Tax Practice Series: Gross Income

Question 1

Realized

Answer 1

Amount actually received

Question 2

Recognized

Answer 2

Amount on which tax is due in the normal course (i.e., the sale price minus the basis).

Question 3

Are loan proceeds and repayment of loans gross income to the borrower or lender?

Answer 3

No - neither the loan proceeds more the repayment of the principal are taxable income to either the borrower or lender

Question 4

The TCJA repealed the AMT for which types of taxpayers?

Answer 4

Corporate

Question 5

Claim of Right Doctrine

Answer 5

Under the claim of right doctrine, a taxpayer that receives income under a claim of right that is free of restrictions must include the income in gross income for the year of receipt, regardless of whether the taxpayer is entitled to retain the income.

Question 6

When does CODI arise from purchase of your own debt?

Answer 6

CODI arises if the purchase is for a price less than face value

Question 7

How do you calculate the amount of CODI?

Answer 7

CODI is generally equal to the amount due on the obligation (or, in the case of things not issued at par, the adjusted issue price) minus the amount paid by the debtor in consideration of the discharge.

Question 8

How are debt for stock exchanges taxed?

Answer 8

CODI to the extent the principal amount of the debt exceeds the FMV of the stock/interest.

Question 9

How is the conversion of convertible debt taxed?

Answer 9

CODI to the extent the principal amount of the debt exceeds the FMV of the stock/interest.

Question 10

How is the conversion of convertible preferred taxed?

Answer 10

CODI to the extent the adjusted issued price of the preferred exceeds the FMV of the stock/interest received.

Question 11

How is a debt for debt exchange treated?

Answer 11

A debtor that issues a new debt instrument in satisfaction of an existing debt instrument is treated as having satisfied the indebtedness with an amount of $$ equal to the issue price of the new instrument.

Question 12

How is the adjusted issue price in a debt for debt exchange determined?

Answer 12

The issue price is determined as follows:
 If either the new or old issue is publicly traded (which is a very lax standard), the issue price of the new debt is the public trading price.
 If not publicly traded (and subject to exceptions), the issue price is the PV of the payments to be received, based on comparable federal rates.
 If neither of the above two apply, the stated redemption value at maturity.

Question 13

Treatment of a significant modification

Answer 13

A significant modification is treated as a debt-for-debt exchange.

Question 14

Three key exceptions to inclusion of CODI in gross income

Answer 14

Bankruptcy exception
Insolvency exception
Qualified real property business indebtedness (non C Corporations only)

Question 15

When is property received as compensation taxable?

Answer 15

The FMV of the property (minus any amount paid for it) is treated as compensation (and thus taxable) in the year when the taxpayer’s right to the property is not subject to substantial risk of forfeiture.

Question 16

What constitutes a “substantial risk of forfeiture”?

Answer 16

There is substantial risk of forfeiture where the rights in the property are conditioned upon the future performance of services or the occurrence of a condition and the possibility of forfeiture is substantial if the condition is not satisfied.

Question 17

What does an 83(b) election do?

Answer 17

This election will cause current tax of unvested/subject to substantial risk of forfeiture property at the FMV at grant. Future appreciation will not be taxed.