LAW 591: Taxation of Individuals
Professor J. Todd Chasteen
Textbooks: J. Martin Burke & Michael K. Friel, Taxation of Individual Income (8th Edition 2007)
Daniel J. Lathrope, Selected Federal Taxation Statutes & Regulations (2008 Edition)
APPROACH TO THE EXAM
Is it income?
Does the item fall w/i the definition of used under IRC § 61?
Does it fall w/i any of the statutory exclusions from income?
To whom is the income taxable?
If a gift has been made, is income shifted to the donee? Consider the following:
was the gift of property or of the income from property?
Was the gift of income from services?
Did the donor retain excessive controls?
If the gift was a trust, is income taxed to the grantor, the beneficiary, or the trust?
Is it deductible?
Does it qualify as a business or investment deduction?
Is the item business or personal?
Is it a current expense? or a capital outlay?
It is ordinary and necessary?
Is it barred by public policy?
If it is not an expense, can it be deducted as depreciation, depletion, a loss, or a bad debt?
Is the deduction above the line or below the line, and is it limited by the restriction on “miscellaneous itemized deductions”?
Does it qualify as a personal deduction? If so, it must fit w/i the statutory provisions for interest, charitable contributions, etc.
Does a sale of property produce gain or loss?
How much was the gain or loss?
What was the basis? Are there any adjustments to basis?
Was there a realization? If so, what was the amount realized?
Does the transaction qualify for nonrecognition?
Is the asset a capital asset? If so, was there a “sale or exchange”?
Does the alternative tax minimum (AMT) apply?
What was the T’s “alternative minimum taxable income”?
What is the T’s exemption under the AMT?
What is the T’s AMT?
is the AMT greater than the T’s “regular” tax?
When is the item income or deductible?
Does the T use the cash method, the accrual method, or the installment method?
If the transaction spans several years, should each year be taken separately or can the entire period be considered?
Ch. 2 GI
Bargain purchase
The purchase of an item below FMV
FMV
The price a willing buyer would pay a willing seller w/ neither under a compulsion to buy or sell and both having reasonable knowledge of relevant facts.
GI
All income from whatever source derived
Imputed income
May be derived from self-help, (i.e., performing services for oneself) or from using one’s own property (e.g., owning a home that has rental value); not taxable as GI.
Realization
The amount received at the sale or disposition
IRS § 31
Tax withheld on wages (allowed as a credit for the taxable year)
IRS § 61a1
Fringe benefits not specifically excluded are includable as GI.
T. Reg. § 1.61-2; 1.61-2(a)(1)
Compensation for services, including fees, commissions, etc., is income.
T. Reg. § 1.61-2(d)(1)
If services are paid for in exchange for other services, the fmv of such must be included as compensation. If the services are rendered at a stipulated price, such price will be presumed to be the fmv of the compensation received in the absence of evidence to the contrary.
T. Reg. § 1.61-2(i)
Property transferred to EE or IC as compensation for services for an amount < fmv, the difference b/t the amount pd and the fmv at the time of transfer is compensation; included in GI.
In computing the gain/loss from the sub sale of the prop, its basis shall be the amount pd for the prop increased by the amt of such difference included in the GI.
T. Reg. § 1.61-8(a)
Rents and royalties are GI, but $$ received as a result of the transfer of patent rights under certain circumstances constitute capital gain (CG) instead of ordinary income.
T. Reg. 1.61-9(a)
Dividends, in general, included as GI
T. Reg. § 1.61-11(a)
Pensions, in general, = GI unless excluded by law.
T. Reg. § 1.61-14(a)
Miscellaneous items of GI, in general
· Many other kinds of GI, e.g.,
o punitive damages
o treble damages
o exemplary damages
o another person’s payment of T’s income taxes
o illegal gains
o treasure trove, to the extent of its value in US currency (Cesarini v. U.S.)
T. Reg. § 1.1001-1(a)
AR from sale or other disposition of property = any $ received + FMV of any property (other than $) received.
T. Reg. § 20.2031-1(b)
FMV is defined as the price a willing buyer would pay a willing seller w/ neither under a compulsion to buy or sell and both having reasonable knowledge of relevant facts.
Rev. Rul. 79-24, 1979-1 C.B. 60[1]
Bartering - Sec. 1.61-2(d)(1) of the regulations provides that if services are paid for other than in money, the FMV of the property/services taken in payment must be included in income. If the services were rendered at a stipulated price, such price will be presumed to be the FMV of the compensation received in the absence of evidence to the contrary.
Service Annment 2002-18, 2002-1 C.B. 621
No tax liability (no GI) for receipt or personal use of frequent flyer miles…attributable to T’s business or official travel.
GI
YES
NO
Amount realized from the sale or disposition of property
Frequent flyer miles
Compensation for services
Unrealized gain (e.g., appreciation in stock)
Property transferred as compensation for services in an amount less than its FMV (FMV – amount $$ = GI)
Imputed income from self-help
All income from whatever source derived
Imputed income from owning and using one’s own property
Interest
Barg
as and ER pays all the traveling, lodging, and meal expenses. The wife qualified for the trip by achieving the required increase in sales during the year.
I: Whether the McCanns should have included in their income tax return, as part of GI, an amount based upon the cost to the company of defraying their travel and other expenses on the trip to Las Vegas.
H: GI defined as all income from whatever source derived [§ 61(a)]. GI may be realized, therefore in the form of services, meals, accommodations, stock, or other property, as well as in cash [§ 1.61-1(a)]. This is income b/c it is closely tied to her performance at work, mainly increased sales. Generally, just about anything related to the employer/employee relationship is regarded as income.
Note: When services are paid for in a form other than money, it is necessary to determine the fair market value of the thing received [See § 1.61-2(d)(1)]
* Court will look at personal pleasure v. business time while at mtg.
* Can argue the trip was primarily business and therefore it is not taxable.
* Is it for the convenience of employer? Or for the benefit of employee?
* Is EE attendance mandatory?
Roco v. Commissioner
Issue: Whether the $ petitioner received from the US in qui tam settlement is includable as GI.
H: YES. Petitioner is liable for the accuracy-related penalty.
Peller v. C’mer
A bargain building is not taxable income. It becomes taxable upon sale or transfer. The profit is not recognized until sold.
Realization, Imputed Income and Bargain Purchases
IRS does not tax mere appreciation in value of property until it has been realized.
GROSS INCOME/CH 2:
HYPO: Win Reader’s Digest sweepstakes; is it taxable? Yes. 1-61(a)…”all income from whatever source derived.” Economic benefit when you win the award;
[1] Revenue Rulings are binding internally on the tax courts and IRS; but courts can disregard them or adjust the view of the Rev. Rul.
[J1]Reimbursed employee expenses, moving expenses related to job, loss from sale of capital asset
[J2]medical expenses paid for and not covered by ins; taxes—state and local; interest on home loan; charitable contributions; casualty losses (acts of God); non-reimbursed employee expenses.
