Federal Income Tax Law | EssayIvy.com

Running head: FEDERAL TAX INCOME LAW 1

FEDERAL TAX INCOME LAW

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FEDERAL TAX INCOME LAW 2

Federal Tax Income Law

Question one:

First of all, it is important to understand that Individual A rented the apartment to commercial

tenants before selling it to individual B. The sale resulted in capital gain for individual B while

individual A incurred some losses. Under chapter 1 of the capital gain and losses, it is held that a

gain that is derived from the sale of a property should be treated as special under certain

circumstances. In this case, section 1201 of the code holds that the maximum tax rate of capital

gain needs to be 25%. Therefore, the sale of each asset should be granted special treatment as per

the regulations thereunder. The provisions of section 751 of the code highlights the importance

of recognizing the ordinary income with respect to the total amount that individual A sold to

individual B the building.

Question two:

a.)

Authorities relied upon: In this case, Barb will have to face the Internal Revenue Authority

and the franchise Tax Board. Barb owes the taxes because he made a profit from the sale of a

property.

Response: It is important to understand that before Barb decided to exchange property with

Dan, he had lived in it for more than five years. Therefore, tax implication will remain the

same by exchanging property to Barb despite having the consent to lenders. If he had not

lived in the house for more than 2 years, Barb cannot get tax exemption and will have to pay

on capital gain that resulted from the sale. It is worth noting that Barb sold the property at a

FEDERAL TAX INCOME LAW 3

profit. Therefore, Barb has income tax and at the same time a loss that he can claim. The sale

of the property has a transfer tax that Barb had to pay which makes it difficult for him to

evade the authorities tasked with making sure individuals do not flaunt tax laws.

b.) Just like Barb, Dan faces tax consequences and authorities relied upon in this case

includes the Internal Revenue Authority and the Franchise Tax Board. Whether it was a

capital gain or loss realized from buying the property, the deal is categorized as worth

more to the tax authorities which categorizes Dan in a higher-income bracket.

Response: Dan may have difficult time with the authorities because he itemized the

deductions which automatically reduce the taxable income. It is also important to

acknowledge that Dan deducted the interest paid to the mortgage. Dan is a taxpayer who

owns a property with comparable ability to deduct tax to the purchase of goods and

services.

Question three:

a.) Incurring loss from sale or exchange of property

Under code 267 section a, there is no loss deduction to be imposed on a tax payer when

exchange of property involves a related party. The provision hold that any related party can

create a tax loss that has no economic substance because related party still enjoys the benefits of

a property that is categorized to be subject of loss. The Internal Revenue Service is the authority

concerned with such cases whether there was an outstanding stock of capital interest or not.

b.) Like-kind Exchange

FEDERAL TAX INCOME LAW 4

Under the code section 1031, the provision holds that any related party exchange is subject to

disposition if the sale agreement occurs within the period of two years. The circumstance of

this provision is that a capital gain or loss of an earlier transaction should not differ with

indirect transfers. The Franchise Tax Board holds that are payments should be made in

respect to the immediate sale of exchange of property. Related parties in this provision are

exempted from loss transaction.

c.) Expensing

Under section 179 of the code, the Internal Revenue Authority defines related parties as same

which exempts an individual from paying taxes if a property was sold between family

members. In this case, an individual may be allowed to dispense the property. However,

buying property from a parent prohibits an individual from dispensing the property.

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