John Smith Case

2014 Words9 Pages
(1) John Smith's Tax Issues: (a) How is the $300,000 treated for purposes of federal tax income? Applicable Law & Analysis: Section 61(a) of the Internal Revenue Code defines gross income as income from whatever source derived, including (but not limited to) “compensation for services, including fees, commissions, fringe benefits, and similar items.” I.R.C. § 61(a)(1). Conclusion: Courts consistently have upheld the determination that wages fall within section 61(a)(1)’s definition of compensation and, accordingly, constitute taxable income.61(a)(1)’s definition of compensation and, accordingly, constitute taxable income. Eligible sources of gross income may be located in section 861 The United States Supreme Court has interpreted…show more content…
• The hours of your business can be whatever you want them to be. • You are free to stay in the same location as long as you wish. (2) Jane Smith Tax Issues: (a) What are the different tax consequences between paying down the mortgage debt and assuming a new mortgage debt for federal income tax purposes? Applicable Law & Analysis: (Section 121 (a) “Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more. (US Code, Section 121 (a); http://www.law.cornell.edu/uscode/text/26/121 Conclusion: There should be a little or no difference between paying an old mortgage and assuming a new one. If the couple sells a house they could exclude up to $500,000 of recognized gain, if they have lived in this house for at least two years in the five year period. (b) Can John and Jane Smith utilize a 1031 tax exchange to buy a more expensive house using additional money from John's case? Applicable Law &…show more content…
If this activity would be treated as hobby, an “activity not engage in for profit” then, according to Section 183 (a) “no deduction attributable to such activity shall be allowed under this chapter except (1) the deductions which would be allowable under this chapter for the taxable year without regard to whether or not such activity is engaged in for profit, and (2) a deduction equal to the amount of the deductions which would be allowable under this chapter for the taxable year only if such activity were engaged in for profit, but only to the extent that the gross income derived from such activity for the taxable year exceeds the deductions allowable by reason of paragraph

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