol><li style="font-weight: 400;" aria-level="3"><h3>Fourth, profits must be derived solely from the efforts of the promoter or a third party. Howey.</h3></li><ol><li style="font-weight: 400;" aria-level="4">More Control 🡪 Not a security; Less control🡪 Investment contract</li><li style="font-weight: 400;" aria-level="4">Rule: The test is whether the investors, considering actual and the practical exercise of their powers, had a sufficient influence over factors that would determine the success or failure of the business.&nbsp;</li><li style="font-weight: 400;" aria-level="4">LLP/LLC: There is a rebuttable presumption that limited interests are securities and general partnership interests are not securities because limited partners do not exercise significant participation in the business while general partners do; however, if the Williamson factors are all present, either interest is a security.</li><ol><li style="font-weight: 400;" aria-level="5">Regardless of management powers in the organizing documents, the question is whether the investors practically exercised management functions. Williamson Factors:&nbsp;</li><ol><li style="font-weight: 400;" aria-level="6">(1) Limited Power: “An agreement among the parties leaves so little power in the hands of the partner or venture that the arrangement in fact distributes power as would a limited partnership”</li><li style="font-weight: 400;" aria-level="6">(2) Inexperience and Unknowledgable: “The partner or venture is so inexperienced and unknowledgeable in business affairs that he is incapable of intelligently exercising his partnership or venture powers,”; or&nbsp;</li><li style="font-weight: 400;" aria-level="6">(3) Dependency: The partner or venture is so dependent on some unique entrepreneurial or managerial ability of the promoter or manager that he cannot replace the manager of the enterprise or otherwise exercise meaningful partnership or venture power.”</li></ol></ol><li style="font-weight: 400;" aria-level="4">LLC/LPs: Generally, there is a rebuttable presumption that member-managed LLCs are not securities and manager-managed may be a security because in a member-managed the members exercise significant control and in a manger-managed, they do not.</li><ol><li style="font-weight: 400;" aria-level="5">In Avenue Capital Mgmt v. Schaden, the 10th Cir (2016) asserted that the court considers several factors including: “contribution of time and effort to the success of the enterprise, their contractual powers, their access to information, the adequacy of financing, the level of speculation, and the nature of the business risks.”</li></ol></ol></ol><li style="font-weight: 400;" aria-level="2"><h2>Stock</h2></li><ol><li style="font-weight: 400;" aria-level="3">Rule: If an economic interest is called a “stock” and bears the characteristics generally associated with stock, the court will find that it a stock under the definition of “security” and subject to securities laws. Landreth Timber Co. v. Landreth (1985).&nbsp;</li><li style="font-weight: 400;" aria-level="3">Characteristics of (Common) Stock:</li><ol><li style="font-weight: 400;" aria-level="4">Right to receive dividends upon an apportionment of profits;</li><li style="font-weight: 400;" aria-level="4">Negotiability;</li><li style="font-weight: 400;" aria-level="4">Ability to pledge or hypothecate;</li><li style="font-weight: 400;" aria-level="4">Voting rights in proportion to shares owned; and</li><li style="font-weight: 400;" aria-level="4">Capacity to appreciate in value.</li></ol><li style="font-weight: 400;" aria-level="3">Note: Same test for passive and active investors and an economic interest may not be a security if the economic reality shows that the interest was not sold for the purpose of raising capital for a profit-making enterprise (Forman).</li></ol><li style="font-weight: 400;" aria-level="2"><h2>Notes</h2></li><ol><li style="font-weight: 400;" aria-level="3">There is a rebuttable presumption that notes are securities subject to securities law and that presumption may be rebutted by application of the Reves Test.</li><li style="font-weight: 400;" aria-level="3">First, under securities laws, if the economic interest falls within the nine-month-or-less commercial paper (an unsecured obligation issued by a corporation or bank, with a high credit rating, to finance short-term credit needs) exception, then it is not a note within the definition of the word “security.” Securities Act sec. 3(a)(3); Exchange Act sec. 3(a)(10).</li><li style="font-weight: 400;" aria-level="3">Second, if the economic interest bears a strong resemblance to one of the enumerated categories of instruments exempted from securities laws then it is not a security:</li><ol><li style="font-weight: 400;" aria-level="4">Securities laws do not apply to certain notes including:</li><ol><li style="font-weight: 400;" aria-level="5">Notes delivered in consumer financing;</li><li style="font-weight: 400;" aria-level="5">Notes secured by a mortgage;&nbsp;</li><li style="font-weight: 400;" aria-level="5">Short-term notes secured by a lien on a small business or some of its assets;</li><li style="font-weight: 400;" aria-level="5">Notes evidencing a character loan to a bank customer;</li><li style="font-weight: 400;" aria-level="5">Short-term notes secured by an assignment of accounts receivable;</li><li style="font-weight: 400;" aria-level="5">Notes formalizing an open-account debt incurred in the ordinary course of business; and&nbsp;</li><li style="font-weight: 400;" aria-level="5">Notes evidencing loans by commercial banks for current operations.&nbsp;</li></ol></ol><li style="font-weight: 400;" aria-level="3">Finally, if the economic interest is not one of the enumerated financial instruments exempted from securities law, the court must determine whether the instrument should be added to the list of notes by a showing of four factors:</li><ol><li style="font-weight: 400;" aria-level="4">Motivation: If the seller’s purpose is to raise capital for general use, and the buyer is interested in profit, then the instrument is likely a security; however, if the note is exchanged to facilitate minor purchases, correct cash-flow difficulties, or advance some other commercial or consumer purposes, then this factor weighs against being a security.</li><li style="font-weight: 400;" aria-level="4">Plan of Distribution: The larger number of offerees and lower their sophistication, the more likely it is a security; however, the fewer offerees and greater the sophistication, the less likely it is a security.</li><li style="font-weight: 400;" aria-level="4">Public Expectations: If the public expects the interest to be sold as an “investment” then the factor weighs in favor of being a security.</li><li style="font-weight: 400;" aria-level="4">Presence or Absence of Risk Reducing Factors: If another regulatory scheme significantly reduces the risk of the instrument, application of the securities laws may be unnecessary. These risk-reducing factors include alternate regulatory regimes or the presence of collateral.</li></ol><li style="font-weight: 400;" aria-level="3">REMEMBER THE PRESUMPTION OF A SECURITY.</li></ol></ol><li style="font-weight: 400;" aria-level="1"><h1>Public Company Disclosure</h1></li><ol><li style="font-weight: 400;" aria-level="2"><h2>Public Company Status</h2></li><ol><li style="font-weight: 400;" aria-level="3">Summary Table</li></ol></ol></ol><br><div><table><tbody><tr><td><p>SECTION</p></td><td><p>TRIGGER</p></td><td><p>REQUIREMENTS</p></td><td><p>TERMINATION (Going Dark)</p></td></tr><tr><td><p>§12 (a), (b)<br><br></p><p>Rule 12d2-2<br><br></p></td><td><p>Exchange Listing under the Exchange Act by filing a registration statement</p><br></td><td><ul><li style="font-weight: 400;" aria-level="1">Periodic Filings</li><li style="font-weight: 400;" aria-level="1">Proxy rules + annual report</li><li style="font-weight: 400;" aria-level="1">Tender offer rules</li><li style="font-weight: 400;" aria-level="1">Insider stock transactions (§16)</li></ul><br></td><td><p>Rule 12d2-2</p><ul><li style="font-weight: 400;" aria-level="1">Delisting (including filing Form 25 w/ SEC) and either:</li><li style="font-weight: 400;" aria-level="1">(a) Less than 300 shareholders or</li><li style="font-weight: 400;" aria-level="1">(b)less than 500 shareholders and $10 m in assets for 3 years</li></ul><br></td></tr><tr><td><p>§12(g)</p><br><p>12g-4</p><p><br><br></p></td><td><p>Threshold under the JOBS Act: Total assets greater than $10 million on the last day of the company’s fiscal year; and either 2,000 shareholders of record of a class of equity (other than exempted securities) or 500 shareholders of record of such a security who are not accredited investors</p><br></td><td><ul><li style="font-weight: 400;" aria-level="1">Periodic Filings</li><li style="font-weight: 400;" aria-level="1">Proxy rules + annual report</li><li style="font-weight: 400;" aria-level="1">Tender offer rules</li><li style="font-weight: 400;" aria-level="1">Insider stock transactions (§16)</li></ul></td><td><br><p>Rule 12h-3</p><p>Either</p><ul><li style="font-weight: 400;" aria-level="1">(a) Less than 300 shareholders or</li><li style="font-weight: 400;" aria-level="1">(b)less than 500 shareholders of record and $10 m in assets for 3 years</li></ul><br><p>When either condition is satisfied, the company files a Form 15 so certifying, and the issuer’s duty to file reports required by Section 13(a) “shall be suspended immediately. Rule 12g-4(b).</p></td></tr><tr><td><p>§15(d)</p><br><p>Rule 12h-3</p><br><br></td><td><p>Filing of a registration statement under the 33 Act, which has become effective.</p></td><td><ul><li style="font-weight: 400;" aria-level="1">Periodic Filings</li><ul><li style="font-weight: 400;" aria-level="2">10K</li><li style="font-weight: 400;" aria-level="2">10Q</li><li style="font-weight: 400;" aria-level="2">8K</li><li style="font-weight: 400;" aria-level="2">NOT Proxy Statements</li></ul></ul></td><td><br><p>(Rule 12h-3)</p><br><p>Either&nbsp;</p><ul><li style="font-weight: 400;" aria-level="1">Less than 300 shareholders and no earlier than next fiscal year after offering or</li><li style="font-weight: 400;" aria-level="1">Less than 500 shareholders of record and less than $10 m in assets for 3 years&nbsp;</li></ul><br><p>The duty to file disclosure reports is only suspended for that fiscal year in which one is met and begins again in any fiscal year for which, on the first day of that year, the conditions are not met. Rule 12h-3</p><br></td></tr></tbody></table></div><br><ol><li style="font-weight: 400;" aria-level="3">Terminating Status (Going Dark)</li><ol><li style="font-weight: 400;" aria-level="4">The company must delist;</li><li style="font-weight: 400;" aria-level="4">The company must ensure it is not a public company under § 12(g);</li><li style="font-weight: 400;" aria-level="4">If the company has filed a prior effective registration statement with the SEC, the company must meet the requirements to suspend public company status.&nbsp;</li></ol><li style="font-weight: 400;" aria-level="3">“Held of Record” – Rule 12g5-1</li><ol><li style="font-weight: 400;" aria-level="4">Applicable to 12(g) and 15(d).&nbsp;</li><li style="font-weight: 400;" aria-level="4">Securities held in a custodial capacity for a single trust or estate are counted by each trust, estate, or account as a distinct holder of record. Rule 12g5-1(a)(3).</li><li style="font-weight: 400;" aria-level="4">Institutional custodians are not single holders of record for purposes of the Exchange Act's registration and periodic reporting provisions. Instead, each of the depository's accounts for which the securities are held is a single record holder.&nbsp;</li><li style="font-weight: 400;" aria-level="4">Securities held in street name by a broker-dealer are held of record under the rule only by the broker-dealer.&nbsp;</li><li style="font-weight: 400;" aria-level="4">The JOBS Act, signed in 2012, provides that holders of record will not include “persons who received the securities pursuant to an employee compensation plan in transactions exempted from the registration requirements of section 5 of the Securities Act of 1933.”&nbsp; 15 U.S.C. § 78l(g)(5).&nbsp; And persons who acquire securities in exempt crowdfunding offerings will not be counted as holders of record.&nbsp; 15 U.S.C. § 78l(g)(6).&nbsp;</li></ol><li style="font-weight: 400;" aria-level="3">Emerging Growth Companies</li><ol><li style="font-weight: 400;" aria-level="4">“Emerging growth company” is an issuer with total annual gross revenues of less than $1 billion during it most recent fiscal year.&nbsp;</li><li style="font-weight: 400;" aria-level="4">A company loses EGC status at the earliest of: [Sec. Act Sec. 2(a)(19)]</li><ol><li style="font-weight: 400;" aria-level="5">Revenue exceeds $1 billion on the last day of the fiscal year;</li><li style="font-weight: 400;" aria-level="5">The last day of the fiscal year following the fifth anniversary of the date of the first sale of common equity in a registered public offering;</li><li style="font-weight: 400;" aria-level="5">The date on which the company has issued more than $1 billion in non-convertible debt aggregated over the previous three-year period; or</li><li style="font-weight: 400;" aria-level="5">The date on which the company is deemed to be a “large accelerated filer” (Rule 12b-2)&nbsp;</li><ol><li style="font-weight: 400;" aria-level="6">Rule 12b-2 defines large accelerate file as companies with over $700 million of worldwide equity float in the hands of non-affiliates among other requirements</li></ol></ol><li style="font-weight: 400;" aria-level="4">Benefits: Exempt from the following:</li><ol><li style="font-weight: 400;" aria-level="5">“Say on Pay” requirement that shareholders have the ability to vote on executive compensation. Ex. Act. Sec. 14A.</li><li style="font-weight: 400;" aria-level="5">CEO pay disparity disclosures</li><li style="font-weight: 400;" aria-level="5">Certain disclosures under Items 301 (selected financial data) and Item 303 (management’s discussion and analysis) of S-K</li><li style="font-weight: 400;" aria-level="5">Requirement of an external auditor attesting to the internal controls under §404 of Sarbanes Oxley</li><li style="font-weight: 400;" aria-level="5">Rule promulgated by the PCAOB requiring mandatory audit firm rotation</li></ol></ol></ol><ol><li style="font-weight: 400;" aria-level="2"><h2>Periodic Disclosure</h2></li><ol><li style="font-weight: 400;" aria-level="3"><h3>Generally – Securities Act Sec. 13(a).&nbsp;</h3></li><ol><li style="font-weight: 400;" aria-level="4">Under Sec. 13(a), the SEC requires three principal disclosure documents from public companies:</li><ol><li style="font-weight: 400;" aria-level="5">Annual Report: Form 10-K</li><ol><li style="font-weight: 400;" aria-level="6">Rule 13a-1</li></ol><li style="font-weight: 400;" aria-level="5">Quarterly Report: Form 10-Q</li><ol><li style="font-weight: 400;" aria-level="6">Rule 13a-13</li></ol><li style="font-weight: 400;" aria-level="5">Special Reports: Form 8-K</li><ol><li style="font-weight: 400;" aria-level="6">Rule 13a-11</li></ol></ol><li style="font-weight: 400;" aria-level="4">Certification of Periodic Reports: Under SEC rules, the CEO and CFO must each certify, using the form set out in Reg S-K Item 601(b)(31), the periodic reports, based on their knowledge, that (1) it does not contain material statements that are false or misleading, and (2) that it fairly presents the financial condition and results of operation of the company. Exchange Act Rule 13a-14, 15d-14.&nbsp;</li></ol><li style="font-weight: 400;" aria-level="3"><h3>Form 10-K, 10-Q: Periodic Reports</h3></li><ol><li style="font-weight: 400;" aria-level="4">Filing: Reporting companies must file within 90 days of the close of the fiscal year, an annual report containing certain information. Under Item 7 of Form 10-K, the company must disclosure information according to Item 303(a) of Reg S-K.&nbsp;</li><li style="font-weight: 400;" aria-level="4">Item 303(a)(3)(ii) of Reg S-K requires disclosure of “any known trend or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.”&nbsp;</li><ol><li style="font-weight: 400;" aria-level="5">Accordingly, a “trend” occurs when something happens over time and continues. An “uncertainty” is an event in the future that is not the result of some continual development.&nbsp;</li><li style="font-weight: 400;" aria-level="5">According to an SEC Release in 1989, companies must take two steps in determining whether a trend or uncertainty requires disclosure:</li><ol><li style="font-weight: 400;" aria-level="6">First, the company must determine whether it is reasonably likely that the trend of uncertainty will continue as to affect net sales, revenue, or income. If it will not continue as to affect the company’s financials, then no disclosure is required.</li><li style="font-weight: 400;" aria-level="6">Second, if management cannot make that determination, management must objectively evaluate the consequences of the trend or uncertainty on the assumption that it will continue. Then, disclosure is required unless management determines that the impact is not reasonably likely to be material.</li></ol><li style="font-weight: 400;" aria-level="5">Note: The trend or uncertainty must be known.&nbsp;</li></ol></ol><li style="font-weight: 400;" aria-level="3"><h3>Form 8-K: Current or Special Reports</h3></li><ol><li style="font-weight: 400;" aria-level="4">Must be filed within four business days of triggering event.</li><li style="font-weight: 400;" aria-level="4">Events requiring disclosure:</li><ol><li style="font-weight: 400;" aria-level="5">Section 1: Operational events:</li><ol><li style="font-weight: 400;" aria-level="6">Entry into (or termination of) definitive material agreements outside the ordinary course;</li><li style="font-weight: 400;" aria-level="6">Bankruptcy or receivership</li><li style="font-weight: 400;" aria-level="6">Loss of significant customer</li></ol><li style="font-weight: 400;" aria-level="5">Section 2: Financial events:</li><ol><li style="font-weight: 400;" aria-level="6">Acquisition or disposition of assets constituting more than 10% of total assets</li><li style="font-weight: 400;" aria-level="6">Results of operations and financial condition&nbsp;</li><li style="font-weight: 400;" aria-level="6">Costs associated with exit or disposal activities, including termination benefits for employees, contract termination costs, and other associated costs</li><li style="font-weight: 400;" aria-level="6">Material impairments to assets such as goodwill</li></ol><li style="font-weight: 400;" aria-level="5">Section 3: Securities-Related events:</li><ol><li style="font-weight: 400;" aria-level="6">Delisting&nbsp;</li><li style="font-weight: 400;" aria-level="6">Unregistered sales of equity securities</li><li style="font-weight: 400;" aria-level="6">Changes in debt rating</li><li style="font-weight: 400;" aria-level="6">Material modifications to rights of securities holders</li></ol><li style="font-weight: 400;" aria-level="5">Section 4: Financial Integrity events:</li><ol><li style="font-weight: 400;" aria-level="6">Item 4.01. Changes in certifying accountant</li><li style="font-weight: 400;" aria-level="6">Item 4.02. Notice that previously issued financial statement or audit reports should no longer be relied upon.&nbsp;</li></ol><li style="font-weight: 400;" aria-level="5">Section 5: Governance events</li><ol><li style="font-weight: 400;" aria-level="6">Changes in corporate control</li><li style="font-weight: 400;" aria-level="6">Item 5.02. Changes in directors and principal officers</li><ol><li style="font-weight: 400;" aria-level="7">In Re Hewlett-Packard Co. (2007)</li><ol><li style="font-weight: 400;" aria-level="8">Item 5.02 requires that if a director resigns because of a disagreement with the registrant on a matter of registrant’s operations, the registrant must disclose a brief description of the circumstances representing the disagreement that the registrant believes caused, in whole or in part, the director’s resignation</li><li style="font-weight: 400;" aria-level="8">Additionally, registrant must provide resigning director with a company of the disclosure, give the resigning director an opportunity to respond stating whether they agree with the 8-K, and if they receive a response, the letter must be filed by registrant as an amendment to the 8-K within 2 business days</li></ol></ol><li style="font-weight: 400;" aria-level="6">Amendments to corporate documents</li><li style="font-weight: 400;" aria-level="6">Amendment or waiver of company’s code of ethics</li><li style="font-weight: 400;" aria-level="6">Matters submitted to a vote of the company’s shareholders</li></ol><li style="font-weight: 400;" aria-level="5">Section 6: Asset-Backed Securities</li><li style="font-weight: 400;" aria-level="5">Section 7: Regulation FD: Any disclosure the issuer elects to disclosure through Form 8-K to comply with Reg FD</li><li style="font-weight: 400;" aria-level="5">Section 8: Other Events: anything the issuer, at its options, think would be important to its security holders</li></ol><li style="font-weight: 400;" aria-level="4">Penalties: Failure to file a form 8-K or a deficient 8-K is a violation of Section 13(a) and related rule (Rule 13a-11). SEC does not need to show scienter.</li></ol></ol><li style="font-weight: 400;" aria-level="2"><h2>Books and Records Disclosure</h2></li><ol><li style="font-weight: 400;" aria-level="3">Keep Records: Companies are required to “make and keep books, records, and account, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.” Section 13(b)(2)(A).&nbsp;</li><ol><li style="font-weight: 400;" aria-level="4">Notes:&nbsp;</li><ol><li style="font-weight: 400;" aria-level="5">No scienter—strict liability</li><li style="font-weight: 400;" aria-level="5">No materiality requirement</li><li style="font-weight: 400;" aria-level="5">No private right of action to enforce §13(b)(2)—only SEC and, in extreme cases, the Department of Justice</li></ol></ol><li style="font-weight: 400;" aria-level="3">Internal Controls: Companies are also required to devise and maintain a system of internal account controls sufficient to provide reasonable assurances that—(i) transactions are executed in accordance with mangement’s authorization; (ii) transactions are recorded as necessary; (iii) access to assets is permitted only with management’s authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken for the differences. Section 13(b)(2)(B).</li><li style="font-weight: 400;" aria-level="3">In Sum:&nbsp;</li><ol><li style="font-weight: 400;" aria-level="4">Subpart (A) requires good records.</li><li style="font-weight: 400;" aria-level="4">Subpart (B) requires systems to produce good records</li></ol><li style="font-weight: 400;" aria-level="3">Qualifiers:&nbsp;</li><ol><li style="font-weight: 400;" aria-level="4">“Reasonable detail” and “reasonable assurances” means “such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.” Section 13(b)(7).&nbsp;</li></ol><li style="font-weight: 400;" aria-level="3">Actors:</li><ol><li style="font-weight: 400;" aria-level="4">Company is primary violator</li><li style="font-weight: 400;" aria-level="4">Officials in the company can be aiders and abettors or control person</li><ol><li style="font-weight: 400;" aria-level="5">Aiding and abetting violation requires&nbsp;</li><ol><li style="font-weight: 400;" aria-level="6">(1) an independent primary violation,&nbsp;</li><li style="font-weight: 400;" aria-level="6">(2) actual knowledge by the alleged aider and abettor of the primary violation, or reckless ignorance of that violation, and actual knowledge by the alleged aider and abettor of his or her own role in furthering it, or reckless ignorance of that role, and&nbsp;</li><li style="font-weight: 400;" aria-level="6">(3) substantial assistance by the aider and abettor in the commission of the primary violation</li></ol><li style="font-weight: 400;" aria-level="5">Individuals within a company can be pursued as control persons under section 20(a)3</li></ol><li style="font-weight: 400;" aria-level="4">In re BHP Billington Ltd. (2015)</li></ol><li style="font-weight: 400;" aria-level="3">Rules relating to 13(b):</li><ol><li style="font-weight: 400;" aria-level="4">Rule 13b2-1: Prohibits directly or indirectly falsifying books and records subject to 13(b)(2)(A).</li><ol><li style="font-weight: 400;" aria-level="5">No materiality qualifier.</li><li style="font-weight: 400;" aria-level="5">No scienter</li></ol></ol></ol><li style="font-weight: 400;" aria-level="2"><h2>Executive Compensation</h2></li><ol><li style="font-weight: 400;" aria-level="3">Dodd-Frank requires companies to disclose the compensation of their CEO, CFO, and the next three highest paid executive officers.</li><li style="font-weight: 400;" aria-level="3">Amount includes bonuses, stocks, options, and retirement benefits. Equity must be disclosed at FMV.</li></ol><li style="font-weight: 400;" aria-level="2"><h2>Regulation FD: Selective Disclosure</h2></li><ol><li style="font-weight: 400;" aria-level="3">Prevent selective disclosure by mandating disclosure through Form 8-K.</li><li style="font-weight: 400;" aria-level="3">Applies when an issuer, or someone acting on its behalf, discloses material nonpublic information to:</li><ol><li style="font-weight: 400;" aria-level="4">“a broker or dealer, or a person associated with a broker or dealer,” FD 100(b)(1)(i)</li><li style="font-weight: 400;" aria-level="4">“an investment adviser . . . an institutional investment manager” FD 100(b)(1)(ii)</li><li style="font-weight: 400;" aria-level="4">“an investment company” or “affiliated person” of an investment company” FD 100(b)(1)(iii); or</li><li style="font-weight: 400;" aria-level="4">“a holder of the issuer’s securities, under circumstances in which it is reasonably foreseeable that the person will purchase or sell the issuer’s securities on the basis of the information.” FD 100(b)(1)(iv).</li></ol><li style="font-weight: 400;" aria-level="3">Reg FD does not apply to disclosure to:</li><ol><li style="font-weight: 400;" aria-level="4">a person who owes a duty of trust or confidence to the issuer; FD 100(b)(2)(i)</li><li style="font-weight: 400;" aria-level="4">a person who expressly agrees to maintain the disclosed information in confidence; FD 100(b)(2)(ii)</li><li style="font-weight: 400;" aria-level="4">disclosures in connection with certain securities offerings. FD 100(b)(2)(iii)</li></ol><li style="font-weight: 400;" aria-level="3">If the regulation does apply, the company must:</li><ol><li style="font-weight: 400;" aria-level="4">Disclose the information simultaneously to the public if disclosure was intentional; FD 100(a)(1)</li><li style="font-weight: 400;" aria-level="4">Disclose the information “promptly” to the public if disclosure was not intentional; FD 100(a)(2)</li><ol><li style="font-weight: 400;" aria-level="5">Promptly means “as soon as reasonably practicable” but in no event after the later of 24 hours or the commencement of the next day’s trading on the NYSE after a senior official of the issuer learns that there has been a non-intentional disclosure or is reckless in not knowing.</li></ol></ol><li style="font-weight: 400;" aria-level="3">SEC identified seven cateogries of information that are material and subject to disclosure under Reg FD, note that these are still subject to the materiality qualifier and are not dispositive as material:</li><ol><li style="font-weight: 400;" aria-level="4">Earnings information;</li><li style="font-weight: 400;" aria-level="4">M&amp;As, joint ventures, or changes in assets;</li><li style="font-weight: 400;" aria-level="4">New products or discoveries, or developments regarding customers or supplies&nbsp;</li><li style="font-weight: 400;" aria-level="4">Changes in control or in management;</li><li style="font-weight: 400;" aria-level="4">Changes in auditors or auditor notification that the issuer may no longer rely on an auditor’s audit report;</li><li style="font-weight: 400;" aria-level="4">Events regarding the issuer’s securities—e.g. defaults on strict securities, calls of securities for redemption, repurchase plans, stock splits or changes in dividends, changes to rights of security holders, public or private sales of additional securities, and</li><li style="font-weight: 400;" aria-level="4">Bankruptcy or receivership.</li><li style="font-weight: 400;" aria-level="4">SEC v. Seibel Systems., Inc. (SDNY 2005).</li></ol><li style="font-weight: 400;" aria-level="3">Public disclosure may be made by:</li><ol><li style="font-weight: 400;" aria-level="4">Filing an 8-K; FD 101(e)(1)</li><li style="font-weight: 400;" aria-level="4">“another method (or combination of methods) of disclosure that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public” FD 101(e)(2)</li><ol><li style="font-weight: 400;" aria-level="5">E.g. Press release</li><li style="font-weight: 400;" aria-level="5">May also do both.</li></ol></ol><li style="font-weight: 400;" aria-level="3">Actionability: No Private Right of Action; SEC only</li></ol></ol><ol><li style="font-weight: 400;" aria-level="1"><h1>Rule 10b-5 Antifraud</h1></li><ol><li style="font-weight: 400;" aria-level="2"><h2>The Statute/Regulation</h2></li><ol><li style="font-weight: 400;" aria-level="3">Exchange Act Section 10(b) declares it is “unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange—</li><ol><li style="font-weight: 400;" aria-level="4">(b) To use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations . . . .”</li></ol><li style="font-weight: 400;" aria-level="3">Rule 10b-5 also declares that&nbsp;</li><ol><li style="font-weight: 400;" aria-level="4">“It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange:</li><ol><li style="font-weight: 400;" aria-level="5">(a) To employ any device, scheme, or artifice to defraud;&nbsp;</li><li style="font-weight: 400;" aria-level="5">(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, or&nbsp;</li><li style="font-weight: 400;" aria-level="5">(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,</li></ol><li style="font-weight: 400;" aria-level="4">In connection with the purchase or sale of any security.&nbsp;</li></ol></ol><li style="font-weight: 400;" aria-level="2"><h2>Generally</h2></li><ol><li style="font-weight: 400;" aria-level="3">Cause of Action</li><ol><li style="font-weight: 400;" aria-level="4">Private cause implied; the statute does not create an express private cause of action. See Kardon v. Nat’l Gympsum Co. (E.D. Pa. 1946)</li><li style="font-weight: 400;" aria-level="4">SEC can bring&nbsp;</li><ol><li style="font-weight: 400;" aria-level="5">A suit in federal court based upon a 10b-5 violation</li><li style="font-weight: 400;" aria-level="5">An administrative enforcement action before an ALJ</li></ol><li style="font-weight: 400;" aria-level="4">DOJ may bring criminal prosecution for violation of Rule 10b-5</li></ol><li style="font-weight: 400;" aria-level="3">PSLRA&nbsp;</li><ol><li style="font-weight: 400;" aria-level="4">Imposes a rebuttable presumption that the lead plaintiff in a class action is the shareholder with the largest financial interest in the class;</li><li style="font-weight: 400;" aria-level="4">Requires plaintiffs plead with particulatity facts leading to a strong inference of scienter;</li><li style="font-weight: 400;" aria-level="4">Imposes a stay on discovery until after the MtD is decided;</li><li style="font-weight: 400;" aria-level="4">Provides a safe harbor for forward looking statements;</li><li style="font-weight: 400;" aria-level="4">Limits the liability of defendants not engaged in intentional fraud to their proportionate share of the harm.</li></ol><li style="font-weight: 400;" aria-level="3">Time Limits: 28 U.S.C. §1658(b).</li><ol><li style="font-weight: 400;" aria-level="4">Statute of Limitations: 2 years. Does not begin to run until plaintiffs discovers the facts constituting the violation or when a reasonably diligent plaintiff should have become aware of the violation—whichever is first.</li><li style="font-weight: 400;" aria-level="4">Statute of Repose: 5 years. Cut off without exception.</li></ol></ol><li style="font-weight: 400;" aria-level="2"><h2>Jurisdictional Hook</h2></li><ol><li style="font-weight: 400;" aria-level="3">Requires “the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange.” Rule 10b-5. The jurisdictional hook, however, is usually easily satisfied as an intrastate telephone call, intrastate mailing, internet use, or otherwise will satisfy this element.</li></ol><li style="font-weight: 400;" aria-level="2"><h2>Proper Defendants</h2></li><ol><li style="font-weight: 400;" aria-level="3"><h3>Generally</h3></li><ol><li style="font-weight: 400;" aria-level="4">In a private Rule 10b-5 action, all defendants must either be&nbsp;</li><ol><li style="font-weight: 400;" aria-level="5">Primary Violators of the rule; or</li><li style="font-weight: 400;" aria-level="5">Control person defendant</li></ol><li style="font-weight: 400;" aria-level="4">In an SEC action, defendants may be either:</li><ol><li style="font-weight: 400;" aria-level="5">Primary violators of the rule;</li><li style="font-weight: 400;" aria-level="5">Control person defendants; or</li><li style="font-weight: 400;" aria-level="5">Aiders and Abettors</li><ol><li style="font-weight: 400;" aria-level="6">Limited to SEC actions. Central Bank v. First Interstate Bank of Denver</li></ol></ol></ol><li style="font-weight: 400;" aria-level="3"><h3>Primary and Secondary Violators</h3></li><ol><li style="font-weight: 400;" aria-level="4">A natural person who&nbsp;</li><ol><li style="font-weight: 400;" aria-level="5">“makes” a misstatement in the sense that they have control over the misstatement’s content and dissemination or to whom the misstatement is attributed. Janus Capital Grp. V. First Derivative Traders (2011)—proper under 10b-5(b).</li><li style="font-weight: 400;" aria-level="5">Fails to disclose a material fact when under a duty to disclose.</li><li style="font-weight: 400;" aria-level="5">Acting with scienter, disseminates a misstatement, even though they did not “make” the statement and the act is proximately related to the misstatement. Lorenzo (proper under 10b-5(a),(c))</li></ol><li style="font-weight: 400;" aria-level="4">Note:</li><ol><li style="font-weight: 400;" aria-level="5">Stonebridge controls Rule 10b-5(a), (c)&nbsp;</li><li style="font-weight: 400;" aria-level="5">Janus controls Rule 10b-5(b): Requirement of “to make” the statement</li><ol><li style="font-weight: 400;" aria-level="6">Rule: “[T]he maker of a statement is the entity with authority over the content of the statement and whether and how to communicate it. Without such authority, it is not ‘necessary or inevitable’ that any falsehood will be contained in the statement.” Janus.&nbsp;</li></ol></ol><li style="font-weight: 400;" aria-level="4">If a natural person spoke or wrote on behalf of a company, then the company is also a proper defendant—through agency principles—and the company is a proper defendant if they issued a statement.&nbsp;</li><li style="font-weight: 400;" aria-level="4">Other defendants are proper if plaintiff can prove reliance because:</li><ol><li style="font-weight: 400;" aria-level="5">They had a duty to disclose a material fact and they did not; or</li><li style="font-weight: 400;" aria-level="5">Their deceptive act—under Rule 10b-5(a), (c)—had a proximate or immediate relationship to a false or misleading statement by a defendant listed above</li><ol><li style="font-weight: 400;" aria-level="6">Not a proper defendant if their deceptive act and the statement were remote. Stoneridge.</li><li style="font-weight: 400;" aria-level="6">Are proper if their deceptive acts made the statement “necessary or inevitable” Stoneridge.</li></ol></ol></ol><li style="font-weight: 400;" aria-level="3"><h3>Control Person Liability: “Potential” Control Test (8th Cir)</h3></li><ol><li style="font-weight: 400;" aria-level="4">Exchange Act Sec. 20(a) states that “Every person who, directly or indirectly, controls any person liable . . . shall also be liable jointly and severally with and to the same extent as such controlled person . . . unless the controlling person acted in good faith and did not directly or indirectly induce the act.”</li><li style="font-weight: 400;" aria-level="4">Control person means “the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.” Rule 12b-2.&nbsp;</li><li style="font-weight: 400;" aria-level="4">The Test: The 8th Circuit requires:</li><ol><li style="font-weight: 400;" aria-level="5">(1) The primary violator to violate federal securities laws.</li><ol><li style="font-weight: 400;" aria-level="6">Note: FRCP 9 heightens the pleading requirements.</li></ol><li style="font-weight: 400;" aria-level="5">(2) The defendant exercised actual general control over the controlled person or entity and</li><ol><li style="font-weight: 400;" aria-level="6">No heightened pleading requirement.</li><b><li aria-level="6">IE: He had the power to exercise control in general</li></b></ol><li style="font-weight: 400;" aria-level="5">(3) The defendant “possessed the power to control the specific transaction or activity upon which the primary violation is predicated, but he need not prove that this latter power was [actually] exercised.”</li><ol><li style="font-weight: 400;" aria-level="6">IE: He had the potential to control the particular transaction, it does not matter that they did or did not.</li></ol><li style="font-weight: 400;" aria-level="5">Lustgraaf v. Behrens (8th Cir. 2010)&nbsp;</li></ol><li style="font-weight: 400;" aria-level="4">Defense: Defendant bears the burden to show they acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause.</li></ol><li style="font-weight: 400;" aria-level="3"><h3>Aider or Abettor Liability – Exchange Act 20(e)</h3></li><ol><li style="font-weight: 400;" aria-level="4">Not applicable in private causes of action; only SEC enforcement.</li><li style="font-weight: 400;" aria-level="4">PLSRA expressly grants the SEC the power to bring an action against aider and abettors of a 10b-5 violation by knowingly giving substantial assistance to the primary violation. Exchange Act 20(e).</li><li style="font-weight: 400;" aria-level="4">The SEC must show:</li><ol><li style="font-weight: 400;" aria-level="5">An independent primary violator;</li><li style="font-weight: 400;" aria-level="5">Actual knowledge, or reckless ignorance, by the alleged aider and abettor of the primary violation, and actual knowledge, or reckless ignorance, of their role in furthering the primary violation, and</li><li style="font-weight: 400;" aria-level="5">Substantial assistance by the aider and abettor in the commission of the primary violation.</li></ol></ol></ol><li style="font-weight: 400;" aria-level="2"><h2>Elements- All</h2></li><ol><li style="font-weight: 400;" aria-level="3"><h3>Deception or manipulation by primary violator.</h3></li><ol><li style="font-weight: 400;" aria-level="4"><h4>Deception&nbsp;</h4></li><ol><li style="font-weight: 400;" aria-level="5">The rule does not provide relief where plaintiff simply alleges a breach of fiduciary duty and no deception occurs. Santa Fe (1977) (asserting that minority’s 10b-5 claim failed simply because they did not follow proper protocol to dispute value of their shares—the officers did not deceive them)</li><li style="font-weight: 400;" aria-level="5">Note: The rule does apply where such breach entails a misstatement of a material fact or an omission of a material fact when the defendant had a duty to disclose as this amounts to deception. Santa Fe.</li></ol><b><i><li aria-level="4"><h4>Misstatement of Material Fact</h4></li></i></b><ol><li style="font-weight: 400;" aria-level="5">Materiality 🡪 Material Portion of Outline</li><li style="font-weight: 400;" aria-level="5">If an issuer misstates a material fact, the misstatement may be actionable; however, context can play a role in determining whether the statement is materially false and “true statements may discredit the [misleading] one[s] so obviously that the risk of real deception drops to nil.” Va. Bankshares.&nbsp;</li></ol><b><i><li aria-level="4"><h4>Opinions: Generally</h4></li></i></b><ol><li style="font-weight: 400;" aria-level="5">Facts v. Opinion (Omnicare)</li><ol><li style="font-weight: 400;" aria-level="6">A fact is “a thing done or existing” or “an actual happening.”</li><li style="font-weight: 400;" aria-level="6">“An opinion is ‘a belief, a view’ or a ‘sentiment which the mind forms of persons or things.’’”&nbsp;</li></ol><li style="font-weight: 400;" aria-level="5">To show falsity of an opinion, a plaintiff must show:</li><ol><li style="font-weight: 400;" aria-level="6">Speaker or writer did not believe the opinion at the time it was spoken or written;&nbsp;</li><li style="font-weight: 400;" aria-level="6">Opinion contained a non-opinion embedded fact that was false; or</li><li style="font-weight: 400;" aria-level="6">The speaker did not disclosure “particular (and material) facts going to the basis for the issuers opinion” including</li><ol><li style="font-weight: 400;" aria-level="7">“Facts about the inquiry the issuer did or did not conduct or [Facts underlying the opinion]</li><li style="font-weight: 400;" aria-level="7">The knowledge it did or did not have—whose omission makes the opinion . . . misleading to a reasonable person reading the statement fairly and in context.” [Facts throwing the opinion into doubt if revealed to a reasonable investor]</li></ol></ol><li style="font-weight: 400;" aria-level="5">Omnicare:&nbsp;</li><ol><li style="font-weight: 400;" aria-level="6">Words such as “we believe” and “we think” do not nullify a whole statement, and even these words make the statements capable of misleading investors.&nbsp;</li></ol></ol><b><i><li aria-level="4"><h4>Opinions: Forward Looking Statements</h4></li></i></b><ol><li style="font-weight: 400;" aria-level="5">Rule: Forward-looking statements—including statements of business plans, projections of earnings, and historical facts regarding issuer’s earning for a quarter on which the company’s books are closed—is analyzed in a manner similar to falsity of other opinions (above). Omnicare; Ind. Pub. Retirement Sys. v. SAIC, Inc. (2d Cir. 2016)&nbsp;</li><li style="font-weight: 400;" aria-level="5">Protections under the PLSRA&nbsp;</li><ol><li style="font-weight: 400;" aria-level="6">APPLIES ONLY IN PRIVATE ACTIONS. Section 21E(c)(1).&nbsp;</li><li style="font-weight: 400;" aria-level="6">Available only to:&nbsp;</li><ol><li style="font-weight: 400;" aria-level="7">Issuers (public companies); Section 21E(a)(1);</li><li style="font-weight: 400;" aria-level="7">“a person acting on behalf of such issuer” Section 21E(a)(2)</li><li style="font-weight: 400;" aria-level="7">An underwriter, with respect to information derived from an issuer. Section 21E(a)(3)</li><li style="font-weight: 400;" aria-level="7">An outside reviewer retained by such issuer making a statement on behalf of such issuer. Section 21E(a)(4).</li></ol><li style="font-weight: 400;" aria-level="6">Not available for:</li><ol><li style="font-weight: 400;" aria-level="7">Statements made “in connection with an initial public offering.” Exchange Act 21E(b)(2)(D).</li><li style="font-weight: 400;" aria-level="7">Statements “included in a financial statement prepared in accordance with [GAAP].” Exchange Act 21E(b)(2)(A).</li><li style="font-weight: 400;" aria-level="7">Statement made with respect to an issuer that—in the three years prior to the statement being made—“has been made the subject of a judicial or administrative decree or order arising out of a government action that—</li><ol><li style="font-weight: 400;" aria-level="8">Prohibits future violations of the antifraud provisions of the securities laws;</li><li style="font-weight: 400;" aria-level="8">Requires that the issuer cease and desist from violating the antifraud provisions of the securities laws; or</li><li style="font-weight: 400;" aria-level="8">Determines that the issuer violated the antifraud provisions of the securities laws.”</li><li style="font-weight: 400;" aria-level="8">Exchange Act 21E(b)(1)(A).</li></ol></ol><li style="font-weight: 400;" aria-level="6">Protection 1: Exchange Act 21E(c)(1)(A)(ii)</li><ol><li style="font-weight: 400;" aria-level="7">Immateriality. Statements must be material to be actionable.&nbsp;</li></ol><li style="font-weight: 400;" aria-level="6">Protection 2: Exchange Act 21E(c)(1)(A)(i)</li><ol><li style="font-weight: 400;" aria-level="7">Forward looking statements are protected if the statement, when made, is accompanied by meaningful cautionary language that identifies important risk factors that could alter the results. Sec. 21E(c)(1)(A)(i). “Meaningful cautionary statement” cannot be boilerplate and should include language tying risks to the issuer’s business. As risks change, the language should change.</li></ol><li style="font-weight: 400;" aria-level="6">Protection 3: Exchange Act 21E(c)(1)(B)</li><ol><li style="font-weight: 400;" aria-level="7">The plaintiff must prove that when the statement was made, the maker of the statement, or its officers or directors, had actual knowledge that the forward-looking statement was false or misleading. Sec. 21E(c)(1)(B).</li></ol></ol><li style="font-weight: 400;" aria-level="5">Bespeaks Caution Doctrine (Judicially-Created)</li><ol><li style="font-weight: 400;" aria-level="6">Forward-looking statements are protected if when made, the forward-looking statements were coupled with cautionary language that identified the risks that eventually matured and frustrated the realization of the statement.</li><ol><li style="font-weight: 400;" aria-level="7">NO Boilerplate</li><li style="font-weight: 400;" aria-level="7">Add information from PLSRA protection 2</li></ol></ol><li style="font-weight: 400;" aria-level="5">Other Notes:</li><ol><li style="font-weight: 400;" aria-level="6">Asher v. Baxter Intern. Inc., (7th Cir. 2004) (“As long as the firm reveals the principal risks, the fact that some other event caused problems cannot be dispositive.”)</li></ol></ol><i><li style="font-weight: 400;" aria-level="4"><h4>Omissions&nbsp;</h4></li></i><ol><li style="font-weight: 400;" aria-level="5">No liability for omissions unless under a duty to disclose.</li><li style="font-weight: 400;" aria-level="5">Such duties arise if:</li><ol><li style="font-weight: 400;" aria-level="6">The defendant has a positive legal duty to disclose imposed by statute or regulation—e.g. Items in 8-K or 303(a)(3) disclosures.</li><li style="font-weight: 400;" aria-level="6">Defendant makes a statement that misleads absent disclosure of the omitted fact</li><li style="font-weight: 400;" aria-level="6">Defendant is trading under conditions that impose a duty to disclose or abstain (e.g. issuer is buying or selling its own stock)</li></ol></ol><i><li style="font-weight: 400;" aria-level="4"><h4>Duty to Correct/Update</h4></li></i><ol><li style="font-weight: 400;" aria-level="5">Rule: Duty to correct arises when the maker of a statement discovers, after making the statement, that the statement was false when they made it. This duty continues so long as the maker “knows or should know that potential investors are relying on” the false statement. The duty does not extend to statements made by third parties. Gallagher v. Abbott Labs.</li><li style="font-weight: 400;" aria-level="5">Rule: Duty to update arises when the make of a statement—which was true when made but later became untrue—has a duty to disclose the effect of the later events on the subject of the statement. Gallagher v. Abbott Labs.</li><ol><li style="font-weight: 400;" aria-level="6">Outside of explicit, specified events under Regulation S-K, a company does not need to provide continuous disclosure of all events.&nbsp;</li></ol><li style="font-weight: 400;" aria-level="5">Gallagher v. Abbott Labs. (holding that Defendant did not need to continuously update/correct their prior statements on litigation since they were not incorrect when made and the 8-K was proper when they filed it to account for the event).&nbsp;</li></ol></ol><li style="font-weight: 400;" aria-level="3"><h3>Scienter</h3></li><ol><li style="font-weight: 400;" aria-level="4">Rule: To succeed in a 10b-5 action, the plaintiff must adequately prove that the defendant had the requisite scienter or “a mental state embracing an intent to deceive, manipulate, or defraud.” Ernst &amp; Ernst v. Hochfelder (1976) (finding that the statute of 10b imposes a scienter requirement from the words “manipulative,” “deceptive,” and “contrivance” meaning “intention or willful conduct”).</li><ol><li style="font-weight: 400;" aria-level="5">Extreme recklessness, such as “a highly unreasonable omission” beyond simple or even inexcusable negligence, which “presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it” satisfies the scienter requirement of 10b-5 actions.</li></ol><li style="font-weight: 400;" aria-level="4">Scienter is imputed to a company when the corporate official who makes or issues the statement has scienter. Southland.&nbsp;</li><ol><li style="font-weight: 400;" aria-level="5">Scienter is imputed by the executive official to the entity if:</li><ol><li style="font-weight: 400;" aria-level="6">The executive wrote or reviewed the statement;</li><li style="font-weight: 400;" aria-level="6">The statement was attributed to the executive with the executive’s permission</li><li style="font-weight: 400;" aria-level="6">The executive signed the document containing the statement</li></ol></ol><li style="font-weight: 400;" aria-level="4">Special Rules for Pleading Scienter in PRIVATE SUITS: PLSRA</li><ol><li style="font-weight: 400;" aria-level="5">The complaint must, with respect to each act or omission, state “with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind. Section 21D(b)(2)(A); FRCP 9.</li><ol><li style="font-weight: 400;" aria-level="6">Forward-looking statements protected by 21E must be pled with facts raising a strong inference that the statement was made with actual knowledge that it was false or misleading. Section 21 E(c)(1)(B).</li></ol><li style="font-weight: 400;" aria-level="5">Tellabs test for “strong inference”:</li><ol><li style="font-weight: 400;" aria-level="6">First, when faced with a 12b6 motion under a 10(b) action, courts must accept all factual allegations in the complaint as true.</li><li style="font-weight: 400;" aria-level="6">Second, courts must consider the complaint in its entirety, as well as other sources such as documents incorporated by reference and matters taken on judicial notice.</li><li style="font-weight: 400;" aria-level="6">Third, the reviewing court must determine whether the alleged facts raise such a “strong inference” and the court, in doing so, “must consider plausible nonculpable explanations for the defendant’s conduct, as well as inference favoring the plaintiff.”</li><li style="font-weight: 400;" aria-level="6">In sum, the reviewing court conducts a comparative analysis and must ask: when the allegations are accepted as true and taken collectively, would a reasonable person deem the inference of scienter at least as strong as any opposing inference. Section 21D(b)(2)(A); FRCP 9; Tellabs, Inc. v. Makor Issues &amp; Rights, Ltd. (2007).</li></ol></ol></ol><li style="font-weight: 400;" aria-level="3"><h3>“in connection with” requirement</h3></li><ol><li style="font-weight: 400;" aria-level="4">Rule: The “in connection with” requirement of 10b is satisfied when deception occurs within one of Rule 10b-5’s three subparts and occurs with the purchase or sale of a security. Zanford.&nbsp;</li><i><li style="font-weight: 400;" aria-level="4">An SEC filing or a press release by the company—or even an advertisement—can satisfy this element if causes the investor to purchase or sale securities in the capital markets. Zanford.</li></i><li style="font-weight: 400;" aria-level="4">In private actions to satisfy the requirement:</li><ol><li style="font-weight: 400;" aria-level="5">In a misrepresentation case, the plaintiff must have bought or sold the security after the defendant misrepresented the material fact (and, in order to rely on that fact and to prove loss, before the truth was disclosed)</li><li style="font-weight: 400;" aria-level="5">In an omissions case, the plaintiff must have bought or sold the security after the defendant was under a duty to disclose the omitted fact but failed to do so (and, in order to rely on the omission and to prove loss, before the omitted fact was disclosed)</li></ol></ol></ol><li style="font-weight: 400;" aria-level="2"><h2>Elements– Private Only</h2></li><ol><li style="font-weight: 400;" aria-level="3"><h3>Standing</h3></li><ol><li style="font-weight: 400;" aria-level="4">Rule: Only actual purchasers or sellers (and the SEC) may recover damages under Rule 10b-5. Blue Chip Stamps v. Maynard Drug Stores (1975). The rule does not cover offers to sell, but only actual sales and purchases. Id.&nbsp;</li><li style="font-weight: 400;" aria-level="4">Birnbaum bars three classes of potential plaintiffs:</li><ol><li style="font-weight: 400;" aria-level="5">Potential purchasers of shares who allege that they decided not to purchase because of representations or omissions by issuer</li><li style="font-weight: 400;" aria-level="5">Actual shareholders in the issue who allege that they decided not to sell their shares because of representations of omissions</li><li style="font-weight: 400;" aria-level="5">Shareholders, creditors, and others who suffered loss in the value of their investment due to insider activities in connection with the the purchase or sale of securities.</li></ol><li style="font-weight: 400;" aria-level="4">In a misrepresentation case, the plaintiff must have bought or sold the security after the defendant misrepresented the material fact (and, in order to rely on that fact and to prove loss, before the truth was disclosed)</li><li style="font-weight: 400;" aria-level="4">In an omissions case, the plaintiff must have bought or sold the security after the defendant was under a duty to disclose the omitted fact but failed to do so (and, in order to rely on the omission and to prove loss, before the omitted fact was disclosed)</li></ol><li style="font-weight: 400;" aria-level="3"><h3>Reliance</h3></li><ol><li style="font-weight: 400;" aria-level="4">In a private action, the plaintiff must prove reliance, which can be satisfied by:</li><ol><li style="font-weight: 400;" aria-level="5">Actual reliance whereby the plaintiff relies on a misstatement of the defendant and, as a result, buys or sells the security;</li><ol><li style="font-weight: 400;" aria-level="6">Applies only to missrepresentations.</li></ol><li style="font-weight: 400;" aria-level="5">Fraud-on-the-market reliance whereby the plaintiff is granted a presumption that they relied on a material misstatement to purchase or sell the security in an efficient market because the misstatement distorted stock prices—inducing the plaintiff to buy or sell. Basic v. Levinson.</li><ol><li style="font-weight: 400;" aria-level="6">Defense: The defendant may rebut this presumption by showing (1) the challenged misrepresentation in fact did not change the stock price, or (2)the particular plaintiff would have traded regardless of the misrepresentation. Basic v. Levinson.&nbsp;</li><li style="font-weight: 400;" aria-level="6">Note: To invoke the presumption:&nbsp;</li><ol><li style="font-weight: 400;" aria-level="7">The misstatement must be publicly known;</li><li style="font-weight: 400;" aria-level="7">The misstatement must be material;</li><li style="font-weight: 400;" aria-level="7">The stock must be traded in an efficient market; and</li><li style="font-weight: 400;" aria-level="7">The plaintiff must have traded the stock between the time when the misstatement was made and when the truth was revealed.</li><li style="font-weight: 400;" aria-level="7">Halliburton Co.&nbsp;</li></ol></ol><b><li aria-level="5">In Omission Cases, the plaintiff presumptively relies on an omission of a material fact if the defendant had a duty to disclose; however, this presumption may be defeated by showing the disclosure of material information would not have affected plaintiff’s trading decision. Affiliated Ute (1972) (holding omissions of material fact are granted presumptive reliance).</li></b><ol><b><li aria-level="6">Notes:&nbsp;</li></b><ol><b><li aria-level="7">Plaintiff presumptively relies on omissions of material information.</li></b><b><li aria-level="7">For half-truths, courts are split with some courts requiring reliance the half-truth (5th Cir.) and other granting presumptive reliance (2d Cir).</li></b><b><li aria-level="7">Presumption does not apply in markets that lack information efficiency—excludes small companies in thinly traded markets.</li></b></ol></ol></ol></ol><li style="font-weight: 400;" aria-level="3"><h3>Loss Causation</h3></li><ol><li style="font-weight: 400;" aria-level="4">Rule: Plaintiffs in private actions bear the burden of proving that the act or omission of the defendant caused the loss for which the plaintiff seeks to recover. Exchange Act 21D(b)(4). To prove loss causation, the plaintiff must show that the defendant’s omission or misstatement caused, when controlling for outside factors, a change in the price of the stock after the truth or disclosure of omitted facts was revealed. Dura Pharms.&nbsp;</li></ol><li style="font-weight: 400;" aria-level="3"><h3>Damages—Exchange Act 21D(e)</h3></li><ol><li style="font-weight: 400;" aria-level="4">Out-of-Pocket Damages: (Presumptive Measure of Damages). The plaintiff&nbsp; may recover the difference between the purchase price and value of the security at the time of sale (or vice versa for purchases).</li><ol><li style="font-weight: 400;" aria-level="5">Must control to remove other factors contributing to price fluctuations</li><li style="font-weight: 400;" aria-level="5">Compensation equals the plaintiff’s losses.</li></ol><li style="font-weight: 400;" aria-level="4">Punitive Damages: Not allowed.</li><ol><li style="font-weight: 400;" aria-level="5">PLSRA Section 21D(f) limits damages to actual damages.</li></ol><li style="font-weight: 400;" aria-level="4">Rescissory Damages: Arises when the fraud consists of inducing the purchase of securities that were fairly priced at the time of purchase but were riskier than represented. This measure restores the plaintiff to their original position had the event not happened.</li><ol><li style="font-weight: 400;" aria-level="5">If plaintiff sold, he gets his stock back; if he purchased, he returns the stock and the seller refunds the purchase price.</li><li style="font-weight: 400;" aria-level="5">Only suited to face-to-face transaction</li></ol><li style="font-weight: 400;" aria-level="4">Disgorgement: Arises when the defrauder received more from than the fraud than the defendant loses</li><ol><li style="font-weight: 400;" aria-level="5">Only available when there is no break in the casual chain between the fraud and the defrauder’s profits.&nbsp;</li><li style="font-weight: 400;" aria-level="5">Measure is the defrauder’s profit.&nbsp;</li></ol><li style="font-weight: 400;" aria-level="4">Cover Damages: Difference between the price at which the plaintiff transacted and the price at which the plaintiff could have transacted once the fraud was revealed. Section 21D(f)</li><li style="font-weight: 400;" aria-level="4">Proportionate Liability</li><ol><li style="font-weight: 400;" aria-level="5">All defendants who knowingly violate securities laws are jointly and severally liable for the entire judgment.&nbsp;</li><li style="font-weight: 400;" aria-level="5">Defendants found merely to be reckless are required to pay only their proportionate share of the damages caused. PLSRA 21D(f). The jury will determine their responsibility and the defendant will only pay their proportionate share unless other defendant’s are unable to pay.</li></ol></ol></ol></ol><li style="font-weight: 400;" aria-level="1"><h1>Insider Trading under Rule 10b-5</h1></li><ol><li style="font-weight: 400;" aria-level="2"><h2>Classical Insider Trading: Chiarella</h2></li><ol><li style="font-weight: 400;" aria-level="3">Insider or Temporary Insider</li><ol><b><i><li aria-level="4">Chiarella v. United States (1980) (finding no violation of insider trading because the prohibition does not arise from mere possession of nonpublic information but an affirmative duty to the corporation)</li></i></b></ol><li style="font-weight: 400;" aria-level="3">Acquires (i.e. has actual knowledge) material, nonpublic information&nbsp;</li><li style="font-weight: 400;" aria-level="3">As a result of being an insider</li><li style="font-weight: 400;" aria-level="3">Intended to be available only for corporate purposes and not for personal gain</li><li style="font-weight: 400;" aria-level="3">Has scienter because he or she knows or is reckless in not knowing that</li><ol><li style="font-weight: 400;" aria-level="4">The information is nonpublic</li><li style="font-weight: 400;" aria-level="4">The information is material</li><li style="font-weight: 400;" aria-level="4">He or she has a duty not to use it for personal benefit by trading on it</li></ol><li style="font-weight: 400;" aria-level="3">Trades on the basis of that information in the common or preferred stock of the insider’s company</li><ol><li style="font-weight: 400;" aria-level="4">“on the basis of” means anyone who is aware of material nonpublic information at the time that he or she purchases or sells a security</li></ol><li style="font-weight: 400;" aria-level="3">Without disclosing the information to opposite side trader&nbsp;</li><ol><li style="font-weight: 400;" aria-level="4">In an open market, this is the world.</li></ol></ol><li style="font-weight: 400;" aria-level="2"><h2>Classical Tipper Liability - Dirks</h2></li><ol><li style="font-weight: 400;" aria-level="3">Insider or temporary insider</li><li style="font-weight: 400;" aria-level="3">Acquires (i.e., has actual knowledge) material nonpublic info&nbsp;</li><li style="font-weight: 400;" aria-level="3">As a result of being an insider</li><li style="font-weight: 400;" aria-level="3">Intended to be available only for corporate purposes and not for personal gain</li><li style="font-weight: 400;" aria-level="3">Deliberately passes the information to another in violation of that duty</li><li style="font-weight: 400;" aria-level="3">For personal benefit, and</li><ol><li style="font-weight: 400;" aria-level="4">Under Dirks, a personal benefit includes:</li><ol><li style="font-weight: 400;" aria-level="5">A pecuniary gain or reputational benefit that will translate to future earnings;</li><li style="font-weight: 400;" aria-level="5">A relationship between the insider and the recipients that suggests a quid pro quo</li><li style="font-weight: 400;" aria-level="5">A gift of confidential information to a trading relative or friend because the tip follows a gift of profit</li><li style="font-weight: 400;" aria-level="5">Salman v. U.S. (finding 10b-5 “personal gain” through gratification of helping a sibling through a nonmonetary way).</li></ol><li style="font-weight: 400;" aria-level="4">Question of fact</li></ol><li style="font-weight: 400;" aria-level="3">Has scienter because he or she knows or is reckless in not knowing that</li><ol><li style="font-weight: 400;" aria-level="4">The information is nonpublic</li><li style="font-weight: 400;" aria-level="4">The information is material</li><li style="font-weight: 400;" aria-level="4">He or she has a duty not to use it for personal benefit by obtaining a personal benefit by passing it to others</li></ol><li style="font-weight: 400;" aria-level="3">While knowing or reckless in not knowing that the passing the information on is reasonably likely to result in trading on the information</li></ol><li style="font-weight: 400;" aria-level="2"><h2>Classical Tippee Liability: Dirks</h2></li><ol><li style="font-weight: 400;" aria-level="3">Insider or temporary insider&nbsp;</li><ol><li style="font-weight: 400;" aria-level="4">Acquires (i.e., has actual knowledge) material nonpublic info&nbsp;</li><li style="font-weight: 400;" aria-level="4">as a result of being an insider</li><li style="font-weight: 400;" aria-level="4">Intended to be available only for corporate purposes and not for personal gain</li><ol><li style="font-weight: 400;" aria-level="5">Salman v. U.S. (finding 10b-5 “personal gain” through gratification of helping a sibling through a nonmonetary way).</li></ol><li style="font-weight: 400;" aria-level="4">Deliberately passes the information to another in violation of that duty</li><li style="font-weight: 400;" aria-level="4">For personal benefit</li></ol><li style="font-weight: 400;" aria-level="3">Tippee&nbsp;</li><ol><li style="font-weight: 400;" aria-level="4">knows or should know that the insider tipper has violated his or her duty by providing the information, which includes knowing or negligent ignorance that the tipper received a personal benefit from the tip</li><li style="font-weight: 400;" aria-level="4">has scienter because he or she knows or is reckless in not knowing that</li><ol><li style="font-weight: 400;" aria-level="5">The information is nonpublic</li><li style="font-weight: 400;" aria-level="5">The information is material</li><li style="font-weight: 400;" aria-level="5">trades on the basis of that information in the common or preferred stock of the insider’s company</li></ol><li style="font-weight: 400;" aria-level="4">Without disclosing the information to opposite side traders</li></ol></ol><li style="font-weight: 400;" aria-level="2"><h2>Misappropriation Theory: O’Hagan</h2></li><ol><li style="font-weight: 400;" aria-level="3">Misappropriation Insider Trading</li><ol><li style="font-weight: 400;" aria-level="4">Anyone, regardless of whether he or she is an insider at any company or not</li><li style="font-weight: 400;" aria-level="4">Acquires (i.e., has actual knowledge) material nonpublic info from a source to which the defendant owes a duty of trust or confidence under Rule 10b5-2, or otherwise owes a traditional fiduciary duty</li><li style="font-weight: 400;" aria-level="4">Has scienter because he or she knows or is reckless in not knowing that</li><ol><li style="font-weight: 400;" aria-level="5">The information is nonpublic</li><li style="font-weight: 400;" aria-level="5">The information is material</li><li style="font-weight: 400;" aria-level="5">He or she has a duty not to use it for personal benefit by trading on it</li></ol><li style="font-weight: 400;" aria-level="4">Trades on the basis of that information in any security issued by any company&nbsp;</li><li style="font-weight: 400;" aria-level="4">Without disclosing to the source of the information—before trading—that he or she is going to trade</li></ol><li style="font-weight: 400;" aria-level="3">Misappropriation Tipper Liability&nbsp;</li><ol><li style="font-weight: 400;" aria-level="4">Anyone, regardless of whether he or she is an insider at any company or not</li><li style="font-weight: 400;" aria-level="4">Acquires (i.e., has actual knowledge) material nonpublic info&nbsp;</li><li style="font-weight: 400;" aria-level="4">from a source to which the defendant owes a duty of trust or confidence under Rule 10b5-2 or otherwise owes a traditional fiduciary duty</li><li style="font-weight: 400;" aria-level="4">Deliberately passes the information to another in violation of that duty</li><li style="font-weight: 400;" aria-level="4">For personal benefit</li><li style="font-weight: 400;" aria-level="4">Without disclosing to the source of the information—before passing on the information—that he or she is going to pass on that information</li><li style="font-weight: 400;" aria-level="4">While knowing or reckless in not knowing that the passing the information on is reasonably likely to result in trading on the information</li><li style="font-weight: 400;" aria-level="4">Has scienter because he or she knows or is reckless in not knowing that</li><ol><li style="font-weight: 400;" aria-level="5">The information is nonpublic</li><li style="font-weight: 400;" aria-level="5">The information is material</li><li style="font-weight: 400;" aria-level="5">He or she has a duty not to violate the duty of trust or confidence by passing on the information</li></ol></ol><li style="font-weight: 400;" aria-level="3">Misappropriation Tippee Liability</li><ol><li style="font-weight: 400;" aria-level="4">Anyone, regardless of whether he or she is an insider at any company or not</li><ol><li style="font-weight: 400;" aria-level="5">Acquires (i.e., has actual knowledge) material nonpublic info&nbsp;</li><li style="font-weight: 400;" aria-level="5">From a source to which the defendant owes a duty of trust or confidence under Rule 10b5-2 or otherwise owes a traditional fiduciary duty</li><li style="font-weight: 400;" aria-level="5">Deliberately passes the information to another in violation of that duty</li><li style="font-weight: 400;" aria-level="5">For personal benefit</li></ol><li style="font-weight: 400;" aria-level="4">Tippee&nbsp;</li><ol><li style="font-weight: 400;" aria-level="5">Knows or should know that the tipper has violated his or her duty by providing the information</li><ol><li style="font-weight: 400;" aria-level="6">Note that this is a negligence rather than a recklessness standard&nbsp;</li></ol><li style="font-weight: 400;" aria-level="5">Which includes knowing or negligent ignorance that the tipper received a personal benefit from the tip</li><li style="font-weight: 400;" aria-level="5">Has scienter because he or she knows or is reckless in not knowing that&nbsp;</li><ol><li style="font-weight: 400;" aria-level="6">the information is nonpublic</li><li style="font-weight: 400;" aria-level="6">the information is material</li></ol><li style="font-weight: 400;" aria-level="5">Trades on the basis of that information in any security issued by any company</li><li style="font-weight: 400;" aria-level="5">Without disclosing to the source of the information—before trading—that he or she is going to trade</li></ol></ol><li style="font-weight: 400;" aria-level="3">O’Hagan: Misappropriation Theory</li><ol><li style="font-weight: 400;" aria-level="4">The theory arises from the fiduciary’s duty and prohibits corporate “outsiders” from using information in breach of a duty, not owed to a trading party, but to the source of the information.</li><li style="font-weight: 400;" aria-level="4">It is a defense that the person receiving or obtaining the information has no duty of trust or confidence with respect to the information by establishing that he or she neither knew nor reasonably should have known that the person whom they received it from had a fiduciary relationship with the corporation or such person know or should have known that the person would not keep the information secret based on the person’s history, pattern, or past practices. O’Hagan.</li><ol><li style="font-weight: 400;" aria-level="5">There is a presumptive duty of trust or confidence among family members.</li></ol><li style="font-weight: 400;" aria-level="4"><br></li></ol></ol><li style="font-weight: 400;" aria-level="2"><h2>Notes on Insider Trading</h2></li><ol><li style="font-weight: 400;" aria-level="3">Insiders include</li><ol><li style="font-weight: 400;" aria-level="4">Directors and officers;</li><li style="font-weight: 400;" aria-level="4">Controlling shareholders (10%+)</li><li style="font-weight: 400;" aria-level="4">Employees;</li><li style="font-weight: 400;" aria-level="4">The Corporation itself;</li><li style="font-weight: 400;" aria-level="4">Temporary insiders if “they have entered into a special confidential relationship in the conduct of the business of the enterprise and are given access to information for corporate purposes.” The corporation must “expect the outsider to keep the disclosed nonpublic information confidential, and the relationship at least must imply such a duty.” Chiarella.</li><li style="font-weight: 400;" aria-level="4">Chiarella</li></ol><li style="font-weight: 400;" aria-level="3">The liability of the tipper and tippee are not interrelated; one may be convicted.&nbsp;</li><ol><li style="font-weight: 400;" aria-level="4">There is no requirement that the insider know or be reckless in not knowing that he or she has violated there duty under tippee liability. Hence, it is possible for a tippee to violate Rule 10b-5 even though the tipper does not. U.S. v. Evans.</li></ol></ol></ol></ol><br><ol><li style="font-weight: 400;" aria-level="1"><h1>Public Offerings</h1></li><ol><li style="font-weight: 400;" aria-level="2"><h2>Forms</h2></li><ol><li style="font-weight: 400;" aria-level="3"><h3>Form S-1</h3></li><ol><li style="font-weight: 400;" aria-level="4">Available to all issuers</li><li style="font-weight: 400;" aria-level="4">Used for IPOs</li><li style="font-weight: 400;" aria-level="4">Items in Form S-1 are keyed to the items in Regulation S-K and Regulation S-X</li><li style="font-weight: 400;" aria-level="4">Prospectus under S-1 contains both company information and transaction-related information</li><li style="font-weight: 400;" aria-level="4">Form S-1 issuers that are Exchange Act reporting issuers and current in their filings for the past 12 months may incorporate company-related info by reference to their prior SEC filings</li></ol><li style="font-weight: 400;" aria-level="3"><h3>Form S-3</h3></li><ol><li style="font-weight: 400;" aria-level="4">Issuer Requirements</li><ol><li style="font-weight: 400;" aria-level="5">Organized under US law&nbsp;</li><li style="font-weight: 400;" aria-level="5">Principal Place of Business in the US</li><li style="font-weight: 400;" aria-level="5">Public Company under 12(g) or 15(d) of the Exchange Act</li><li style="font-weight: 400;" aria-level="5">Had been the subject to 34 Act filing requirements for at least 12 months before registration statement and has been timely on those filings.</li><li style="font-weight: 400;" aria-level="5">Disqualification for certain financial events occur since end of last fiscal year, like</li><ol><li style="font-weight: 400;" aria-level="6">Failure to pay dividend on preferred stock or</li><li style="font-weight: 400;" aria-level="6">Default on indebtedness in a material amount</li></ol></ol><li style="font-weight: 400;" aria-level="4">Transaction Requirements</li><ol><li style="font-weight: 400;" aria-level="5">Where the issuer is selling securities for cash, the “aggregate value of the voting and non-voting common equity held by non-affiliates . . . is $75 million or more” or</li><ol><li style="font-weight: 400;" aria-level="6">An affiliate under Rule 405 is a person or entity that controls the issuer, is controlled by the issuer, is under common control as the issuer,&nbsp;</li></ol><li style="font-weight: 400;" aria-level="5">Where the issuer is selling securities for cash and “the aggregate market value of the securities sold by or on behalf of the [issuer] . . . during the period of 12 calendar months immediately prior to, and including, the sale is no more than one-third of the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant” and&nbsp;</li><ol><li style="font-weight: 400;" aria-level="6">Issuer is not a shell company and</li><li style="font-weight: 400;" aria-level="6">Issuer has at least one class of common equity securities listed and registered on a national securities exchange</li></ol></ol></ol><li style="font-weight: 400;" aria-level="3"><h3>The Prospectus</h3></li><ol><li style="font-weight: 400;" aria-level="4">SEC mandates that the prospectus contain language drafted in a “clear, concise and understandable manner.” In other words, in “plain English.” The prospectus must use “short sentences,” “active voice,” and avoid “legal and highly technical business terminology.” Rule 421.&nbsp;</li></ol></ol><li style="font-weight: 400;" aria-level="2"><h2>Key Terms (Types of Issuers)</h2></li><ol><li style="font-weight: 400;" aria-level="3">Non-Reporting Issuer:&nbsp; Issuer not required to file reports under the Exchange Act.</li><li style="font-weight: 400;" aria-level="3">Unseasoned Issuer—issuer required to file reports under the Exchange Act, but is not eligible to use Form S-3 for a primary offering of its securities</li><li style="font-weight: 400;" aria-level="3">Seasoned Issuer: a public company that is filing reports under the Exchange Act and is eligible to use Form S-3 to register primary offerings of securities&nbsp;</li><li style="font-weight: 400;" aria-level="3">Well Known Seasoned Issuer (WKSI): Rule 405. A public company that&nbsp;</li><ol><li style="font-weight: 400;" aria-level="4">Meets the issuer qualifications to use Form S-3 and</li><li style="font-weight: 400;" aria-level="4">As of a date within 60 days of the determination date, has either:</li><ol><li style="font-weight: 400;" aria-level="5">A minimum $700 million of common equity worldwide market value held by non-affiliates; or</li><li style="font-weight: 400;" aria-level="5">Has issued in the last three years at least $1 billion aggregate principal amount of non-convertible securities and is offering “only non-convertible securities, other than common equity,” or will register a common equity issuance under Form S-3 and has outstanding voting and non-voting common equity held by non-affiliates of $75 million or more; and</li></ol><li style="font-weight: 400;" aria-level="4">Is not an “ineligible issuer”</li></ol><li style="font-weight: 400;" aria-level="3">Ineligible Issuer: Rule 405. Includes, but is not limited to, an issuer that</li><ol><li style="font-weight: 400;" aria-level="4">Not current in their Exchange Act filings or late in satisfying those obligations for the preceding twelve months</li><li style="font-weight: 400;" aria-level="4">Is a shell company</li><li style="font-weight: 400;" aria-level="4">Within the past three years, the issuer or a subsidiary was the subject of a judicial or administrative decree arising from action that: prohibitions certain conduct or activities regarding the anti-fraud provisions of the securities laws, requiring the person to cease and desist from violating the anti-fraud provisions, or determines that the person violated the anti-fraud provisions.</li></ol><li style="font-weight: 400;" aria-level="3">Emerging Growth Companies: an issuer with total annual gross revenues of less than $1 billion during it most recent fiscal year.&nbsp;</li><ol><li style="font-weight: 400;" aria-level="4">A company loses EGC status at the earliest of: [Sec. Act Sec. 2(a)(19)]</li><ol><li style="font-weight: 400;" aria-level="5">Revenue exceeds $1 billion on the last day of the fiscal year;</li><li style="font-weight: 400;" aria-level="5">The last day of the fiscal year following the fifth anniversary of the date of the first sale of common equity in a registered public offering;</li><li style="font-weight: 400;" aria-level="5">The date on which the company has issued more than $1 billion in non-convertible debt aggregated over the previous three-year period; or</li><li style="font-weight: 400;" aria-level="5">The date on which the company is deemed to be a “large accelerated filer” (Rule 12b-2)&nbsp;</li><ol><li style="font-weight: 400;" aria-level="6">Rule 12b-2 defines large accelerate file as companies with over $700 million of worldwide equity float in the hands of non-affiliates among other requirements</li></ol></ol></ol></ol><li style="font-weight: 400;" aria-level="2"><h2>Gun-Jumping (Generally)</h2></li><ol><li style="font-weight: 400;" aria-level="3">Penalties for gun-jumping. Section 12(a)(1)</li><ol><li style="font-weight: 400;" aria-level="4">Rescission or Rescission damages</li><li style="font-weight: 400;" aria-level="4">SEC will delay the offering causing:</li><ol><li style="font-weight: 400;" aria-level="5">Disruption of the issuer’s schedule on using the funds in the future;</li></ol><li style="font-weight: 400;" aria-level="4">Section 12(a)(1)</li></ol><li style="font-weight: 400;" aria-level="3"><br></li></ol><li style="font-weight: 400;" aria-level="2"><h2>Prefiling Period</h2></li><ol><li style="font-weight: 400;" aria-level="3"><h3>Generally</h3></li><ol><li style="font-weight: 400;" aria-level="4">The prefiling period begins “once a company decides to take concrete steps toward a public offering” and continues until the issuer files a registration statement.</li></ol><li style="font-weight: 400;" aria-level="3"><h3>No Offers: Section 5(c)</h3></li><ol><li style="font-weight: 400;" aria-level="4">Rule: Securities Act Section 5(c) makes it unlawful for an issuer to make an offer before the filing of a registration statement. Sec. Act. Section 5(c). The definition of “offer” is broad meaning “every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value,” Securities Act 2(a)(3), and includes written and oral offers as well as prospectuses. Section 2(a)(10). Any communication or publicity that may “contribute to conditioning the public mind or arousing public interest” is an offer. Securities Act Release No. 3844 (1957).</li><li style="font-weight: 400;" aria-level="4">In Securities Act Release no. 5180 (1971), the SEC identified four factors that contribute to a communication constituting an offer including: (1) whether the issuer or underwriter instigated publicity, (2) whether the statement was for the purpose of selling the security in a public offering, (3) whether the statement was distributed to investors, and (4) whether the statement includes projections and estimates of future performance or opinions concerning value.&nbsp;</li><li style="font-weight: 400;" aria-level="4">The following are not offers:</li><ol><li style="font-weight: 400;" aria-level="5">Preliminary negotiations or agreements between an issuer and underwriter or among underwriters who are in privity of contract with an issuer. Securities Act 2(a)(3).</li><li style="font-weight: 400;" aria-level="5">Securities Act Release No. 5180 (1971):</li><ol><li style="font-weight: 400;" aria-level="6">Continuing to advertise products or services;</li><li style="font-weight: 400;" aria-level="6">Continuing to release periodic reports to existing shareholders;</li><li style="font-weight: 400;" aria-level="6">Continuing to make press announcements concerning business facts;</li><li style="font-weight: 400;" aria-level="6">Answering unsolicited inquires from shareholders or analyst;</li><li style="font-weight: 400;" aria-level="6">Holding stockholder meetings and answering questions&nbsp;</li></ol></ol></ol><li style="font-weight: 400;" aria-level="3"><h3>No Sales: Section 5(a)(1)</h3></li><ol><li style="font-weight: 400;" aria-level="4">Rule: Until a registration statement becomes effective, the issuer may not sell securities. Sec. Act. 5(a)(1).&nbsp;</li></ol><li style="font-weight: 400;" aria-level="3"><h3>No Deliveries: Section 5(a)(2)</h3></li><ol><li style="font-weight: 400;" aria-level="4">Rule: Until a registration statement becomes effective, the issuer may not deliver securities. Sec. Act. 5(a)(1).&nbsp;</li></ol><li style="font-weight: 400;" aria-level="3"><h3>(Offer) Safe Harbor Rules During the Pre-Filing Period</h3></li><ol><li style="font-weight: 400;" aria-level="4"><h4>Preliminary Negotiations: 33 Act §2(a)(3)&nbsp;</h4></li><ol><li style="font-weight: 400;" aria-level="5">Excludes preliminary negotiation and agreements between the issuer and the underwriters and among the underwriters who will be in privity with the issuer from the definition of “offer”</li></ol><li style="font-weight: 400;" aria-level="4"><h4>Rule 163: Free Writing Prospectuses (only for WKSI)</h4></li><ol><li style="font-weight: 400;" aria-level="5">Availability: Only to WKSI. Rule 163(a).</li><li style="font-weight: 400;" aria-level="5">Exempts offers from 5(c) prohibitions</li><li style="font-weight: 400;" aria-level="5">Communication must be “by or on behalf of an issuer” which means that “the issuer or an agent or representative of the issuer, other than an offering participant who is an underwriter or dealer, authorizes or approves . . . release or dissemination before it is made.”</li><li style="font-weight: 400;" aria-level="5">Oral offers permitted</li><li style="font-weight: 400;" aria-level="5">Written offers are free writing prospectuses, subject to legend and failing requirements of Rule 163(b).</li><ol><li style="font-weight: 400;" aria-level="6">Legend Rule 163(b)(1).</li><ol><li style="font-weight: 400;" aria-level="7">Must include specific words as stated in the rule.</li><li style="font-weight: 400;" aria-level="7">Immaterial or unintentional failure to provide a legend not a violation if:&nbsp;</li><ol><li style="font-weight: 400;" aria-level="8">Good faith and reasonable attempt was made to comply with legend requirement and</li><li style="font-weight: 400;" aria-level="8">Written offers that are free writing prospectuses are&nbsp;</li><ol><li style="font-weight: 400;" aria-level="9">retransmitted, with legend, “as soon as practicable after discovery of the omitted or incorrect legend”</li><li style="font-weight: 400;" aria-level="9">“by substantially the same means as, and directed to substantially the same prospective purchasers to whom, the free writing prospectus was originally transmitted.”</li></ol></ol></ol><li style="font-weight: 400;" aria-level="6">Filing Rule 163(b)(2)</li><ol><li style="font-weight: 400;" aria-level="7">If offer made before filing of registration statement or filing of amendment covering the securities as to which the offer was made, then the free writing prospectus must be filed “promptly upon” the filing of the registration statement or the amendment</li><li style="font-weight: 400;" aria-level="7">Exceptions to filing</li><ol><li style="font-weight: 400;" aria-level="8">“any communication that has previously been filed with, or furnished to, the Commission” or</li><li style="font-weight: 400;" aria-level="8">any communication “that the issuer would not be required to file with the Commission pursuant to the conditions of Rule 433 if the communication was a free writing prospectus used after the filing of the registration statement.”</li></ol><li style="font-weight: 400;" aria-level="7">Immaterial or unintentional failure to timely file not a violation of 5(c) if</li><ol><li style="font-weight: 400;" aria-level="8">Good faith and reasonable attempt was made to comply with filing requirement and</li><li style="font-weight: 400;" aria-level="8">Free writing prospectus filed “as soon as practicable after discovery of the failure to file”</li></ol></ol></ol></ol><li style="font-weight: 400;" aria-level="4"><h4>Rule 163A: Preregistration Communications</h4></li><ol><li style="font-weight: 400;" aria-level="5">Available to any issuer not underwriters or other participants</li><b><li aria-level="5">Protects communications made “more than 30 days before” filing registration statement</li></b><li style="font-weight: 400;" aria-level="5">Does not cover a communication that “reference[s] a securities offering”</li><li style="font-weight: 400;" aria-level="5">Effect is that communication is not an offer under 5(c)</li></ol><li style="font-weight: 400;" aria-level="4"><h4>Rule 168: Regular Communications by reporting issuers</h4></li><ol><li style="font-weight: 400;" aria-level="5">Available to issuers who are domestic reporting issuers, but not underwriters or other participants</li><li style="font-weight: 400;" aria-level="5">Communication is limited to the “regular release or dissemination” of “factual business communication or forward-looking information”&nbsp;&nbsp;&nbsp;</li><ol><li style="font-weight: 400;" aria-level="6">Factual information about the issuer, its business or financial developments, or other aspects of its business</li><li style="font-weight: 400;" aria-level="6">Advertisements of, or other information about, the issuer’s products or services; and</li><li style="font-weight: 400;" aria-level="6">Projections of the issuer’s revenues, income (loss), earnings (loss) per share, capital expenditures, dividends, capital structure, or other financial items</li><li style="font-weight: 400;" aria-level="6">Statements about the issuer management's plans and objectives for future operations, including plans or objectives relating to the products or services of the issuer;</li><li style="font-weight: 400;" aria-level="6">Statements about the issuer's future economic performance, including statements of the type contemplated by the management's discussion and analysis of financial condition and results of operation described in Item 303 of Regulation . . . S-K . . ; and</li><li style="font-weight: 400;" aria-level="6">Assumptions underlying or relating to any of the information described in 4–6 above</li></ol><li style="font-weight: 400;" aria-level="5">Does not cover “a communication containing information about the registered offering.”</li><li style="font-weight: 400;" aria-level="5">“The timing, manner, and form in which the information is released or disseminated is consistent in material respects with similar past releases or disseminations”</li><li style="font-weight: 400;" aria-level="5">Effect is that for purposes of 2(a)(10) and 5(c) covered communication is not an offer</li></ol><li style="font-weight: 400;" aria-level="4"><h4>Rule 169: Regular Communications by new issuers</h4></li><ol><li style="font-weight: 400;" aria-level="5">Available to any issuer (most importantly, to issuers that are not, before registration being considered, 34 Act public companies). Not available to underwriters.</li><li style="font-weight: 400;" aria-level="5">Communication is limited to “factual business information”</li><ol><li style="font-weight: 400;" aria-level="6">Factual information about the issuer, its business or financial developments, or other aspects of its business</li><li style="font-weight: 400;" aria-level="6">Advertisements of, or other information about, the issuer’s products or services; and</li><li style="font-weight: 400;" aria-level="6">Unlike 168, no projections as these are not factual business information.</li></ol><li style="font-weight: 400;" aria-level="5">Does not cover “a communication containing information about the registered offering.”</li><li style="font-weight: 400;" aria-level="5">“The timing, manner, and form in which the information is released or disseminated is consistent in material respects with similar past releases or disseminations”</li><li style="font-weight: 400;" aria-level="5">Effect is that for purposes of 2(a)(10) and 5(c) covered communication is not an offer</li><li style="font-weight: 400;" aria-level="5">NOTE: The information must be “for intended use by persons, such as customers and supplies . . . by the issuer’s employees or agents who historically have provided such information” not by potential investors.&nbsp;</li></ol><li style="font-weight: 400;" aria-level="4"><h4>Rule 135: Offering Notice</h4></li><ol><li style="font-weight: 400;" aria-level="5">Available to any issuer or “any person acting on behalf of either of them” whom “publishes through any medium a notice of a proposed offering to be registered.”</li><ol><li style="font-weight: 400;" aria-level="6">Not available to underwriters because it cannot name underwriters.</li></ol><li style="font-weight: 400;" aria-level="5">Notice is limited to:</li><ol><li style="font-weight: 400;" aria-level="6">Name of issuer</li><li style="font-weight: 400;" aria-level="6">Title, amount and basic terms of securities offered;</li><li style="font-weight: 400;" aria-level="6">The amount of the offering, if any, to be made by selling security holders;</li><li style="font-weight: 400;" aria-level="6">The anticipated time of the offering;</li><li style="font-weight: 400;" aria-level="6">A brief statement of the manner and the purpose of the offering, without naming the underwriters;</li><li style="font-weight: 400;" aria-level="6">Whether the issuer is directing its offering to only a particular class of purchasers</li></ol><li style="font-weight: 400;" aria-level="5">Effect is that notice “will not be deemed to offer . . . securities for sale”</li><li style="font-weight: 400;" aria-level="5">Must include a legend state that notice “does not constitute an offer of any securities for sale.”</li></ol><li style="font-weight: 400;" aria-level="4"><h4>Sec. Act §5(d): Emerging Growth Companies</h4></li><ol><li style="font-weight: 400;" aria-level="5">EGC may make offers during the pre-filing period to “qualified institutional buyers” under Rule 144A and “accredited investors” under Rule 501(a)</li><ol><li style="font-weight: 400;" aria-level="6">Does not apply to offers made to individuals.</li></ol><li style="font-weight: 400;" aria-level="5">PC 2.1 🡪 Defines “qualified institutional buyers” and “accredited investors”</li><b><li aria-level="5">Test Issue: Careful of Reg FD and selective disclosures—Unclear whether they conflict.&nbsp;</li></b></ol></ol></ol></ol></ol><br><br><ol><li style="font-weight: 400;" aria-level="2"><h2>The Waiting Period&nbsp;</h2></li><ol><li style="font-weight: 400;" aria-level="3"><h3>Generally</h3></li><ol><li style="font-weight: 400;" aria-level="4">The Waiting Period begins upon the filing of the registration statement and runs until the registration statement becomes effective. During this period, section 5(a)’s prohibition on sale and deliveries remain in effect; however, section 5(c)’s prohibition on offers is lifted. Section 5(b)(1)’s restriction are now imposed prohibiting the issuer from distributing a prospectus unless it complies with Section 10 of the Securities Act.</li></ol><li style="font-weight: 400;" aria-level="3"><h3>Permitted Offers: §5(c) Prohibition Lifted</h3></li><ol><li style="font-weight: 400;" aria-level="4">Oral offers</li><ol><li style="font-weight: 400;" aria-level="5">Including road shows</li><li style="font-weight: 400;" aria-level="5">Graphics presented real time at road shows but not distributed in hard copy&nbsp;</li></ol><li style="font-weight: 400;" aria-level="4">Offers by a prospectus that complies with Section 10</li><ol><li style="font-weight: 400;" aria-level="5">Preliminary Propspectus&nbsp;</li><li style="font-weight: 400;" aria-level="5">Free Writing Prospectuses under rule 164 and 433</li></ol></ol></ol></ol><br><ol><li style="font-weight: 400;" aria-level="3"><h3>Written Offers: Permissible, but Prospectus must comply with 10(b): §5(b)(1)</h3></li><ol><li style="font-weight: 400;" aria-level="4">While §5(c) prohibition on offers is lifted, the issuer may not distribute a prospectus unless it complies with Section 10. Section 5(b)(1). A prospectus is any communication “written or by radio or television, which offers any security for sale;” therefore, a written offer is usually a prospectus, but an oral offer is not. Sec. Act. Section 2(a)(10).&nbsp;</li><ol><li style="font-weight: 400;" aria-level="5">NOTE: FIRST CHECK TO SEE IF IT IS AN OFFER. NOT AN OFFER🡪NOT A PROSPECTUS</li></ol><li style="font-weight: 400;" aria-level="4">Section 10(b) prospectuses that may be used include: the preliminary statutory prospectus under Rule 430 and free writing prospectuses under Rule 164/433.&nbsp;</li></ol><li style="font-weight: 400;" aria-level="3"><h3>No Sales: Section 5(a)(1)</h3></li><ol><li style="font-weight: 400;" aria-level="4">Rule: Until a registration statement becomes effective, the issuer may not sell securities. Sec. Act. 5(a)(1).&nbsp;</li></ol><li style="font-weight: 400;" aria-level="3"><h3>No Deliveries: Section 5(a)(2)</h3></li><ol><li style="font-weight: 400;" aria-level="4">Rule: Until a registration statement becomes effective, the issuer may not deliver securities. Sec. Act. 5(a)(1).&nbsp;</li></ol><li style="font-weight: 400;" aria-level="3"><h3>Safe Harbor Rules During the Waiting Period</h3></li><ol><li style="font-weight: 400;" aria-level="4"><h4>Rule 134: Identifying Statements</h4></li><ol><li style="font-weight: 400;" aria-level="5">Available to issuer, UW and other participants</li><li style="font-weight: 400;" aria-level="5">Requires</li><ol><li style="font-weight: 400;" aria-level="6">Communication to be limited to certain information about the issuer and security, Rule 134(a)</li><li style="font-weight: 400;" aria-level="6">A legend, Rule 134(b)(1),&nbsp;</li><li style="font-weight: 400;" aria-level="6">Can avoid legend if accompanied by or preceding the statement with the preliminary prospectus, Rule 134(c)(2) or limiting the communication to a tombstone, or basic advertisement, Rule 134(c)</li></ol><li style="font-weight: 400;" aria-level="5">Solicitation of Interest</li><ol><li style="font-weight: 400;" aria-level="6">If a preliminary prospectus accompanies or precedes a rule 134 communication, the communication may solicit an offer to buy or a less formal indication of interest so long as a mandatory boilerplate legend advising the investor of his or her right to revoke the offer to buy prior to acceptance and that indications of interest involve no legal obligation are included. Rule 134(d).</li></ol></ol><li style="font-weight: 400;" aria-level="4"><h4>Rule 135: Offering Notice</h4></li><ol><li style="font-weight: 400;" aria-level="5">Available to any issuer or “any person acting on behalf of either of them” whom “publishes through any medium a notice of a proposed offering to be registered.”</li><ol><li style="font-weight: 400;" aria-level="6">Not available to underwriters because it cannot name underwriters.</li></ol><li style="font-weight: 400;" aria-level="5">Notice is limited to:</li><ol><li style="font-weight: 400;" aria-level="6">Name of issuer</li><li style="font-weight: 400;" aria-level="6">Title, amount and basic terms of securities offered;</li><li style="font-weight: 400;" aria-level="6">The amount of the offering, if any, to be made by selling security holders;</li><li style="font-weight: 400;" aria-level="6">The anticipated time of the offering;</li><li style="font-weight: 400;" aria-level="6">A brief statement of the manner and the purpose of the offering, without naming the underwriters;</li><li style="font-weight: 400;" aria-level="6">Whether the issuer is directing its offering to only a particular class of purchasers</li></ol><li style="font-weight: 400;" aria-level="5">Effect is that notice “will not be deemed to offer . . . securities for sale”</li><li style="font-weight: 400;" aria-level="5">Must include a legend state that notice “does not constitute an offer of any securities for sale.”</li></ol><li style="font-weight: 400;" aria-level="4"><h4>Rule 164/433: Free Writing Prospectuses</h4></li><ol><li style="font-weight: 400;" aria-level="5">Available to issuer, underwriter or other participant</li><li style="font-weight: 400;" aria-level="5">A free writing prospectus is any written communication to offer a security that is or will be subject to a registration statement and that does not meet the requirements a Section 10 statutory final or preliminary prospectus and include written, printed, broadcast, and graphic communications.&nbsp;</li><li style="font-weight: 400;" aria-level="5">For a issuer to seek 164/433 protection, the following conditions under rule 433 must be satisfied:</li><ol><li style="font-weight: 400;" aria-level="6">FWP must include a legend</li><li style="font-weight: 400;" aria-level="6">FWP must be accompanied by (or linked to) the preliminary/final prospectus</li><ol><li style="font-weight: 400;" aria-level="7">Does not apply to seasoned issuers/WKSIs</li></ol><li style="font-weight: 400;" aria-level="6">Must file the FWP with the SEC on the date of first use</li><ol><li style="font-weight: 400;" aria-level="7">Must retain FWP for three years, if not filed with the SEC</li></ol></ol><li style="font-weight: 400;" aria-level="5">Other Notes:</li><ol><li style="font-weight: 400;" aria-level="6">Rule 433(c)(1) allows inclusion in the protected FWP of “information the substance of which is not included in the registration statement” provided that this information does not conflict with the registration statement or information incorporated into the registration by reference.</li></ol></ol><li style="font-weight: 400;" aria-level="4"><h4>Rule 168: Regular Communications by reporting issuers</h4></li><ol><li style="font-weight: 400;" aria-level="5">Available to issuers who are domestic reporting issuers, but not underwriters or other participants</li><li style="font-weight: 400;" aria-level="5">Communication is limited to the “regular release or dissemination” of “factual business communication or forward-looking information”&nbsp;&nbsp;&nbsp;</li><ol><li style="font-weight: 400;" aria-level="6">Factual information about the issuer, its business or financial developments, or other aspects of its business</li><li style="font-weight: 400;" aria-level="6">Advertisements of, or other information about, the issuer’s products or services; and</li><li style="font-weight: 400;" aria-level="6">Projections of the issuer’s revenues, income (loss), earnings (loss) per share, capital expenditures, dividends, capital structure, or other financial items</li><li style="font-weight: 400;" aria-level="6">Statements about the issuer management's plans and objectives for future operations, including plans or objectives relating to the products or services of the issuer;</li><li style="font-weight: 400;" aria-level="6">Statements about the issuer's future economic performance, including statements of the type contemplated by the management's discussion and analysis of financial condition and results of operation described in Item 303 of Regulation . . . S-K . . ; and</li><li style="font-weight: 400;" aria-level="6">Assumptions underlying or relating to any of the information described in 4–6 above</li></ol><li style="font-weight: 400;" aria-level="5">Does not cover “a communication containing information about the registered offering.”</li><li style="font-weight: 400;" aria-level="5">“The timing, manner, and form in which the information is released or disseminated is consistent in material respects with similar past releases or disseminations”</li><li style="font-weight: 400;" aria-level="5">Effect is that for purposes of 2(a)(10) and 5(c) covered communication is not an offer</li></ol><li style="font-weight: 400;" aria-level="4"><h4>Rule 169: Regular Communications by new issuers</h4></li><ol><li style="font-weight: 400;" aria-level="5">Available to any issuer (most importantly, to issuers that are not, before registration being considered, 34 Act public companies). Not available to underwriters.</li><li style="font-weight: 400;" aria-level="5">Communication is limited to “factual business information”</li><ol><li style="font-weight: 400;" aria-level="6">Factual information about the issuer, its business or financial developments, or other aspects of its business</li><li style="font-weight: 400;" aria-level="6">Advertisements of, or other information about, the issuer’s products or services; and</li><li style="font-weight: 400;" aria-level="6">Unlike 168, no projections as these are not factual business information.</li></ol><li style="font-weight: 400;" aria-level="5">Does not cover “a communication containing information about the registered offering.”</li><li style="font-weight: 400;" aria-level="5">“The timing, manner, and form in which the information is released or disseminated is consistent in material respects with similar past releases or disseminations”</li><li style="font-weight: 400;" aria-level="5">Effect is that for purposes of 2(a)(10) and 5(c) covered communication is not an offer</li><li style="font-weight: 400;" aria-level="5">NOTE: The information must be “for intended use by persons, such as customers and supplies . . . by the issuer’s employees or agents who historically have provided such information” not by potential investors.&nbsp;</li></ol><li style="font-weight: 400;" aria-level="4"><h4>Rule 405/433: Road Shows</h4></li><li style="font-weight: 400;" aria-level="4"><h4>Rule 433: Press Interviews</h4></li><ol><li style="font-weight: 400;" aria-level="5">The company can turn the press interview into a free writing prospectus under rules 164/433. To do so the company must:</li><ol><li style="font-weight: 400;" aria-level="6">File a copy of the transcript or</li><li style="font-weight: 400;" aria-level="6">File a copy of an article</li></ol><li style="font-weight: 400;" aria-level="5">With the SEC within four days of the date the company became aware of the publication. Rule 433(f)(1)(ii), (2)(iii).</li><li style="font-weight: 400;" aria-level="5">Further, the filing should contain the Rule 433(c)(2)(i) legend, and the interviewer does not pay for the interview through direct payment or a promise of future advertising, rule 433(f)(1)(i),(ii), and</li><li style="font-weight: 400;" aria-level="5">The issuer, underwriter, and other participants are not affiliated with the media company, rule 433(f), the company will be excused from taking the following steps that would be needed to turn the public into a free writing prospectus:</li><ol><li style="font-weight: 400;" aria-level="6">Accompany or precede each copy of the writing with the most recent preliminary prospectus, rule 433(c)(2)</li><li style="font-weight: 400;" aria-level="6">Place a legend on each copy of the interview, rule 433(c)(2)(i), and&nbsp;</li><li style="font-weight: 400;" aria-level="6">File the article no later than the first date of its distribution (which is now impossible). Rule 433(f).</li></ol></ol><li style="font-weight: 400;" aria-level="4"><h4>Sec. Act §5(d): Emerging Growth Companies</h4></li><ol><li style="font-weight: 400;" aria-level="5">EGC may make offers during the pre-filing period to “qualified institutional buyers” under Rule 144A and “accredited investors” under Rule 501(a)</li><ol><li style="font-weight: 400;" aria-level="6">Does not apply to offers made to individuals.</li></ol><li style="font-weight: 400;" aria-level="5">PC 2.1 🡪 Defines “qualified institutional buyers” and “accredited investors”</li><b><li aria-level="5">Test Issue: Careful of Reg FD and selective disclosures—Unclear whether they conflict.&nbsp;</li></b></ol></ol></ol><ol><li style="font-weight: 400;" aria-level="2"><h2>Post-Effective Period</h2></li><ol><li style="font-weight: 400;" aria-level="3"><h3>No prospectus unless complies with §10: Section 5(b)(1) continues</h3></li><li style="font-weight: 400;" aria-level="3"><h3>No deliveries unless accompanied by final prospectus. Section 5(b)(2)</h3></li></ol></ol><br><br><ol><li style="font-weight: 400;" aria-level="1"><h1>Exempt Offerings (Private Offerings)</h1></li><ol><li style="font-weight: 400;" aria-level="2"><h2>Penalties</h2></li><ol><li style="font-weight: 400;" aria-level="3">An offering must either be registered or meet the requirements for an exemption, otherwise the sale violates section 5(a). If offering is sold in violation of 5(a), then the SEC may bring an enforcement action seeking rescission under section 12(a)(1). The elements of a 12(a)(1) actions are simply: plaintiff is a purchaser, defendant is a seller, and the offering is sold without registration.</li></ol><li style="font-weight: 400;" aria-level="2"><h2>Section 4(a)(2) Offerings</h2></li><ol><li style="font-weight: 400;" aria-level="3">Rule: Section 4(a)(2) states that Section 5 shall not apply transaction by an issuer not involving any public offering.&nbsp;</li><ol><li style="font-weight: 400;" aria-level="4">Issuer is defined by Section 2(a)(4).</li></ol><li style="font-weight: 400;" aria-level="3">Under Section 4(a)(2), the issuer turns on whether an offering is public and such determination turns on “whether the particular class of persons affected need the protection of the Act.” SEC v. Ralston (1953) (finding that some employees need the protection of the Act and other may not).&nbsp;</li><li style="font-weight: 400;" aria-level="3">In Securities Act Release no. 285 (1935), the SEC released several factors that determine whether an offering is “public” as the word is used in section 4(a)(2), including</li><ol><li style="font-weight: 400;" aria-level="4">The number of offerees;</li><ol><li style="font-weight: 400;" aria-level="5">THE INQUIRY IS NOT ON THE NUMBER OF PURCAHSERS. Doran.</li><li style="font-weight: 400;" aria-level="5">More offerees 🡪 leans public</li><li style="font-weight: 400;" aria-level="5">Less offerees, or few sophisticated 🡪 leans private</li></ol><li style="font-weight: 400;" aria-level="4">The relationship of the offerees to each other and the issuer;</li><ol><li style="font-weight: 400;" aria-level="5">Under this rule, for it to weigh in favor of the exemption, courts utilize the disclosure or access rule (Doran) to ensure the offerees have adequate information and protection. This rule requires that the</li><li style="font-weight: 400;" aria-level="5">Issuer must provide, as to all offerees, either&nbsp;</li><ol><li style="font-weight: 400;" aria-level="6">Disclosure, which requires that the issuer in fact provides information that a registration statement would have provided and offerees perhaps must have sophistication with which to evaluate the information, OR</li><li style="font-weight: 400;" aria-level="6">Access, which requires that offerees have access (by executive position at issuer, family ties, bargaining power, agreement, or otherwise) to the records of the company that contain relevant information (sufficiently similar to a registration statement in public offerings) and offerees are sufficiently sophisticated that they could obtain the necessary information and evaluate the risks and merits of the investment</li><ol><li style="font-weight: 400;" aria-level="7">High standard of sophistication for access than disclosure.</li></ol></ol></ol><li style="font-weight: 400;" aria-level="4">Number of units offered;</li><ol><li style="font-weight: 400;" aria-level="5">More units 🡪 Leans public</li><li style="font-weight: 400;" aria-level="5">Less units 🡪 Leans private</li></ol><li style="font-weight: 400;" aria-level="4">Size of offering (total dollar amount)</li><ol><li style="font-weight: 400;" aria-level="5">Greater amount 🡪 leans public</li><li style="font-weight: 400;" aria-level="5">Less amount 🡪 leans private</li></ol><li style="font-weight: 400;" aria-level="4">Manner of offering</li><ol><li style="font-weight: 400;" aria-level="5">Cannot include a general solicitation</li><li style="font-weight: 400;" aria-level="5">General solicitation 🡪 Public</li></ol></ol><li style="font-weight: 400;" aria-level="3">Issuer must at lease show:</li><ol><li style="font-weight: 400;" aria-level="4">Disclosure or Access (Factor 2)</li><li style="font-weight: 400;" aria-level="4">No general solicitation (Factor 5)</li></ol></ol><li style="font-weight: 400;" aria-level="2"><h2>Regulation D (When a company complies with 4(a)(2))</h2></li><ol><li style="font-weight: 400;" aria-level="3"><h3>Rule 504</h3></li><ol><li style="font-weight: 400;" aria-level="4">Aggregate Price: $5 Million. Rule 504(b)(2).</li><li style="font-weight: 400;" aria-level="4">Purchaser Limit: No limit</li><li style="font-weight: 400;" aria-level="4">General Solicitations: Maybe</li><ol><li style="font-weight: 400;" aria-level="5">Generally, rule 502(c) bans “any form of general solicitations or general advertisements;” however, rule 504(b)(1) exempts the issuer from this ban if the issuer registers such and delivers a “substantive disclosure document” to purchasers in accordance with state law.&nbsp;</li></ol><li style="font-weight: 400;" aria-level="4">Disclosure: Not required to give disclosure to accredited or non-accredited.&nbsp;</li><li style="font-weight: 400;" aria-level="4">Resales: Securities under regulation D cannot be resold , 502(d), unless the resale complies with state law restrictions under ruel 504(b)(1)</li></ol><li style="font-weight: 400;" aria-level="3"><h3>Rule 506(b)</h3></li><ol><li style="font-weight: 400;" aria-level="4">Aggregate Price: No limit.</li><li style="font-weight: 400;" aria-level="4">Purchaser Limit: Accredited investors plus up to 35 non-accredited investors that meet rule 506(b)(2)(ii) sophistication requirements.</li><ol><li style="font-weight: 400;" aria-level="5">Excludes from the 35 investor limit:</li><ol><li style="font-weight: 400;" aria-level="6">Accredited investors under rule 501(a), see rule 501(e)(1)(iv),</li><li style="font-weight: 400;" aria-level="6">Any family member of the purchaser who has the same primary residence as the purchaser, rule 501(e)(1)(i).</li></ol><li style="font-weight: 400;" aria-level="5">Sophistication Requirements for non-accredited investors</li><ol><li style="font-weight: 400;" aria-level="6">Under rule 506(b), all non-accredited investors—either alone or with a purchaser representative</li><li style="font-weight: 400;" aria-level="6">—must have “such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment.” Rule 506(b)(2)(ii).</li><li style="font-weight: 400;" aria-level="6">Issuer must reasonably believe, immediately prior or at the time of sale, that each purchaser meets the definition of accredited investor. A self-verification by purchaser (e.g. a statement that they have a net worth greater than $1 million) is sufficient to effect a reasonable belief, provided that the issuer does not facts that call the statement into question.&nbsp;</li></ol></ol><li style="font-weight: 400;" aria-level="4">General Solicitations: Rule 502(c) bans “any form of general solicitations or general advertisements;” therefore, under Rule 506(b) offerings, general solicitations are banned.</li><li style="font-weight: 400;" aria-level="4">Disclosures:</li><ol><li style="font-weight: 400;" aria-level="5">Accredited Investors: No disclosures required.</li><li style="font-weight: 400;" aria-level="5">Non-Accredited Investors: Disclosure Required. Rule 502(b).</li><ol><li style="font-weight: 400;" aria-level="6">Prior to the sale, the issuer must furnisher to a non-accreditor investor “a brief description in writing of any material written information concernin the offering . . . upon [the investor’s] written request” in a easonable time. Rule 502(b)(2)(iv).</li><li style="font-weight: 400;" aria-level="6">Prior to sale, issuer must make available to each purchaser at a reasonable time prior to purchase, an opportunity to ask questions and receive answers concerning the terms and conditions of the offering.” Rule 502(b)(2)(v).</li><li style="font-weight: 400;" aria-level="6">Prior to sale, investor must advise the purchase of the limitations on resale. Rule 502(b)(2)(vii).</li></ol></ol><li style="font-weight: 400;" aria-level="4">Resales: Resales under rule 506 are prohibited by rule 502(d). Rule 502(d) imposes a requirement on the issuer to take reasonable care to discourage investors from reselling the securities including disclosing in writing the unregistered status of the securities and placing a legend on those securities. Rule 502(d).&nbsp;</li></ol><li style="font-weight: 400;" aria-level="3"><h3>Rule 506(c)</h3></li><ol><li style="font-weight: 400;" aria-level="4">Aggregate Price: No limit.</li><li style="font-weight: 400;" aria-level="4">Purchaser Limit: Only to accredited investors&nbsp;</li><ol><li style="font-weight: 400;" aria-level="5">Issuer must reasonably believe, immediately prior or at the time of sale, that each purchaser meets the definition of accredited investor. A self-verification by purchaser (e.g. a statement that they have a net worth greater than $1 million) is sufficient to effect a reasonable belief, provided that the issuer does not facts that call the statement into question. Rule 506(c)(2)(ii).</li><ol><li style="font-weight: 400;" aria-level="6">Net worth requires verification through the individuals financial statements. Rule 502(c)(2)(ii)(B).</li></ol></ol><li style="font-weight: 400;" aria-level="4">General Solicitations: Generally, rule 502(c) bans “any form of general solicitations or general advertisements;” however, rule 506(c)(1) requires that offering companies under 506(c) comply with rule 502(a), (d), not (c) and therefore companies under rule 502(c) are not banned from general solicitations (though, they may only sale and offer securities to accredited investors under 506(c)(2)(i)).&nbsp;</li><li style="font-weight: 400;" aria-level="4">Disclosure: Not required because 506(c) only has accredited investors.</li><li style="font-weight: 400;" aria-level="4">Resales: Resales under rule 506 are prohibited by rule 502(d). Rule 502(d) imposes a requirement on the issuer to take reasonable care to discourage investors from reselling the securities including disclosing in writing the unregistered status of the securities and placing a legend on those securities. Rule 502(d).&nbsp;</li><li style="font-weight: 400;" aria-level="4"><br></li></ol><li style="font-weight: 400;" aria-level="3"><h3>Defined: Accredited Investors. Rule 501(a).</h3></li><ol><li style="font-weight: 400;" aria-level="4">“Any director, executive officer, or general partner of the issuer.” Rule 501(a)(4).</li><li style="font-weight: 400;" aria-level="4">Any natural person with a net worth of $1 million exclusive of their primary residence. Rule 501(a)(5).</li><li style="font-weight: 400;" aria-level="4">Any natural person who received $200,000 in come (or $300,000 with a spouse) during each of the last two years and have a reasonable expectation of receiving that much in the current year. Rule 501(a)(6).</li><li style="font-weight: 400;" aria-level="4">Any partnership or corporation with more than $5 million in assets, provided that it was not formed for the specific purpose of acquiring the securities in the offering. Rule 501(a)(3).</li></ol><li style="font-weight: 400;" aria-level="3"><h3>Defined: Purchaser Representative. Rule 501(i). [For 506(b) usage]</h3></li><ol><li style="font-weight: 400;" aria-level="4">Under 501(i), to qualify as a purchaser representative:</li><ol><li style="font-weight: 400;" aria-level="5">The representative cannot be an officer, director, employee, or major shareholder of the issuer except where the representative is a close relative of the purchaser, rule 501(i)(1),</li><li style="font-weight: 400;" aria-level="5">The representative must have such knowledge and experience in financial and business matters that hey are capable of evaluating the merits and riks of the prospective investment, rule 501(i)(2),</li><li style="font-weight: 400;" aria-level="5">The purchaser must acknowledge in writing that the representative is their representative for evaluating the particular offer, rule 501(i)(3),</li><li style="font-weight: 400;" aria-level="5">The representative must disclose to the purchase any material relationship between them and any affiliates or the issuer, rule 501(i)(4).</li></ol></ol><li style="font-weight: 400;" aria-level="3"><h3>General Solicitations – 502(c) Prohibition</h3></li><ol><li style="font-weight: 400;" aria-level="4">Rule 502(c) bans general solicitaitons</li><li style="font-weight: 400;" aria-level="4">Under each offering:</li><ol><li style="font-weight: 400;" aria-level="5">504: Allowed if meeting certain requirements</li><li style="font-weight: 400;" aria-level="5">506(b): Banned</li><li style="font-weight: 400;" aria-level="5">506(c): Allowed only to accredited investors.</li></ol><li style="font-weight: 400;" aria-level="4">Whether a solicitation is a general solicitation is fact specific and depends on the whether the issuer and offeree have a preexisting relationship of the sort that allows the offeror to assess sophistication. SEC Release No. 6825 (1989).</li><li style="font-weight: 400;" aria-level="4">Targeted solicitation of very sophisticated purchasers may not constitute general solicitation even if the issuer does not have a pre-existing relationship. SEC Release No. 6825 (1989).</li></ol><li style="font-weight: 400;" aria-level="3"><h3>Resales – 502(d) Prohibition</h3></li><ol><li style="font-weight: 400;" aria-level="4">Resales are prohibited under Rule 502(d).</li><li style="font-weight: 400;" aria-level="4">Rule 504: Prohibit unless complies with 504(b)(1).</li><li style="font-weight: 400;" aria-level="4">Rule 506: Resales under rule 506 are prohibited by rule 502(d), which imposes a requirement on the issuer to take reasonable care to discourage investors from reselling the securities including disclosing in writing the unregistered status of the securities and placing a legend on those securities. Rule 502(d).&nbsp;</li></ol><li style="font-weight: 400;" aria-level="3"><h3>Integration – Rule 502(a)</h3></li><ol><li style="font-weight: 400;" aria-level="4">Integration prevents an issuer from dividing an offering into pieces claiming exemption from registration for each piece when the offering, considered as a whole, would not satisfy the criteria for any exemption.</li><li style="font-weight: 400;" aria-level="4">Five Factor Test for Integration</li><ol><li style="font-weight: 400;" aria-level="5">Whether the sales are part of a single plan of financing—look to timing of financing plan and manner of sale (also planned use of proceeds; same facts here may also be useful for factor five)</li><li style="font-weight: 400;" aria-level="5">Whether the sales involve issuance of the same class of securities</li><li style="font-weight: 400;" aria-level="5">Whether the sales are made at or about the same time from Registration</li><li style="font-weight: 400;" aria-level="5">Whether the issuer receives the same type of consideration—not too important if consideration is cash, as the great majority of securities sales are for cash</li><li style="font-weight: 400;" aria-level="5">Whether the sales are made for the same general purpose—look to plan for and actual use of proceeds</li><ol><li style="font-weight: 400;" aria-level="6">Factors 1, 5 are most important but no factor is dispositive.</li></ol></ol><li style="font-weight: 400;" aria-level="4">Integration Safe Harbors under 502(a).</li><ol><li style="font-weight: 400;" aria-level="5">An offering that ends more than 6 months before the Reg D offering begins will not be integrated into that Reg D offering;</li><li style="font-weight: 400;" aria-level="5">An offering that begins more than 6 months after a Reg D offering ends will not be integrated into that Reg D offering</li><li style="font-weight: 400;" aria-level="5">Protects a Reg D offering from having another offering integrated into the Reg D offering where the other offering is separated from the Reg D offering by more than 6 months</li><li style="font-weight: 400;" aria-level="5">Safe harbor conditioned on no sales of same or similar class of security during either of the 6-month periods on either side of the Reg D offering</li></ol><li style="font-weight: 400;" aria-level="4">Effect of Integration:&nbsp;</li><ol><li style="font-weight: 400;" aria-level="5">All offers and sales, in each offering into which another offering is integrated, must be considered when determining whether the offering, after integration, is exempt from registration.</li><ol><li style="font-weight: 400;" aria-level="6">So, integration may prevent satisfaction of the requirements of Reg because, after integration, an integrated offering exceeds applicable aggregate offering price or purchaser limits.</li></ol></ol></ol><li style="font-weight: 400;" aria-level="3"><h3>Innocent and Insignificant Mistakes – Rule 508</h3></li><ol><li style="font-weight: 400;" aria-level="4">Under rule 508, insignificant deviations from conditions in a Regulation D exemption will not cause the loss of the exemption for the purposes of a 12(a)(1) rescission action by purchasers in the offering so long as the issuer made a “good faith and reasonable attempt . . . to comply with all applicable terms, conditions and requirements.” Rule 508(a)(3).</li><li style="font-weight: 400;" aria-level="4">The following failures cannot be excused by rule 508(a) because they are “significant to the offering as a whole:”</li><ol><li style="font-weight: 400;" aria-level="5">Violation of the $5 million aggregate price limit under 504 offerings;</li><li style="font-weight: 400;" aria-level="5">Violations of the prohibition on general solicitations in 504 or 506(b);</li><li style="font-weight: 400;" aria-level="5">Violations of the 35 Purchaser limitations in a 506(b) offering</li></ol><li style="font-weight: 400;" aria-level="4">Does not block an enforcement action by the SEC.</li></ol></ol><li style="font-weight: 400;" aria-level="2"><h2>Intrastate Exemptions</h2></li><ol><li style="font-weight: 400;" aria-level="3"><h3>Section 3(a)(11) Statutory Exemption</h3></li><ol><li style="font-weight: 400;" aria-level="4">For section 3(a)(11) exemption to apply all offers and sales must only be to residents of the state of the issuer and an issuer must also be a resident “doing business in” the same state; accordingly, and any offer or sale to a non-resident will render the exemption unavailable. Securities Act 3(a)(11).</li><li style="font-weight: 400;" aria-level="4">Residence (Purchaser/Issuer)</li><ol><li style="font-weight: 400;" aria-level="5">The residence of a natural person means the natural person’s domicile: the place where the natural person has (1) presence through a true, fixed home and (2) an intent to return or remain indefinitely.</li><li style="font-weight: 400;" aria-level="5">Residence of a corporation or other entity organized under state law is the place of incorporation or organization.</li><li style="font-weight: 400;" aria-level="5">The residence of an unorganized entity such as a general partnership or sole proprietorship is the state with its principal place of business.&nbsp;</li><li style="font-weight: 400;" aria-level="5">A single offer to an out-of-stater loses the exemption.</li></ol><li style="font-weight: 400;" aria-level="4">“Doing Business In” Requirement (Only Issuer)</li><ol><li style="font-weight: 400;" aria-level="5">Under section 3(a)(11), the issuer must also be doing business in the state which it is offering the securities. The requirement of doing business in refers to revenue-generating activity in the issuer’s home state and non-revenue generating activity such as merely setting up an office or conducting substantially all income-producing operations elsewhere does not satisfy this requirement. Busch v. Carpenter (10th Cir. 1987).</li><li style="font-weight: 400;" aria-level="5">Accordingly, the issuer must also intend to use any income derived from the offering for business activity within the state—they cannot intend to use the majority of funds for foreign state activities.&nbsp;</li></ol><li style="font-weight: 400;" aria-level="4">Restrictions on Resales: Coming to Rest</li><ol><li style="font-weight: 400;" aria-level="5">Securities must “come to rest” in the hands of a resident of issuer’s state. SEC Release 4434 (1961).&nbsp;</li><li style="font-weight: 400;" aria-level="5">An offering may be so large that it is impracticable that it will come to rest in one state. SEC Release 4434 (1961).</li><li style="font-weight: 400;" aria-level="5">The securities must come to rest in a resident of the state. A quick resale by purchaser suggests that the stock did not come to rest in the hands of a resident-puchaser; however, this alone may or may not void the exemption. SEC Release 4434 (1961).</li></ol></ol><li style="font-weight: 400;" aria-level="3"><h3>Rule 147</h3></li><ol><li style="font-weight: 400;" aria-level="4">Issuer:</li><ol><li style="font-weight: 400;" aria-level="5">Under rule 147, all offers and sales are limited to resident of the same state in which the issuer is a resident and doing business in the same. Rule 147(c).&nbsp;</li><li style="font-weight: 400;" aria-level="5">An issuer is deemed a resident if</li><ol><li style="font-weight: 400;" aria-level="6">A corporation or entity organized under state law, it is incorporated and organized in that state and it has its principal place of business—where the executives primarily direct, control, and coordinate the company’s activities—in the same. Rule 147(c)(1)(i).</li><li style="font-weight: 400;" aria-level="6">An unorganized entity has its residence at its principal place of business—where the executives primarily direct, control, and coordinate the company’s activities. Rule 147(c)(1)(ii).</li><li style="font-weight: 400;" aria-level="6">A natural person is a residence where its principal residence is located. Rule 1479c)(1)(iii).&nbsp;</li></ol><li style="font-weight: 400;" aria-level="5">Further, a issuer must be doing business in the same state which means that it satisfies at least one of the following under rule 147(c)(2)(i)–(iv):</li><ol><li style="font-weight: 400;" aria-level="6">It derives more than 80% of its gross revenues from in-state operations;</li><li style="font-weight: 400;" aria-level="6">It has more than 80% of its assets within the state;&nbsp;</li><li style="font-weight: 400;" aria-level="6">It intends to use more than 80% of the proceeds from the offering for its business in the state; or</li><li style="font-weight: 400;" aria-level="6">A majority of the issuer’s employees are located in the state.&nbsp;</li></ol></ol><li style="font-weight: 400;" aria-level="4">Offerees: Rule 147(d)</li><ol><li style="font-weight: 400;" aria-level="5">An issuer may only make offers and sale to residers in which the issuer is a resident and who the issuer “reasonably believes” to be residents at the time of the offer or sale; therefore, a single offer to an out-of-state resident causes the issuer to lose the exemption unless the issuer reasonably believes that the offeree was an in-stater. Rule 147(d).</li><li style="font-weight: 400;" aria-level="5">Residence for offerees is determined by:&nbsp;</li><ol><li style="font-weight: 400;" aria-level="6">For a corporation or other business entity—organized or unorganized—the state of its principal place of business (i.e. where the executives primarily direct, control, and coordinate the company’s activities), rule 147(d)(1).</li><li style="font-weight: 400;" aria-level="6">For an individual, the state in which they maintain their principal residence, rule 147(d)(2)</li><li style="font-weight: 400;" aria-level="6">For businesses organized for the specific purpose of acquiring securities offered under rule 147, the business is only a resident if all beneficial owners are residents of the state, rule 147(d)(3).&nbsp;</li></ol></ol><li style="font-weight: 400;" aria-level="4">Limitations on Resale: Rule 147(e).</li><ol><li style="font-weight: 400;" aria-level="5">For a period of six-months from the date of sale, any resale may only be made to residents within the state. Rule 147(e). Accordingly, the issuer must take steps to prevent resale before this time including by placing a legend on the certificate, issuing a stop transfer instruction to the issuer’s transfer agent, or obtaining a written representation from each purchaser. Rule 147(f).</li><ol><li style="font-weight: 400;" aria-level="6">If they sell before the six-month period, the securities have not “come to rest.”</li><li style="font-weight: 400;" aria-level="6">NO INSIGNIFCANT MISTAKES PROVISIONS</li></ol></ol><li style="font-weight: 400;" aria-level="4">Anti-Integration Safe Harbor</li><ol><li style="font-weight: 400;" aria-level="5">A 147 offering will not be integrated with offers or sales made prior to the commencement of the current 147 offering or made thereafter if they are made more than six months after the 147 offering ends. Rule 147(g).</li></ol></ol><li style="font-weight: 400;" aria-level="3"><h3>Rule 147A (Use 147) except:</h3></li><ol><li style="font-weight: 400;" aria-level="4">Issuers:</li><ol><li style="font-weight: 400;" aria-level="5">Issuer need not be incorporated or organized in the state (if a corporation) or organized in the state (if an entity other than a corporation); but must have its principal place of business in the state and must meet the same “doing business” test as under 147</li></ol><li style="font-weight: 400;" aria-level="4">Offerees:</li><ol><li style="font-weight: 400;" aria-level="5">Offers (but not sales) not limited to residents of the issuer’s state; so offers by internet are permitted. ALL SALES MUST STILL BE TO RESIDENTS. Rule 147A(d).</li></ol><li style="font-weight: 400;" aria-level="4">Essentially: No general solicitation under 147 but may have general solicitation under 147A.</li></ol></ol></ol><li style="font-weight: 400;" aria-level="1"><h1>12(a)(1) Rescission Actions</h1></li><ol><li style="font-weight: 400;" aria-level="2">12(a)(1) is a rescission action by the a purchaser or the SEC for violation of section 5. The defendant cannot rely on an exemption unless</li><ol><li style="font-weight: 400;" aria-level="3">The defendant cam provide proof that the offering met the terms, conditions, and requirements of the exemption or</li><li style="font-weight: 400;" aria-level="3">Any failure to comply with a term, requirement, or condition for a regulation D offering is excused by rule 508 (insignificant mistakes)</li></ol><li style="font-weight: 400;" aria-level="2">Proper defendant in a 12(a)(1) action must “sell” the security to the plaintiff—i.e. must be a statutory seller under section 12.</li><ol><li style="font-weight: 400;" aria-level="3">Statutory sellers include, and proper defendant must fit into, one of the following categories:</li><ol><li style="font-weight: 400;" aria-level="4">Owner that passes title to the security to the defendant for value;</li><li style="font-weight: 400;" aria-level="4">Someone who solicits the purchaser to buy the security, motivated at least in part by a desire to serve their financial interest</li><ol><li style="font-weight: 400;" aria-level="5">Majority View: Solicitation more than simply preparing offering disclosure documents is required; playing a professional role (accountant, lawyer etc) is not enough)</li><ol><li style="font-weight: 400;" aria-level="6">Thus, sellers include (i) the issuer, (ii) officers or employees of the issuer who sell the securities by personally urging offerees to buy, (iii) and placement agents and broker/dealers who sell by personally urging offerees to buy</li></ol></ol></ol></ol><li style="font-weight: 400;" aria-level="2">Recovery in 12(a)(1) Action</li><ol><li style="font-weight: 400;" aria-level="3">If purchaser has not resold the security:</li><ol><li style="font-weight: 400;" aria-level="4">Return security to issuer</li><li style="font-weight: 400;" aria-level="4">Receive: Amount paid plus interest less any income received from holding the security</li></ol><li style="font-weight: 400;" aria-level="3">If purchaser has resold the security</li><ol><li style="font-weight: 400;" aria-level="4">Receive: amount paid plus interest less any income received from holding less price received on resale</li></ol></ol></ol></ol><br><br><br data-mce-bogus="1"><p></p></div>Rezsue