Tips for Effectively Using the IRC

1. Tips for Effectively Using the IRC

2. Understand the Setup Subtitles (A – I) Chapters (1 – 100) Subchapters (A - ?) Parts Subparts Sections Subsections

3. Subtitles Subtitle A --Income Taxes [Chapters 1 – 6; Secs. 1-1563] Subtitle B --Estate and Gift Taxes [Chapters 11 – 13; Secs. 2001-2704] Subtitle C --Employment Taxes [Chapters 21 – 25; Secs. 3101-3510] Subtitle D --Miscellaneous Excise Taxes [Chapters 39 – 47; Secs. 4001-5000] Subtitle E --Alcohol, Tobacco, and Certain Other Excise Taxes [Chapters 54Secs. 5001-5891]

4. Subtitles – cont’d Subtitle F --Procedure and Administration [Chapters 61 – 80; Secs. 6001-7873] Subtitle G --The Joint Committee on Taxation [Chapters 91 – 92; Secs. 8001-8023] Subtitle H --Financing of Presidential Election Campaigns [Chapters 95 – 96; Secs. 9001-9042] Subtitle I --Trust Fund Code [Chapter 98; Secs. 9500-9602] Subtitle J --Coal Industry Health Benefits [Chapter 99; Secs. 9701-9722] Subtitle K --Group Health Plan Requirements [Chapter 100; Secs. 9801-9833]

5. Subtitle A CHAPTER 1 --NORMAL TAXES AND SURTAXES [Secs. 1-1400L] CHAPTER 2 --TAX ON SELF-EMPLOYMENT INCOME [Secs. 1401-1403] CHAPTER 3 --WITHHOLDING OF TAX ON NONRESIDENT ALIENS AND FOREIGN CORPORATIONS [Secs. 1441-1464] CHAPTER 6 --CONSOLIDATED RETURNS [Secs. 1501-1563]

6. Citations 163(h)(3)(B) ACQUISITION INDEBTEDNESS. -- • 163(h)(3)(B)(i) IN GENERAL. --The term "acquisition indebtedness" means any indebtedness which -- • (I) is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and • (II) is secured by such residence. • Such term also includes any indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence (or this sentence); but only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness. WHAT IS THE REFERENCE? _________________________________

7. Definitions • 7701(a) When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof – • 7701(a)(1) PERSON. -- • The term "person" shall be construed to mean and include an individual, a trust, estate, partnership, association, company or corporation. • 7701(a)(2) PARTNERSHIP AND PARTNER. -- • The term "partnership" includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title, a trust or estate or a corporation; and the term "partner" includes a member in such a syndicate, group, pool, joint venture, or organization. • 7701(a)(3) CORPORATION. -- • The term "corporation" includes associations, joint-stock companies, and insurance companies.

8. Definitions in IRC Sections Example: • 368(a)(1) IN GENERAL. -- • For purposes of parts I and II and this part, the term "reorganization" means -- • 368(a)(1)(A) a statutory merger or consolidation; • 368(a)(1)(B) the acquisition by one corporation, in exchange solely for all or a part of its voting stock (or in exchange solely for all or a part of the voting stock of a corporation which is in control of the acquiring corporation), of stock of another corporation if, immediately after the acquisition, the acquiring corporation has control of such other corporation (whether or not such acquiring corporation had control immediately before the acquisition);

9. What is Part I & II and this part? • I - §301 – 318 • II - §331 – 346 • III - §351 - 368

10. Limitations on Applicability Example: • §317(a) –“Property” “For purposes of this part, the term “property” means money, securities, and any other property; except that such term does not include stock in the corporation making the distribution (or rights to acquire such stock). • §1273(b)(5) –“Property” “In applying this subsection, the term “property” includes services and the right to use property, but such term does not include money.”

11. Cross References • At end of some sections • Lets you know of related provisions, although not necessarily complete • Example: • §163(m) Cross references. (1) For disallowance of certain amounts paid in connection with insurance, endowment, or annuity contracts, see section 264 . (2) For disallowance of deduction for interest relating to tax-exempt income, see section 265(a)(2) . (3) For disallowance of deduction for carrying charges chargeable to capital account, see section 266 . (4) For disallowance of interest with respect to transactions between related taxpayers, see section 267 . (5) For treatment of redeemable ground rents and real property held subject to liabilities under redeemable ground rents, see section 1055 .

12. Check Effective Dates §23(a) Allowance of credit. • Caution: Para. (a)(1), following, is effective for tax. yrs. begin. before 1/1/2003. For para. (a)(1), effective for tax. yrs. begin. after 12/31/2002, see below. For sunset provisions, see Sec. 901 of P.L. 107-16 reproduced in the history of this Code Sec. • (1) In general.In the case of an individual, there shall be allowed as a credit against the tax imposed by this chapter the amount of the qualified adoption expenses paid or incurred by the taxpayer. • Caution: Para. (a)(1), following, is effective for tax. yrs. begin. after 12/31/2002. For para. (a)(1), effective for tax. yrs. begin. before 1/1/2003, see above. For sunset provisions, see Sec. 901 of P.L. 107-16 reproduced in the history of this Code Sec. • (1) In general.In the case of an individual, there shall be allowed as a credit against the tax imposed by this chapter the amount of the qualified adoption expenses paid or incurred by the taxpayer. • (2) Year credit allowed.The credit under paragraph (1) with respect to any expense shall be allowed— • (A) in the case of any expense paid or incurred before the taxable year in which such adoption becomes final, for the taxable year following the taxable year during which such expense is paid or incurred, and • (B) in the case of an expense paid or incurred during or after the taxable year in which such adoption becomes final, for the taxable year in which such expense is paid or incurred. • Caution: Para. (a)(3), following, is effective for tax. yrs. begin. after 12/31/2002. • (3) $10,000 credit for adoption of child with special needs regardless of expenses.In the case of an adoption of a child with special needs which becomes final during a taxable year, the taxpayer shall be treated as having paid during such year qualified adoption expenses with respect to such adoption in an amount equal to the excess (if any) of $10,000 over the aggregate qualified adoption expenses actually paid or incurred by the taxpayer with respect to such adoption during such taxable year and all prior taxable years.

13. Check topic heading §357(a) General rule.Except as provided in subsections (b) and (c) , if— (1) the taxpayer receives property which would be permitted to be received under section 351 or 361 without the recognition of gain if it were the sole consideration, and (2) as part of the consideration, another party to the exchange assumes a liability of the taxpayer, then such assumption shall not be treated as money or other property, and shall not prevent the exchange from being within the provisions of section 351 or 361 as the case may be. Question – Who is the taxpayer?

14. What “Part” Are You In? • Part III CORPORATE ORGANIZATIONS AND REORGANIZATIONS §§351-368 • Currently in: Subpart B Effects on Shareholders and Security Holders §§354-358

15. Don’t Make Assumptions – Read and Use All Words Question – parents pay medical bills of $20K for son age 25 and they provide over ½ of his support. Son’s GI is $8000. Can parents deduct medical expense paid for son? §213(a) Allowance of deduction.There shall be allowed as a deduction the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, his spouse, or a dependent (as defined in section 152), to the extent that such expenses exceed 7.5 percent of adjusted gross income.

16. Is Son a Dependent? • Support test – yes • Gross income less than exemption amount - no • Relationship – yes • Citizenship – yes • If married … - yes Answer – not a dependent? What is answer to §213 question?

17. continued • “dependent (as defined in section 152)” • 5 tests of a dependent are split among §§151 and 152 • §152 tests are support, relationship and citizenship which were all met • So, medical expense paid for son is deductible by parents.

18. Read Carefully and Reread §280A(d) • For purposes of this section , a taxpayer uses a dwelling unit during the taxable year as a residence if he uses such unit (or portion thereof) for personal purposes for a number of days which exceeds the greater of— (A) 14 days, or (B) 10 percent of the number of days during such year for which such unit is rented at a fair rental. • For purposes of subparagraph (B) , a unit shall not be treated as rented at a fair rental for any day for which it is used for personal purposes.

19. §280A Questions • How many personal use day s actually needed for dwelling to be “used as a residence” if there are 20 rental days? • Why §280A rather than §281? • What change made by P.L. 105-34 – “Sec. 932(a), added a sentence at the end of para. (c)(1), effective for tax. yrs. begin. after 12/31/98.”

20. §280A(c)(1) (1) Certain business use.Subsection (a) shall not apply to any item to the extent such item is allocable to a portion of the dwelling unit which is exclusively used on a regular basis— (A) as the principal place of business for any trade or business of the taxpayer, (B) as a place of business which is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of his trade or business, or (C) in the case of a separate structure which is not attached to the dwelling unit, in connection with the taxpayer's trade or business. In the case of an employee, the preceding sentence shall apply only if the exclusive use referred to in the preceding sentence is for the convenience of his employer. For purposes of subparagraph (A) , the term “principal place of business” includes a place of business which is used by the taxpayer for the administrative or management activities of any trade or business of the taxpayer if there is no other fixed location of such trade or business where the taxpayer conducts substantial administrative or management activities of such trade or business.

21. Legislative History Excerpt P.L. 105-34 Reasons for Change The Committee believes that the Supreme Court's decision in Soliman unfairly denies a home office deduction to a growing number of taxpayers who manage their business activities from their homes. Thus, the statutory modification adopted by the Committee will reduce the present-law bias in favor of taxpayers who manage their business activities from outside their home, thereby enabling more taxpayers to work efficiently at home, save commuting time and expenses, and spend additional time with their families. Moreover, the statutory modification is an appropriate response to the computer and information revolution, which has made it more practical for taxpayers to manage trade or business activities from a home office.

22. Beyond IRC • Judicial doctrines, such as substance over form • Legislative regs • Legislative histories if IRC ambiguous