Transactions Involving Borrowed Funds

Transactions Involving Borrowed Funds

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  Code § 61(a)(12). “If [a] debt is subsequently cancelled for less than its face value, [the taxpayer] is considered to have income.”
  
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  Code § 65. Ordinary loss defined.
  
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  Code § 108(a). Income from discharge of indebtedness—Exclusion from gross income.
  
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  Code § 108(b). Income from discharge of indebtedness—Reduction of tax attributes.
  
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  Code § 108(d)(1). Income from discharge of indebtedness—Meaning of terms; special rules relating to certain provisions—Indebtedness of taxpayer.
  
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  Code § 108(d)(2). Income from discharge of indebtedness—Meaning of terms; special rules relating to certain provisions—Title 11 case.
  
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  Code § 108(d)(3). Income from discharge of indebtedness—Meaning of terms; special rules relating to certain provisions—Insolvent.
  
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  Code § 108(e). Income from discharge of indebtedness—General rules for discharge of indebtedness (including discharges not in Title 11 cases or insolvency)
  
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  Code § 108(f). Income from discharge of indebtedness—Student loans.
  
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  Code § 165(c). Losses—Limitation on losses of individuals.
  
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  Code § 165(d). Losses—Wagering losses.
  
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  Code § 6321. Lien for taxes.
  
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  Regulation § 1.61-12(a). Income from discharge of indebtedness—In general.
  

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  Tax benefit—don’t initially include debt as income b/c they intended to pay it back—once they don’t intend to pay it back  taxable
  

Off-track Betting parlor—drafted up tickets worth $80,280—at the end of the day was behind $32,105—at the end of the day had tickets worth $48,000 (same day restitution)

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  Why isn’t this excludable as borrowing?
  
  • 
    No mutuality of intent to repay the loan
    
  • 
    James v United States—unlawful gains taxable—test: mutual intent and consensual recognition
    
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  What is the authority for deducting $42,000?
  
  • 
    § 165(c)—Limitation on losses of individuals
    
  • 
    Can he deduct the $38,000 loss?
    
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      Could he call it a transaction entered into for profit? A transaction is 1-sided, but generally a good argument
      
    • 
      Unlikely to make money, irrational to expect to profit  IRS could argue that gambling is not an enterprise where one could expect to make profit
      
      • 
        i.e. stealing to use for personal gains? If Avi stole cash from Ben and used the money to buy a car he could NOT deduct the car but he COULD deduct the restitution
        
  • 
    § 165(c)(3)—can deduct gambling losses
    
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  § 165(d)—just within gambling transactions you can net your gambling position against your game
  

  	Scenario 1	Scenario 2
  Amount Stolen	$80	$80
  Round 1
  Winnings/Losses	($38)	$10
  Round 2
  Winning/Losses		($48)
  Net Gambling Position	($38)	($38)
  Deduction	$0	$0
  Total Gross Income	$80	$80

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  Does this seem harsh that he’s being taxed on all $80,000?
  
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    No—someone else who was able to gamble with $80,000 would be taxed on that income
    
  • 
    Doesn’t measure his ability to pay—but punitive value
    
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  What is the policy of making people include stolen funds in income? (J. Blackmun’s dissent in Rutkin)
  
  • 
    § 6321—IRS gets a lien—gets priority over victim’s restitution
    

What is the James test exactly? “consensual recognition, express or implied, of the obligation to repay”

“Without restriction on the disposition”—why is this here? Illiquid—can only use for specified purpose—James refers to taxable income, not nontaxable—if car dealership sells you a car for $30,000 then says you only have to repay $7,000 don’t have to pay $23,000 forgiven debt—we’ll come back to this later

Gilbert v Commissioner

Gilbert acquired a bunch of Celotex (his employer) stock on margin—had the corporation pay for the stock—Board didn’t approve the borrowing from the company

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  Similar to Collins but because he has authority he can argue that he was going to pay Celotex back
  

1. 
   Rob borrows $1,000 from the bank and spends it. Is the money he borrows income? When Rob repays the loan, can he deduct the $1,000 he repays? (Ignore, for now, the question of whether the interest Rob pays on the loan is deductible.)
   

2. 
   Suppose David Zarin, the compulsive gambler, finds himself back in a casino and sitting next to someone who is very drunk and has a large pile of gambling chips. What are the tax consequences if:
   

1. 
   Zarin simply takes chips worth $200,000 from this fellow gambler without anyone suspecting anything and loses them all gambling?
   

2. 
   Zarin takes the $200,000 of chips but says to the drunk gambler, “Don’t worry. If I win, I’ll pay you back.” He then loses all of them.
   

Can he reasonably expect that he will win? No intention to repay if he lost  taxable like (a)

3. 
   Same as (b) except that Zarin wins $280,000. He returns the $200,000 of chips to the drunk gambler and pockets $80,000. Would it make any difference if he hit the jackpot at 11:55pm on New Year’s Eve and replaced the chips at 1:00am on New Year’s Day?
   

OR (more consistent) still unlawful gains, not loan  taxable income = $280,000 w/ deduction for $200,00 repayment