Federal Tax Outline
Fall 2011- Arsenault
I. Gross Income 52-72
a. Code Sections
a. Section 61- Gross income defined
1. IRS Regulations
a. 1.61-1- General definition of gross
b. -2(a)(1)- Examples of gross income
c. -2(d)(1)- Services paid for in property or services = FMV (if price stipulated, this is FMV in absence of evidence to contrary)
d. -14(a)- Misc income
i. Pun, treble, exemplary damages
ii. Another person's payment of taxpayer's taxes (unless excluded by law)
iii. Illegal gains
iv. Treasure Trove in year it was reduced to undisputed possession
b. Notes
i. Gross income includes the receipt of any financial benefit which IS
1. Not a mere return of capital, AND
2. Not accompanied by a contemporaneously acknowledged obligation to repay, AND
3. Not excluded by a specific statutory provision.
4. “undeniable accessions to wealth, clearly realized, over which the taxpayers have complete domain”
II. Gifts and Inheritance 73-95
a. Code Sections Gifts, Devises, and Inheritances
a. 102- Gifts and Inheritances
1. (a) income EXCLUDED, value of property by gift, bequest, devise, inherit.
2. (b) NOT EXCLUDED- income from prop in (a)
3. (c) Employee Gifts NOT EXCLUDED (achiev awards under 74(c) and de minimis fringes under 132(e) excludable)
a. IRS Regulations Gifts Also Devises and Inheritances
i. 1.102-1(a)- Section 102 does not apply to prizes and awards nor scholarships
ii. -1(b)
4. Cases and Rulings
a. Lythe v. Hoey
i. “What he got from the estate came to him because he was an heir.”
b. Wolder v. Commissioner
i. Facts. Petitioner, Victor Wolder, was an attorney and he entered into an agreement with a client that the client bequeath to him 500 shares of common stock or other security in return for lifetime legal services without charge. The client did leave Petitioner $15,845 in cash and 750 shares of stock. Petitioner argued that the amount is excluded from income.
ii. The bequest was income because it was payment for services rendered.
Question answers, Gifts and Inheritance 73-95
a. Questions 94
i. Father leaves daughter $20K in will
1. Not gross (102a)
ii. Father dies intestate, leaves $20K in property
1. Not gross
iii. Father leaves daughter out of will, daughter wins settlement of controversy.
1. Not gross (Lythe)
iv. Father leaves daughter $20K for “long and devoted service.
1. Not gross, but could be depending on the facts.
v. Same as above except for agreement to care for father in declining years – contract for employment/job
1. Yes, gross
vi. Same as above except death intestate and daughter gets claim under agreement for care.
1. Yes
vii. Same as f, but daughter settles for $10K
1. Yes
viii. Daughter received $20K for services as execturix
1. Yes, she was required to perform a service for the $20,000
ix. Father made her executrix, but made a bequest in lieu of comp for executrix
1. Yes, she was still performing a service. (Mirian said it wouldn't, but Wolder said it was)
b. Code Sections Employee Gifts
a. 102(c)- Employee Gifts NOT EXCLUDED (achiev awards under 74(c) and de minimis fringes under 132(e) excludable)
1. IRS Regulations Gifts
a. 1.102-1(f)- explanation of 102(c)
i. (2) of this section says that related parties who transfer and also have an employment relationship CAN also exclude if the gift is attributed to familial relationship and NOT their employment relationship.
b. 274(b)- Gifts from employers that CAN be excluded
c. See 74(c)- Exception for certain employee achievement awards in relation to entertainment, amusement, and recreation expenses.
d. See 132(e)- De Minimus fringe benefits
e. See 274(j)-Employee Achievement awards
f. Cases and rulings
1. Commissioner v. Durberstein
a. Facts, Cadillac received by business associate.
b. Rule: GIFT IS “detached and disinterested generosity, out of affection, respect, admiration, charity or like impulses” as determined by the transferor's “intention.”
g. Answers to questions: page 84 Employee Gifts
· With the croupier question, it is considered by the courts to not be a gift because the gambler is “intensely interested” in that they are believers in luck and runs and tip for good mojo.
· Page 86-
(a) Emp. gives all employees, except wine, case of wine for Christmas worth $120, gives son (employee) case worth $700
(i) Maybe, depends on where he got the gift (office or home)
(b) Congregation for whom Rev. serves as minister gives check for $5K at retirement.
(i) Generally, a gift at retirement is not a gift for gross income purposes. Clergy sometimes are treated differently, but the clergy is sometimes a type of family member and may not have to pay taxes.
(c) Retiree receives $5K trip on retirement. Emp contributed $3K fellow emp $2K
(i) Retire has income of (get answer)
III. Employee Benefits 96-106
a. Code Sections Exclusions for fringe benefits
a. 132 (Omit (j)(2),(5)(m)&(n)) Fringe benefits
1. Nondiscrimination rule- Most fringe benefits may be made available on a tax free basis to officers, owners, or highly compensated employees only if the benefits are also provided on
2. substantially equal terms to other employees.
3. (a)(1)Exclusion for no-additional-cost service-> (b)
1. (a)(1)- No-additional-cost services: Services provided to the employee if the same services are offered for sale to customers, and the employer incurs no substantial additional cost in providing that service to the employee (revenue lost in comparison to what they charge customer is the consideration.
i. Airline, railroad, or subway seats, hotel rooms if working in those respective businesses
ii. Allowed if given for free, at a discount, or cash rebate program.
iii. If an employee of an airline that is owned by a cruise ship line (conglomerates), a free
3. (a)(2)Qualified employee discount ->(b)(3)
1. Cannot exceed 20% or price charged to customers
i. Aggregate sales price reduced by cost/aggregate sales price
2. (a)(2) Qualified employee discounts: Courtesy discounts on items purchased from employer.
i. Non discrimination and same line of work restrictions apply.
ii. Applies to property (other than real and property held for investment)
iii. Included insurance policies
iv. DOES NOT include loans to employees of financial institutions
v. Ceiling on the amount
1. Not to exceed 20% FOR SERVICES of the price at which the services are offered by the employer to the customer.
2. Property percentage discount determined by individual business evaluated in the following formula: Aggregate sales cost-cost/aggregate sales price.
ds business convention in another town, Employer picks up tab.
1. Employee business trip is excludable 132(d)
l. Emp has bar and provides employees with happy hour cocktails at end of each week's work?
1. 132(e)(1) De minimus
m. Employer gives each employee a case of scotch for Christmas
1. Not excludable from income Reg. 1.132(e)(1) because a case of scotch can be substantial and if substantial, it is not excludable.
n. Emp is officer of corporation which pays Emp's parking fees at lot. Not- officers pay their own fees.
1. Excludable because only (a)(1) and (a)(2) require discrimination. Only the first $175 is excludable though 132(f)(2)(B).
o. Employer provides Emp with $185 worth of vouchers each month for commuting on public transit
1. 132(f)(2)(A) says first $100, but the extra $85 in gross per month. 132(f)(7) says the remainder is not includable under de minimus or any other provision, so it is gross.
IV. Prizes and Awards 112-121
a. General Notes
a. What is now excluded
i. Under 74(b) Awards that are donated to governmental or 17o(c)(1) or (2) charity may be excluded. (you never owned them)
ii. Under 74(c), employee achievement awards are excluded (limits)
1. Must be
a. In the form a tangible personal property
b. Awarded as part of a meaningful ceremony
c. Not disguised compensation
2. Length of service award man not be excluded if employed under 5 years 274(j)
3. Safety achievement award 274(j)
a. Only if under 10% of emp get one
b. If not made to manager, administrator, clerical or other professional employee
b. Code Sections Prizes
a. 74- Prizes and Awards
i. (a) General Rule
ii. (b) Exception for certain prizes and awards transferred to charities
3. (c) exception for certain Employee achievement awards
4. IRS Regulations (NOT IN CODE BOOK)
a. 1.74-1(a) Inclusion in gross income. (1) Section 74(a) requires the inclusion in gross income of all amounts received as prizes and awards, unless such prizes or awards qualify as an exclusion from gross income under subsection (b), or unless such prize or award is a scholarship or fellowship grant excluded from gross income by section 117. Prizes and awards which are includible in gross income include (but are not limited to) amounts received from radio and television giveaway shows, door prizes, and awards in contests of all types, as well as any prizes and awards from an employer to an employee in recognition of some achievement in connection with his employment.
(2) If the prize or award is not made in money but is made in goods or services, the fair market value of the goods or services is the amount to be included in income.
(b) Exclusion from gross income. Section 74(b) provides an exclusion from gross income of any amount received as a prize or award, if (1) such prize or award was made primarily in recognition of past achievements of the recipient in religious, charitable, scientific, educational, artistic, literary, or civic fields; (2) the recipient was selected without any action on his part to enter the contest or proceedings; and (3) the recipient is not required to render substantial future services as a condition to receiving the prize or award. Thus, such awards as the Nobel prize and the Pulitzer prize would qualify for the exclusion. Section 74(b) does not exclude prizes or awards from an employer to an employee in recognition of some achievement in connection with his employment.
(c) Scholarships and fellowship grants. See section 117 and the regulations thereunder for provisions relating to scholarships and fellowship grants.
