CALVIN H. JOHNSON, University of Texas at Austin - School of Law
Email: cjohnson@law.utexas.edu

Depreciable assets used in business benefit from an asymmetry in which gains are capital gains eligible for the lower capital gains rates, while losses are ordinary losses deductible from ordinary income immediately and are not subject to the section 1211 limitations on capital losses. That asymmetry yields a tax of less than zero at a time when revenue needs are great, and it induces investments that make no sense in the pretax economic world. Timber, iron ore, and coal also get the benefit of the capital gains rates, whereas most business activity produces income taxed at 35 percent. This proposal would repeal section 1231, the source of the asymmetry, and would subject land and depreciable property used in business to the capital loss limitations. However, casualty losses and gains from casualty insurance would be treated as ordinary. Recapture of depreciation would be augmented by an interest factor on the depreciation deductions, but the gain from land and depreciable property could thereafter be eligible for capital gains treatment.

This proposal is part of a continuing series on the treatment of capital gains. For prior proposals, see Calvin H. Johnson, "Fixing Capital Gains at the Core," Tax Notes, Dec. 14, 2009, p. 1221, Doc 2009-26144, or 2009 TNT 240-11; Johnson, "Cleaning Compensation for Services Out of Capital Gain," Tax Notes, Jan. 11, 2010, p. 233, Doc 2009-27878, or 2010 TNT 9-5; and Johnson, "Sale of Goodwill and Other Intangibles as Ordinary Income," Tax Notes, Jan. 14, 2008, p. 321, Doc 2008-331, or 2008 TNT 10-31.

This proposal is made as a part of the Shelf Project, a collaboration among tax professionals to develop and perfect proposals to help Congress raise revenue without raising tax rates. The current deficit is now at $1.6 trillion, or 11.2 percent of annual GDP, and federal spending over the next decade will be twice that. In a revenue crisis, base-protecting revenue provisions that were not possible under ordinary politics become political necessities. Tax rates cannot be raised on this tax base. Shelf Project proposals defend the tax base and improve the rationality and efficiency of the tax system. They are intended to raise revenue without raising rates, because the best tax systems have the broadest possible base to reach the lowest feasible tax rates. A longer description of the Shelf Project is found at "The Shelf Project: Revenue-Raising Projects That Defend the Tax Base," Tax Notes, Dec. 10, 2007, p. 1077, Doc 2007-22632, or 2007 TNT 238-37.

ROBERT W. WOOD, Wood & Porter
Email: wood@woodporter.com

Using the legal fees arising out of the complicated divorce of Doris Day’s son as an example, the author looks at when legal fees are deductible. The focus of the article is on the legal fees that result from a divorce and whether a taxpayer can find a way to characterize some of these fees as arising under the ordinary course of business, even when the reason for the underlying transactions trace back to the personal matter of a marital separation.