Federal Income Taxation

<div class="Section1"><br /> <br /> Under certain circumstances, a portion of Social Security benefits and tier 1 railroad retirement benefits may be taxable. If a taxpayer’s modified adjusted gross income plus one-half of the Social Security benefits (including tier I railroad retirement benefits) received during the taxable year <em>exceeds</em> certain base amounts, then a portion of the benefits are includible in gross income as ordinary income. “Modified adjusted gross income” is a taxpayer’s adjusted gross income (disregarding foreign income, savings bonds, adoption assistance program exclusions, the deductions for education loan interest and for qualified tuition and related expenses) <em>plus</em> any tax-exempt interest income received or accrued during the taxable year.<a href="#_ftn1" name="_ftnref1">¹</a>A taxpayer whose modified adjusted gross income plus one-half of his or her Social Security benefits exceed a base amount is required to include in gross income the <em>lesser</em> of (a) 50 percent of the excess of such combined income over the base amount, <em>or</em> (b) 50 percent of the Social Security benefits received during the taxable year.<a href="#_ftn2" name="_ftnref2">²</a> The “base amount” is $32,000 for married taxpayers filing jointly, $25,000 for unmarried taxpayers, and zero ($0) for married taxpayers filing separately who have not lived apart for the entire taxable year.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> In addition to the initial tier of taxation discussed above, a percentage of Social Security benefits that exceed an adjusted base amount will be includable in a taxpayer’s gross income. The “adjusted base amount” is $44,000 for married taxpayers filing jointly, $34,000 for unmarried taxpayers, and zero ($0) for married individuals filing separately who did not live apart for the entire taxable year.<a href="#_ftn4" name="_ftnref4">⁴</a> If a taxpayer’s modified adjusted gross income plus one-half of his or her Social Security benefits exceed the adjusted base amount, his or her gross income will include the <em>lesser</em> of (a) 85 percent of the Social Security benefits received during the year, <em>or</em> (b) the sum of – (i) 85 percent of the excess over the adjusted base amount, plus (ii) the smaller of – (A) the amount that is includable under the initial tier of taxation, or (B) $4,500 (single taxpayers) or $6,000 (married taxpayers filing jointly).<a href="#_ftn5" name="_ftnref5">⁵</a><br /> <blockquote><em>Example 1.</em> A married couple files a joint return. During the taxable year, they received $12,000 in Social Security benefits and had a modified adjusted gross income of $35,000 ($28,000 plus $7,000 of tax-exempt interest income). Their modified adjusted gross income plus one-half of their Social Security benefits [$35,000 + (½ of $12,000) = $41,000] is greater than the applicable <em>base amount</em> of $32,000 but less than the applicable <em>adjusted base amount</em> of $44,000; therefore, $4,500 [the lesser of one-half of their benefits ($6,000) or one-half of the excess of $41,000 over the base amount (½ × ($41,000 – $32,000), or $4,500)] is included in gross income.<br /> <br /> <em>Example 2.</em> During the taxable year, a single individual had a modified adjusted gross income of $33,000 and received $8,000 in Social Security benefits. His modified adjusted gross income plus one-half of his Social Security benefits [$33,000 + (½ of $8,000) = $37,000] is greater than the applicable <em>adjusted base amount</em> of $34,000. Thus, $6,550 [the lesser of 85 percent of his benefits ($6,800), or 85 percent of the excess of $37,000 over the adjusted base amount (85 percent × ($37,000 – $34,000), or $2,550) plus the lesser of $4,000 (the amount includable under the initial tier of taxation) or $4,500] is included in gross income.</blockquote><br /> An election is available that permits a taxpayer to treat a lump sum payment of benefits as received in the year to which the benefits are attributable.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <p style="text-align: center;"><strong>Reductions of Social Security Benefits that do not Reduce the</strong><br /> <strong>Amount Included in the Computation of Taxable Benefits</strong></p><br /> Workers’ compensation pay that reduced the amount of Social Security received and any amounts withheld from a taxpayer’s Social Security benefits to pay Medicare insurance premiums do not reduce the amount that are included in the computation of taxable Social Security benefits.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> In <em>Green v. Comm</em>.,<a href="#_ftn8" name="_ftnref8">⁸</a> the taxpayer argued that his Social Security disability benefits were excludable from gross income<a href="#_ftn9" name="_ftnref9">⁹</a> because they had been paid in lieu of workers’ compensation. Thus, they should not be included in the computation of taxable Social Security benefits. The Tax Court determined, however, that Title II of the Social Security Act is <em>not</em> a form of workers’ compensation. Instead, the Act allows for disability payments to individuals regardless of employment. Consequently, the taxpayer’s Social Security disability benefits were includable in gross income.<br /> <br /> Similarly, in a case of first impression, the Tax Court held that a taxpayer’s Social Security disability insurance benefits (payable as a result of the taxpayer’s disability due to lung cancer caused from exposure to Agent Orange during his Vietnam combat service) were includable in gross income under IRC Section 86 and not excludable under IRC Section 104(a)(4). The court reasoned that Social Security disability insurance benefits do not take into consideration the nature or cause of the individual’s disability. Eligibility for purposes of Social Security disability benefits is determined on the basis of the individual’s prior work record, not the cause of the disability. Moreover, the amount of Social Security disability payments is computed under a formula that does not consider the nature or extent of the injury. Consequently, because the taxpayer’s Social Security disability insurance benefits were not paid for personal injury or sickness in military service within the meaning of IRC Section 104(a)(4), the benefits were not excluded from gross income under IRC Section 104(a)(4).<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> Railroad retirement benefits (other than Tier I benefits) are taxed in the same way as benefits received under a qualified pension or profit sharing plan. For this purpose, the Tier II portion of the taxes imposed on employees and employee representatives is treated as an employee contribution, while the Tier II portion of the taxes imposed on employers is treated as an employer contribution.<a href="#_ftn11" name="_ftnref11">¹¹</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.   IRC § 86(b)(2).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.   IRC § 86(a)(1).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.   IRC § 86(c)(1). In a Tax Court case, the term “live apart” means living in separate residences. In that case, the taxpayer lived in the same residence as his spouse for at least thirty days during the tax year in question (even though maintaining separate bedrooms). The Tax Court ruled that he did not “live apart” from his spouse at all times during the year; therefore, the taxpayer’s base amount was zero. <em>McAdams v. Commissioner</em>, 118 TC 373 (2002).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.   IRC § 86(c)(2).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.   IRC § 86(a)(2).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.   IRC § 86(e).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.   Rev. Rul. 84-173, 1984-2 CB 16.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.   TC Memo 2006-39.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.   Under IRC § 104(a)(1).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>. <em>Reimels v. Commissioner</em>, 123 TC 245 (2004), <em>aff’d</em>, 436 F.3d 344 (2d Cir. 2006); <em>Haar v. Commissioner</em>, 78 TC 864, 866 (1982), <em>aff’d</em>, 709 F.2d 1206 (8th Cir. 1983), followed.<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.  See IRC § 72(r)(1).<br /> <br /> </div>

<div class="Section1">Under the Inflation Reduction Act of 2022, the tax credit for new energy efficient homes under IRC Section 45L was extended through 2032 (and retroactively through 2022, although the pre-existing rules will continue to apply for 2022). The tax credit is designed to provide an incentive for builders of both residential homes and multi-family dwellings to use materials designed to reduce energy consumption.</div><br /> <div class="Section1"><br /> <br /> Beginning in 2023, the credit is also modified by increasing the maximum amount of the credit to either $2,500 or $5,000 (the prior maximum was $2,000 per unit). The new programs also eliminate the height restrictions, so that the previously-existing three-story or less requirement no longer applies beginning in 2023.<br /> <br /> Builders must satisfy certain energy-efficient criteria qualify for the $2,500 credit. Beginning in 2023, single-family homes must satisfy the requirements of the Department of Energy’s “Energy Star Single Family New Homes Program,” Version 3.1 for homes constructed before January 1, 2025 and Version 3.2 for later years. It is expected that additional details will be provided. Manufactured homes are required to satisfy the latest Energy Star Manufactured Home National Program requirements that are in effect on the later of (1) January 1, 2023 or January 1 of the year that is two calendar years prior to the date the dwelling is acquired.<br /> <br /> If the single-family or manufactured home is certified as a DOE Zero Energy Ready Home (ZERH) (or meets the requirements of a successor program implemented by the Department of Energy), a higher $5,000 credit is available.<br /> <br /> For multi-family dwellings, a $500 credit is available if the home satisfies the criteria of the Energy Star Single Family New Homes Program and a $1,000 credit is available if the building is ZERH certified.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> Builders must also satisfy prevailing wage standards beginning in 2023. To qualify, workers must be paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which such residence is located as most recently determined by the Secretary of Labor.<br /> <br /> To qualify for the tax credit, the taxpayer must obtain an audit that provides an estimate of the energy and cost savings of each energy-efficient home improvement. Beginning in 2024, that audit must be conducted by a Qualified Home Energy Auditor, which is an auditor who has been certified by one of the certification programs listed by the Department of Energy on its certification programs page for the energy efficient home improvement credit. For 2023, a transition rule applies so that the auditor need not be a Qualified Home Energy Auditor.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> The IRS has also appropriated funds and authorized the Department of Energy to distribute funds to establish rebate programs for owners and occupants of residential property who engage in qualifying transactions under the law.  For tax purposes, a rebate paid to or on behalf of a purchaser pursuant to the DOE Home Energy Rebate Programs will be treated as a purchase price adjustment for the purchaser and is not taxable income.  For rebates provided at the time of sale, the amount of the rebate provided in connection with the DOE Home Energy Rebate Programs is not included in a purchaser’s cost basis under IRC Section 1012.  For rebates provided at a later time, the amount of the rebate constitutes an adjustment to basis under IRC Section 1016.  Payments of rebate amounts to the purchaser that are treated as a purchase price adjustment are not subject to information reporting under IRC Section 6041.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 45L(c), as modified by Inflation Reduction Act § 13304.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Notice 2023-59.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. A-24-19.<br /> <br /> </div>

<div class="Section1">Each year, an individual’s basis is reduced by the amount of the depreciation deduction taken so that his adjusted basis in the property reflects accumulated depreciation deductions. If depreciation is not deducted, his basis must nonetheless be reduced by the amount of depreciation allowable, but the deduction may not be taken in a subsequent year.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <p style="text-align: center;"><strong>Recapture</strong></p><br /> Upon disposition of property, the seller often realizes more than return of basis after it has been reduced for depreciation. Legislative policy is that on certain dispositions of depreciated property the seller realizes a gain that is, at least in part, attributable to depreciation. To prevent a double benefit, the IRC requires that some of the gain that would otherwise generally be capital gain must be treated as ordinary income. In effect, it requires the seller to “recapture” some of the ordinary income earlier offset by the depreciation.<a href="#_ftn2" name="_ftnref2">²</a> In addition, if depreciated property ceases to be used predominantly in a trade or business before the end of its recovery period, the owner must recapture in the tax year of cessation any benefit derived from expensing such property.<a href="#_ftn3" name="_ftnref3">³</a> This provision is effective for property placed in service in tax years ending after January 25, 1993.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 1016(a)(2).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. IRC §§ 1245, 1250.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. Treas. Reg. § 1.179-1(e)(1).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>. Treas. Reg. § 1.179-6.<br /> <br /> </div>

<div class="Section1">For tax purposes, a &ldquo;capital asset&rdquo; is any property that, in the hands of the taxpayer, is not: (1) property (including inventory and stock in trade) held primarily for sale to customers; (2) real or depreciable property used in his trade or business; (3) copyrights and literary, musical, or artistic compositions (or similar properties) created by the taxpayer, or merely owned by him, if his tax basis in the property is determined (other than by reason of IRC Section 1022, which governs the basis determination of inherited property) by reference to the creator&rsquo;s tax basis; (4) letters, memoranda, and similar properties produced by or for the taxpayer, or merely owned by him, if his tax basis is determined by reference to the tax basis of such producer or recipient; (5) accounts or notes receivable acquired in his trade or business for services rendered or sales of property described in (1), above; (6) certain publications of the United States government; (7) any commodities derivative financial instrument held by a commodities derivatives dealer; (8) any hedging instrument that is clearly identified as such by the required time; and (9) supplies of a type regularly used or consumed by the taxpayer in the ordinary course of his trade or business.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> Generally, any property held as an investment is a capital asset, except that rental real estate is generally not a capital asset because it is treated as a trade or business asset (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7791">7791</a>).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;IRC &sect; 1221; Treas. Reg. &sect; 1.1221-1.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;See IRS Pub. 544.<br /> <br /> </div></div><br />

<div class="Section1">In order to claim bonus depreciation with respect to used property, the property must not be used by the taxpayer or a predecessor at any time before the taxpayer acquired the property (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>). This requirement raised questions as to whether bonus depreciation could be available with respect to property that the taxpayer previously leased, or in which the taxpayer previously held an interest but did not own entirely. See the heading below for a discussion of the short holding period exception proposed in the 2019 regulations.<div class="Section1"><br /> <br /> Under the regulations, bonus depreciation may now be available for property that a taxpayer previously leased and later acquired. In some situations, a taxpayer may make improvements to property that is leased and obtain a depreciable interest in the property as a result.&nbsp;If the taxpayer later acquires the property, bonus depreciation is unavailable with respect to the portion of the property in which the taxpayer held a depreciable interest during the lease period.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> Relatedly, if a taxpayer originally held a depreciable interest in property, and later acquires an additional depreciable interest in an additional portion of the same property, the additional depreciable interest is not treated as though it was used by the taxpayer prior to acquisition (i.e., it is eligible for bonus depreciation under the used property rules if all other requirements are satisfied). If the taxpayer previously had a depreciable interest in the subsequently acquired additional portion, bonus depreciation is not available. A different rule applies in situations where a taxpayer sells a partial interest in property and later buys a partial interest in the same property. If a taxpayer holds a depreciable interest in a portion of the property, sells that portion or a part of that portion, and later acquires a depreciable interest in another portion of the same property, the taxpayer is treated as previously having a depreciable interest in the property up to the amount of the portion for which the taxpayer held a depreciable interest in the property before the sale.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Under the 2019 regulations, the mere fact that a business leases property to a disqualified business (i.e., one that does not qualify to use bonus depreciation, such as certain businesses with floor plan financing interest) does not &ldquo;taint&rdquo; the property, meaning that such exclusion from the additional first year depreciation deduction does not apply to lessors of property to a trade or business described in IRC Section 168(k)(9) so long as the lessor is not described the section.<a href="#_ftn3" name="_ftnref3">³</a><br /> <p style="text-align: center;"><strong>Short Holding Period Exception</strong></p><br /> The 2019 regulations provide an exception to the depreciable interest rule in situations where the taxpayer disposes of the property within a short period of time after placing the property in service. If the following are true:<br /> <p style="padding-left: 40px;">(a)a taxpayer acquires and places in service property,</p><br /> <p style="padding-left: 40px;">(b)the taxpayer or a predecessor did not previously have a depreciable interest in the property,</p><br /> <p style="padding-left: 40px;">(c)the taxpayer disposes of the property to an unrelated party within 90 calendar days after the date the property was originally placed in service by the taxpayer (without taking into account the applicable convention), and</p><br /> <p style="padding-left: 40px;">(d)the taxpayer reacquires and again places in service the property, then</p><br /> the taxpayer&rsquo;s depreciable interest in the property during that 90-day period is not taken into account for determining whether the property was used by the taxpayer or a predecessor at any time prior to its reacquisition by the taxpayer.<a href="#_ftn4" name="_ftnref4">⁴</a> The proposed rule does not apply if the taxpayer reacquires and again places in service the property during the same taxable year the taxpayer disposed of the property.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;Treas. Reg. &sect; 1.168(k)-2(b)(3)(iii)(B)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;Treas. Reg. &sect; 1.168(k)-2(b)(3)(iii)(B)(2).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;Treas. Reg. &sect; 1.168(k)- 2(b)(2)(ii)(F).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;Prop. Treas. Reg. &sect; 1.168(k)-2(b)(3)(iii)(B)(4).<br /> <br /> </div></div><br />

<div class="Section1">The bonus depreciation rules (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a>) may be applied to used property if the property was not used by the taxpayer (or a predecessor) prior to the acquisition. The property is considered to have been used by the taxpayer or a predecessor prior to the acquisition if the taxpayer or predecessor had a depreciable interest in the property at any time prior to the acquisition, regardless of whether depreciation deductions were actually claimed.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> Under the 2019 final regulations, &ldquo;predecessor&rdquo; is defined to include (i) a transferor of an asset to a transferee in a transaction to which IRC Section 381(a) applies, (ii) a transferor of an asset to a transferee in a transaction in which the transferee&rsquo;s basis in the asset is determined, in whole or in part, by reference to the basis of the asset in the hands of the transferor, (iii) a partnership that is considered as continuing under IRC Section 708(b)(2), (iv) the decedent in the case of an asset acquired by an estate, or (v) a transferor of an asset to a trust.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Further, all of the following must be true:<br /> <p style="padding-left: 40px;">(1)the property was not acquired from certain related parties, including: (a) the taxpayer&rsquo;s spouse, ancestors and descendants, (b) 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 the individual, (c) a grantor and a fiduciary of any trust, (d) a fiduciary of a trust and a fiduciary of another trust, if the same person is a grantor of both trusts, (e) a fiduciary and a beneficiary of a trust, (f) a fiduciary of a trust and a beneficiary of another trust, if the same person is a grantor of both trusts, (g) 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, (h) a person and an organization to which IRC 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, (i) a corporation and a partnership if the same person owns more than 50 percent of the outstanding stock in the corporation or capital interest or profits of the partnership, (j) an S corporation and another S corporation if the same person owns more than 50 percent of the outstanding stock of each corporation, (k) 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, (l) the executor and beneficiary of an estate, (m) two partnerships in which the same person owns more than 50 percent of the capital interests and profits or (n) a partnership and a person owning more than 50 percent of the capital interests and profits of the partnership.</p><br /> <br /> <br /> <hr><br /> <br /> <strong><strong>Planning Point:</strong></strong> The IRS regulations on the bonus depreciation rules contain a general anti-abuse rule that will apply to determine related party status. The rules provide that in a series of related transactions, the property is treated as though it was transferred directly from its original owner to its ultimate owner. The relationship between the original owner and the ultimate owner is tested immediately after the last transfer in the series of transactions. The 2019 final regulations provide for a five-year &ldquo;lookback&rdquo; period in making the determination as to whether the property was previously used by a prohibited party.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <hr><br /> <p style="padding-left: 40px;">(2)the property was not acquired by one member of a controlled group from another member of that group,</p><br /> <p style="padding-left: 40px;">(3)the property was acquired by purchase, within the meaning of IRC Section 179,</p><br /> <p style="padding-left: 40px;">(4)the basis of the property in the hands of the person acquiring it is not determined in whole or part by reference to the adjusted basis of the property in the hands of the person from whom it was acquired or under IRC Section 1014(a) (basis of property acquired from a decedent),</p><br /> <p style="padding-left: 40px;">(5)the cost of the property does not include the basis of the property as determined by reference to the basis of other property held by the taxpayer.<a href="#_ftn4" name="_ftnref4">⁴</a></p><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;Prop. Treas. Reg. &sect; 1.168(k)-2(b)(3)(iii)(B)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;Treas. Reg. &sect; 1.168(k)-2(a)(2)(iv).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;Prop. Treas. Reg. &sect; 1.168(k)-2(b)(3)(iii)(C).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;IRC &sect;&sect; 168(k)(2)(E)(ii), 267(b), 707(b).<br /> <br /> </div></div><br />

<div class="Section1">Generally, an interest surcharge is an interest charge payable by the seller to the IRS with respect to a portion of a tax liability that is deferred as a result of installment reporting. In other words, installment reporting allows the taxpayer to defer the gain realized from the installment over time rather than in the year of sale. The tax on that gain is considered a deferred tax liability. The interest surcharge applies to all installment obligations held by the taxpayer (meaning it applies to multiple installment sales) in which deferred payments for sales during the taxable year exceed $5,000,000. There is an exception to the surcharge with respect to: (1) property used or produced in the trade or business of farming, (2) timeshares and residential lots, and (3) personal use property.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> The amount of the interest surcharge is determined by multiplying the “applicable percentage” of the deferred tax liability by the underpayment rate in effect at the end of the taxable year (with respect to tax deficiencies). The “applicable percentage” is determined by dividing the portion of the aggregate obligations for the year that exceeds $5,000,000 by the aggregate face amount of such obligations that are outstanding at the end of the taxable year. If an obligation remains outstanding in subsequent taxable years, interest must be paid using the same percentage rate as in the year of the sale.<a href="#_ftn2" name="_ftnref2">²</a> In addition, if the installment obligation is pledged as security for a loan, the net proceeds of the loan will be treated as a payment received on the installment obligation (up to the total contract price); however, no additional gain is recognized on subsequent payments of such amounts already treated as received. The date of such constructive payment will be (a) the date the proceeds are received <em>or</em> (b) the date the indebtedness is secured, whichever is later.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 453A(b).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 453A(c).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 453A(d)(1). <em><em>See</em></em> Revenue Act of 1987 Conf. Rept., at pages 22-23.<br /> <br /> </div>

<div class="Section1">Two spouses may file a joint return. Same-sex couples who are married under state law must now file either jointly or married filing separately for 2013 and beyond because of the Supreme Court’s <em>Windsor</em> decision.<a href="#_ftn1" name="_ftnref1">¹</a> Gross income and deductions of both spouses are included; however, a joint return may be filed even though one spouse has no income. A widow or widower <em>who has a dependent child</em> may file as a “surviving spouse” and calculate tax using joint return tax rates for two years after the taxable year in which the spouse died. However, no personal exemption is allowed for the deceased spouse except in the year of death (note that the personal exemption was suspended from 2018-2025).<a href="#_ftn2" name="_ftnref2">²</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. <em>Windsor v. U.S</em>., 133 S. Ct. 2675 (2013).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. IRC §§ 1(a), 2(a), 6013(a). <em><em>See</em></em> IRC § 151(b).<br /> <br /> </div>

<div class="Section1">The personal holding company (PHC) tax is a penalty tax designed to keep shareholders from avoiding personal income taxes on securities and other income-producing property placed in a corporation to avoid higher personal income tax rates. The PHC tax is 20 percent (15 percent for tax years beginning prior to 2013) of the corporation’s undistributed PHC income (taxable income adjusted to reflect its net economic income for the year, minus dividends distributed to shareholders), if it meets both the “stock ownership” and “PHC income” tests.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> A corporation meets the “stock ownership” test if more than 50 percent of the value of its stock is owned, directly or indirectly, by or for not more than 5 shareholders.<a href="#_ftn2" name="_ftnref2">²</a> Certain stock owned by families, trusts, estates, partners, partnerships, and corporations may be attributed to individuals for purposes of this rule.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> A corporation meets the “PHC income” requirement if 60 percent or more of its adjusted ordinary gross income is PHC income, generally defined to include the following: (1) dividends, interest, royalties, and annuities; (2) rents; (3) mineral, oil, and gas royalties; (4) copyright royalties; (5) produced film rents (amounts derived from film properties acquired before substantial completion of the production); (6) compensation from use of corporate property by shareholders; (7) personal service contracts; and (8) income from estates and trusts.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC §§ 541, as amended by ATRA, 542, 545.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 542(a)(2).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  IRC § 544.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.  IRC §§ 542(a)(1), 543(a).<br /> <br /> </div>

<div class="Section1">If an installment sale between related parties is canceled or payment is forgiven, the <em>seller</em> must recognize gain in an amount equal to the difference between the fair market value of the obligation on the date of cancellation (but in no event less than the face amount of the obligation) and the seller&rsquo;s basis in the obligation.<a href="#_ftn1" name="_ftnref1">¹</a> The seller&rsquo;s basis in the obligation is the difference between the face value of the obligation less the amount of income that would be includible in gross income had the obligation been actually satisfied.<a href="#_ftn2" name="_ftnref2">²</a><br /> <blockquote><em>Example:</em> Asher sells a tractor to Samuel for $10,000 with an adjusted basis of $2,000. In exchange, Samuel conveys five installment notes ($2,000 each). Asher&rsquo;s gross profit ratio would be 80 percent (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="666">666</a>) meaning that 80 percent of each payment would be included in gross income ($1,600) and 20 percent ($400) would be tax-free return of basis. Therefore, each note would have a basis of $400 ($2,000 face value less $1,600 income). So, if Asher were to forgive a $2,000 installment note, he would recognize a gain of $1,600 (the difference between the face amount of the note and his basis in the note). In other words, a forgiven note is essentially taxed in the same way as it would have been had the seller actually received payment.</blockquote><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;IRC &sect; 453B(f).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;IRC &sect; 453B(b).<br /> <br /> </div></div><br />