A. Extra income increases tax liability, so it is better to get it in the future
B. Deductions decrease tax liability, so I want them right now
II. Progressive Tax System: As tax base increases, government taxes a larger percentage
A. Example: If making $20,000, first $10,000 goes into first bracket (lowest tax) and second $10,000 into the second bracket
A. Taxable (Net) Income = Gross Income – Deductions (TI=GI-D)
B. Section 61: Gross Income = Income from whatever source derived
1. Anything found, etc.
2. Taxpayer has obligation to value property and pay tax once something is determined to be income.
3. Test is objective not subjective. I.e. doesn’t matter that you didn’t know it was a diamond.
C. GI – Certain deductions = AGI , AGI – Personal Exemptions – either standard or itemized deduction = taxable income.
D. Imputed income not gross income—FMV of taxpayer’s performance of services for himself. Consumption of use value of one’s own property.
E. Timing—income when received
1. Unless constructive receipt
2. Key is whether TP had “unfettered control over the date of actual receipt.” If yes then construction receipt and income when they could have received.
F. Bargain Purchase rule–Irrebuttable presumption in arm’s length transaction that when you buy property for CASH, you get what you pay for
II. Relevant Cases
A. Glenshaw Glass:
1. Are punitive damages awarded income—yes.
2. Supreme Court current definition of Income is:
a. Accessions to wealth
c. Dominion and control by taxpayer
3. Repudiates the notion that there has to be a source. Source is not a limitation but an explanation.
4. Repudiates old definitions but does not provide a new clear definition. However, the three phrases in Glenshaw Glass are key and cited regularly.
B. Cesarini: When you find money in a piano, it is gross income, taxable in the year in which there was knowledge
1. HYPO: Diamond found in piano
a. Taxable when found
b. Law does not distinguish between cash and property because value is the translation of property into money
1) To tax the diamond, it must be valued
2) Look to what people in the marketplace are willing to pay
c. Fair Market Value: The value that the property would have if it was transferred from a willing seller to a willing buyer, both being reasonably aware of the circumstances
2. HYPO: Bought a piano for $1,000, which was really a Steinway valued at $100,000
a. No gain, no loss
b. Bargain Purchase Rule: Irrebuttable presumption in arm’s length transaction that when you buy property for CASH, you get what you pay for
c. Taxed on gain when sold (realized)
ices to someone other than for whom the services are performed then:
A. Excess of the FMV of the property over the amount paid for the property is gross income.
– Amount Paid (purchase price)
B. Timing—Gross income when non forfeitable. § 83(a) (we don’t care whether the property is non-transferable in the traditional sense unless it is a permanent condition).
1. Gross income in the first time when either: transferable or non-forfeitable.
2. I.e. To not be income must be both nontransferable and forfeitable.
3. But, if non-forfeitable, then automatically transferable so therefore, we only need to focus on forfeitability.
a. I.e. if forfeitable then automatically nontransferable (per statute definition of transferability) and therefore there is no income. I.e. both happen together based on forfeitability.
C. Timing—Or § 83(b) election to recognize income when property is transferred even if forfeitable. (see below) but no deduction if subsequently forfeited.
Permanent restriction only considered—if temporary restriction, then not considered in FMV.