1. MACRS vs. Financial Depreciation Methods
How would you compare the MACRS method for personal property to non-tax financial depreciation? Describe the MACRS system for personal property in terms of both (1) Recovery Period and (2) Depreciation method used. Why is MACRS less “realistic”? Also, why does the tax law allow taxpayers to use this special method?
2. Basis of Gifts
How do the rules work for determining the basis of gifts? Let me tell you a story: Years ago, I had a client who was very wealthy, with several million dollars of stock, all of which had a very low basis. She was going to give $10,000 of stock to each of her nephews and nieces. In each case the $10,000 of stock had a basis of only about $200. She asked me “Will they have taxable income on the gift?” I told her no, gifts are not taxable. The next April, she called me and yelled at me. She said they had each sold the stock and had huge taxable gains. I told her, “Of course, but that was not a gain on the “gift”, that was a gain on the sale of the stock, which was another transaction.” She told me “What did you think they were going to do with those stock shares, wallpaper their bathrooms with them?” Anyway, although my advice was technically correct, it was not very practical. I should have advised her about the results of a subsequent sale.
3. Step Up of Basis of Death
Under the IRC, a taxpayer who inherits property gets an automatic, income-tax-free, step-up in basis for that asset to its fair market value at death. Even very low basis, tremendously appreciated property is brought up to its fair market value as its basis, without any tax cost whatsoever. This tax giveaway almost seems too good to be true for estate planning purposes. (The old joke is, “People are just dying to get it.”) So, why would Congress give taxpayers such a generous break? What was their motivation?