Tax
Office G-302
T, 10-12
1800’s — Customs and Duties
1894 — Pollack declared federal income tax unconstitutional
1909 – Corp I.C. allowed
1913 — 16th amendment
Sources of Tax Law:
Legis: IRC (Title 26 USC) plus legislative history (more important in tax than other areas of law)
Admin: Treasury Regulations/Reg. Rule (Issued by IRS but not binding)/Reg. Proc/Notice (IRS thinking about clamping down on something or expanding enforcement) (Treasury Dept. + IRS)
Judicial: Case opinions
TP files returns — not audited (done)
TP files return — audited — no deficiency asserted
TP files return — audited — deficiency asserted — TP Agrees and Pays
TP files return — audited — deficiency asserted — TP can either 1) not pay and go to Tax. Ct. for a “re-determination” or 2) pay the tax and sue for a refund in district court or claims court — 1) Tax Ct. appeals to fed. Court of appeals for the TP’s Circuit or 2) Appeal to Fed Ct. Appeals or CT of appeals for fed circuit
I. Gross Income
A. Benefits in Kind
1. In General
Should professor’s salary be taxed?
– Is something gross income? Basic place to start is sec. 61 of IRC. Salary is included in this section. Regulations would give more specific insight (reg 1.61).
– Presumption that anything coming in is income unless there is a specific exemption, but there is no definition of income in the entire IRC
– Would a Cadillac be taxable? Not a problem that is not cash (in-kind), it is compensation.
– What if she gave her a Cadillac because she was embarrassed that Ring was driving an ugly car? Probably still compensation but there are some ways to say it is not income. Maybe not everything that comes from the employer is income. Compensation v. Job-Related
– All the things that might be income — all benefits? What if I value something at 30K but buy it for 20K, is this consumer surplus taxable? No, its just not practical. So its obviously not all benefits are taxed, so one of the factors influencing the definition of income is practicality/administrative implications.
– Factors:
o Practicality/Uniformity
o Incentives of how people want to pay and get paid
– What if dean gave tickets?
o Probably income, whether it is transferable or not will influence the value.
– What if Ring just loves teach does not want to get paid is it still income? Yes.
– In-Kind raises tremendous questions about valuation…
– Steamship tickets are taxable even though it is surprise prize, not actually listed in sec. 61. Debate in Reginald Turner case is not over whether it is income, but how to value the prize. IRS thinks the value should be the market value of the tickets ($2200). Taxpayer thinks they should be valued at $500, unclear of the justification (not planning on it, not transferable, etc.). Must make sure that the market item and the actual item are actually substantially the same in order to justify.
– Court decides to split the difference.
– TP’s did not plan on it, but they could have refused. The court says that if you win a luxury for yourself, the value might not be at fair market value. A sense that there should be an individualized assessment in determining the value.
– Textbook example: Ring receives sample casebook, is that income? Section 61 implies that it probably should be. It has some value. The question is why it wouldn’t be considered value (Haverly), principal receives the book and then donates to the library and tries to get a tax deduction on his return. He recorded $0 income but then claimed $2000 deduction. Government wants that you can only count it as a deduction if he reports it as income. An equal option that neither reported as income nor is a deduction taken. In Haverly the court wind up makes the TP report income but the court could have also said no deduction. Double benefits are frowned upon (not income but deductible).
– Why is not counted as income if you don’t deduct it? Court says because the IRS may enforce income as it sees fit. The issue of administrative practicality comes up again.
– Air-Conditioning in Ring’s office income/compensation? Does seem like it superficially, it is a benefit and could be an incentive to take a job. Could make the practicality argument but can easily make the argument that it is required for the job (easier to make this argument for a desk). Basic tool of the trade v. decorating amenities will come up again when we talk about business benefits.
– Employer offers to pay taxes (Old Colony), the question is whether this is income? IRS says that it is income because functionally same as salary. Same if employer paid grocery bill.
– Tax Payer argues that seems like an every ending cycle for an agreement to pay someone’s taxes, because every payment of taxes would be considered income, which would in be taxed, so on and so on
– The Court’s answer that it is income and deals with Taxpayer’s fear by saying that they would deal with that scenario when it comes up, right now the IRS only wants to collect the first round of taxes.
– Employer is trying to guarantee take home pay. After Old Colony, how do you make this guarantee? The way is to guarantee a certain gross income using the following formula (called grossing up):
o You want a certain after tax amount (A) = Taxable Income (T) – Tax Paid (TP).
o A = T-tT
o A = T (1-t)
o T = A/(1-t)
– Hypo
o EE has 100K salary + 200K other income. Employer agrees to payee’s income tax on salary. Q. How to stack – which $100K is salary in the tax brackets?
§ 31% 300K
§ 28% 200K
§ 15% 100K
o Could choose a bracket or use an avg. tax rate on the 300K. Employer would argue for 15%, employee for 31%.
– Main issues so far:
o When does the form of payment actually matter?
o When is value play heavily into what we do? When do we need include something into income because how hard it is to value?
o What other policy concerns? If you are choosing to exclude something from income is it fair? Is it efficient? What broader choices are made?>
2. Fringe Benefits
– Relationship between §61 and §119. §119 excludes meals and lodging from gross income under certain circumstances. Does §61 normally cover meals and §119 is a specific exclusion or does §61 never cover these items and §119 is just to clarify. Makes a big difference as to whether failing 119 automatically makes the benefit taxable income.
– Benaglia, this is pre-section §119. The Basic issue is whether the meals and lodging given to a hotel manager and his wife taxable income. The TP’s argument that it is not is that it is for the “convenience of the employer.” Argues that in order to do this kind of job you need to be on the premises. Why do we care whether it is for the convenience of the employer? Because it may be less of a benefit if it a convenience of the employer? Why would we think this to be the case? One reason is that affect’s the employee’s flexibility, it is not full benefit just like Reginald Turner. You might no take the job if you need to report it as income, to someone in Benagla’s social class would not spend the fair market value for the benefit just like Turner.
– A real sense that it seems harsh that the whole room board to be considered the employee’s income. But why not charge at least some of it as income? Why does convenience of employer eliminate it all? Seems like practicality is a factor yet again.
– In Benaglia, IRS makes the argument that he is managing two hotels, and he can and does only live at one so this defeats that it is necessary to perform the job. Also refer to the language of the letter which refers to a negotiation over this “benefit.” Also the employee went on extended trips, which indicates it is not a necessity.
– In the end the Court says that if you can characterize it as primarily for the convenience of the employer it will not be accounted as taxable income.
– There is an alternative to this all or nothing “convenience of the employer” Benaglia method
o Tax on replacement cost
o Threshold, above which is taxable income
o Address the mismatch (no taxable income but also no deduction for the employer)
o include just the cost to the employer as taxable income to Benaglia
o Tie threshold to salary
Topics:
EE Fringe Ben
of benefits
o Used to be that the employer would give you the option of some cash, life insurance, child care, etc. which would otherwise would be tax-free, under the old rule you would be taxed if you chose cash
o Under the old rules if you chose you other in-kind benefits covered under IRC as tax free benefits, even though they were offered cash, you would still be taxed precisely because you were offered the option of taking cash, this meant that if employers wanted to offer these benefits they could not offer the cash-option
o This set up a scenario where different groups of employees were competing
o Under section 125, the option of cash does not taint the otherwise tax-free status of the benefit, still taxed on cash, of course
– Other fringe benefits
o Prior to 132 (1984), lots of ruling and decisions in which there is non-statutory exclusions of income, Congress wants to clean it up (same motive as 119), going to replace all the non-statutory exclusions out there.
o If it’s not in 132, the legislative history tells us it is not excluded
o I work for AA and I get free personal flights off-duty, is this taxable in 1984? Suppose the seat would have been empty and get no food, then no tax because covered under 132 (b) No-additional cost service. Can make some arguments that there is extra fuel, labor, etc. And it is really possible that there was no possible sale at all?
o Why is no-additional cost even relevant test for excluding it from income? One reason we generally don’t like to waste things. Another reason is that employer cannot make a simultaneous deduction to this empty seat since it is no additional cost. No double benefit going on.
o What are different ways to look at employer giving employee free seat?
§ 132 (b) treats it as there is no tax consequence
§ The other way to look at is to give $100 income to EE and $100 cost to employer, which is deductible. Next EE spends $100 on seat, taxable income to employer. The net is = 0, so this matches 132 (b) for the employer but the employee bears a tax burden. 132 (b) removes the employee tax burden.
o For this to qualify as a benefit under 132 (b)
§ benefit can’t be discriminatory (i.e. only offered to highly compensated employees)
§ must be an employee
· 132 (h) includes spouses, dependents and retired employees
· 132 (h) (3) For airlines, parents also can claim income exemption, why?! Maybe it is because airline tickets are not as easily transferable, goods v. services. Also, Congress seemed sensitive for business practice, didn’t want to carve it out if historically employees were getting it for free
§ Benefit has to be in the line of business in which you work, if AA starts making Soup, and you work for the soup part of the company can’t get airline seats, tax-free, maybe don’t want to give an big advantage to large companies
o 132 (c)
§ qualified employee discount, discount up to a certain amount will be tax-free, again, why? One reason is that it is not completely compensatory — employers want employees to endorsing and more familiar with the product.
o 132 (d)
employers give you something really work-related, even more so than product from employee discount (i.e. desk, paper, etc.). If you broke it out to $100 of income for paper and $100
