Individual Tax Outline

CHAPTER 2 – GROSS INCOME
Section 61(a) – Gross income is all income from whatever source derived

Eisner – income described as “the gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through a sale or conversion of capital assets.
Income Realized in Any Form

The regs explicitly provide that gross income may be realized in any form, whether money, property, or service.

i. If service are paid for in property, the FMV of the property is the measure of compensation
ii. If paid for in the form of services, the value of services received is the amount of compensation
1. FMV is generally defined as the price a willing buyer would pay a willing seller, neither under a compulsion to buy or sell, and both having reasonable knowledge of relevant facts.
a. A taxpayer who accumulates frequent flyer miles as a result of business travel paid for by her employer, is not required to report any gross income as a result of the receipt of the frequent flyer miles or her use of those miles for personal travel.

Realization, Imputed Income and Bargain Purchases

We do not tax mere appreciation in value of property
Section 1001 – an exchange of property gives rise to a realization event so long as the exchanged properties are “materially different,”—that is, so long as they embody legally distinct entitlements.
Imputed income is not taxed
Bargain purchases usually do not constitute gross income.

Rev Ruling 79-24 – if services are paid for other than in money, the FMV of the property or services taken in payment must be included in income.

CHAPTER 3 – THE EFFECT of an OBLIGATION to REPAY

LOANS

Loans are not gross income
A loan does not represent an “accession to wealth” or increase the taxpayer’s net worth b/c the loan proceeds are accompanied by an equal and offsetting liability

i. The borrower has an obligation to repay the loan, and it is this repayment obligation that negates treatment of a loan as income.
1. Repayment of a loan does not reduce gross income
2. Repayment is not a deductible expense
a. The lender has no deduction when the loan is made; the repayment is merely a recovery of capital for him.

Payment of one’s liabilities by another may give rise to gross income
In order for a transfer of funds to constitute a loan, at the time the funds are transferred there must be an unconditional obligation on the part of the transferee to repay, and an unconditional intention on part of the transferor to secure repayment of such funds.

Claim of Right

Claim of Right Doctrine

i. If a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to return [report], even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore it equivalent.
1. The taxpayer may never be required to return the money, and under the claim of right doctrine we do not await the resolution of a contingency to decide whether or not the receipt of the money was income.
a. Funds which the taxpayer acts only as a conduit are not received under a claim of right.

Illegal Income

Gains from an illegal business may be taxed
Where a consistent pattern of fraudulent dealings demonstrates an absence of an intent to repay, merely labeling the funds obtained as “loans” will not avoid gross income.

Deposits

The regs explicitly provide that rent paid in advance generally constitutes gross income in the year it is received regardless of the period covered or the taxpayer’s method of accounting (Reg 1.61-8(b))

i. A loan on the other hand is not income b/c there is an offsetting obligation of repayment

CHAPTER 4 – GAINS DERIVED FROM DEALINGS in PROPERTY

Amount Realized – Money received + FMV of any other property
Basis – cost
Adjusted Basis – (unrecovered cost) equals cost / total cost of property including the “add ons”
Cost Basis – of the property received in a taxable exchange is the FMV of the property received in the exchange
Tax Cost Basis
Gain
Recovery of Capital
Nonrecourse Debt
Recourse Debt
Taxable Exchange

Section 61(a)(3) – Gross income includes gains derived from dealings in property.
1. Reg 1.61-6(a) – gain is the excess of the amount realized over the unrecovered cost or other basis for the property sold or exchanged.
a. the specific rules for computing the amount of gain or loss are contained in Section 1001 and the regs thereunder.
i. Section 1001(b) – Amount Realized on the sale or other disposition of property equals the money received + FMV of any other property received.
ii. Section 1011(a) – Adjusted Basis = equals cost “except as otherwise provided in Section 1012”
1. Philadelphia Park Rule – when property received Basis = FMV of the property received.
iii. Section 1016 requires taxpayer to adjust her basis in property to reflect any recovery of her investment or any additional investment made in the property.
1. Adjusted basis reflects the impact events occurring subsequent to one’s acquisition of property may have on the amount of one’s investment in the property.
a. Recovery of Capital – A taxpayer may recover tax-free her investment (capital) in property before being charged with income from a disposition of the property.
2. Impact of Liabilities
a. Impact on Basis
i. Because of the obligation to repay, taxpayer is entitled to include the amount of a loan in computing his basis in property.
1. Loan = part of taxpayer’s cost of the property (Section 1012)
b. Impact on Amount Realized
i. Recourse liabilities incurred by a taxpayer in the acquisition of property are included in the taxpayer’s basis in that property and
ii. Recourse liabilities of a seller, assumed by