Vol. 28, No. 2 #9 (April 2005). A Few Tax Principles.

• Author: Every General Practitioner Should Know

Wyoming Bar Journal

2005.

Vol. 28, No. 2 #9 (April 2005).

A Few Tax Principles

WYOMING LAWYER April 2005/Vol. XXVIII, No. 2 A Few Tax Principles Every General Practitioner Should Know

By Thomas N. Long If you are a general practitioner, this issue of the Wyoming Lawyer with its emphasis on taxation and finance may strike you as irrelevant to your practice. If you already understand the many unhappy tax consequences that can surprise clients as a result of steps taken in a civil or criminal matter, perhaps you need not read any further. If you think at least one of the handful of points mentioned below might be news to you, and you would prefer to learn by reading about it rather than learn the hard way, read on.

Having a debt forgiven can create a new debt (to the IRS).

The discharge of a debt is considered the receipt of taxable income.(fn1) There is a bankruptcy exception under Internal Revenue Code 108 that says that a discharge resulting from a Title 11 case, a discharge when the taxpayer is "insolvent," a discharge of either "qualified farm indebtedness" or "qualified real property business indebtedness" does not cause taxable income.(fn2)

A criminal plea may lead to a tax bill as well as hard time.

If your client stole money or otherwise had a gain from an illegal transaction, such as embezzlement, fraud, extortion, drug sales, etc., the "earnings" from the illegal activity are taxable as ordinary income. Section 61 taxes "all income from whatever source derived."

Loans usually need to bear interest.

The IRS mandates that certain interest rates be used for certain purposes under various sections of the tax code. Section 7872 provides that certain loans must bear a minimum rate of interest. Section 1274 establishes rates for installment sale obligations, and 7872 utilizes the same rates for loans (although it does not allow the three month look back that is available for installment sales). If a loan or sale provides for an inadequate rate of interest, interest income will be imputed to the seller or lender.(fn3) The rules differ depending on whether a loan is a demand loan or a term loan. A demand loan is required to have a rate at least equal to the applicable federal rate (AFR) of interest,(fn4) and the interest rate is going to need to adjust each month if the AFR is increasing.

Life insurance...