Federal Income Taxation
Joondeph – Spring 2006
1. Initial Concepts. 2
2. Income Generally. 2
3. Ordinary vs Capital Gain. 2
4. AR, Basis, AdjBasis, and Gain. 3
5. Windfalls, Gifts, Transfers at Death. 3
6. Annuities. 5
7. Loans and Income From Dicharge of Indebtedness. 5
8. Exclusions – General6
9. Exclusions – §132 Fringe Benefits. 7
10. Exclusions – Other Fringe Benefits. 8
11. GI, AGI, and TI9
12. Deductions – Above The Line – Purely Business. 9
13. Deductions – Above The Line – Mixed Business/Personal11
14. Deductions – Above The Line – Purely Personal13
15. Deductions – Below The Line. 13
16. Credit – Employment-Related Child and Dependent Care (IRC §21, 129)15
17. Transfers of Property Subject to Debt15
18. Realization and Recognition. 16
19. Express Non-Recognition Provisions. 17
20. Net Operating Loss Carry-back and Carry-over18
21. Claim of Right18
22. Tax Benefit Doctrine. 18
23. Constructive Receipt and Economic Benefit Doctrines. 19
24. Tax-preferred Retirement Plans. 19
25. Employee Stock Options. 19
26. Attribution of Income. 20
27. Transfers Incident to Marriage and Divorce. 21
28. Distinguishing Current Expenses From Capital Expenditures. 22
29. UNICAP Rules of §263A.. 23
1. Initial Concepts
A. Progressivity
1.
B. Basic Goals of any tax system
1. Fairness
a) Horizontal Equity: Treat those similarly situated alike
b) Vertical Equity: Fair in allocation of burdens up and down the “scale of well being”
2. Economic rationality
3. Administrability
C. Procedural Issues
1. If TP is uncertain about whether to pay a tax, TP has three options:
a) “Underpay” Pay the tax how they think it should be paid. TP will wait for IRS to “catch” them and assert a deficiency, and file in Tax Court (no jury). TP will not have to post a bond in the amount of the deficiency. TP or IRS can appeal to Cir Ct, and so on. TP will not be liable for penalty if they had a good faith argument for their method of calculating their tax liability.
b) “Overpay” Pay the tax how they think the IRS wants it to be paid and sue for a refund in either US Dist Ct (jury available) or the US Ct of Claims (no jury). TP will have to post a bond. TP or IRS Can appeal to Cir Ct, and so on.
2. Income Generally
A. Old Definition: from Eisner; Income is the gain derived from capital, from labor, or both
B. Current Definition: from Glenshaw Glass; Income is an:
1. accession to wealth
2. clearly realized
3. over which the TP has complete dominion
C. The Tax Code:
1. IRC defines gross income in exceedingly broad terms, basically adopting the definition in Glenshaw Glass. (IRC §61)
2. Income includes income realized in any form, whether in money, property, or services. (Regs §1.61-1(a))
3. Bartering: If property or services are paid for in property or services, the FMV of the property or services taken in payment must be included in income. (Regs §1.61-2(d)(1))
4. The FMV of services rendered at stipulated price is the price stipulated, absent evidence to the contrary. (Regs §1.61-2(d)(1))
D. Income need not be:
1. readily reducible to cash
2. paid directly to the TP (Old Colony Trust Co.)
E. Payment of taxes for the TP is income to the TP
F. Economic Benefit Doctrine: Where a benefit is fully vested an it is secure from the Payor’s creditors, then it is income
3. Ordinary vs Capital Gain
A. Ordinary Income: includes all accessions to wealth except those that qualify as capital gain income
B. Capital Gain: includes the gain realized as a result of the sale or other d
ofits are taxed in the year received. (Burnet)
c) (Raytheon)
B. Gifts
1. Gifts generally excluded from gross income. (§102(a)), But this section does not exclude:
a) Income from property (§102(b)(1))
b) The property itself if it is income from property (§102(b)(2))
c) Any transfer from employer to employee (§102(c))
2. Definition of gift: (Duberstein)
a) Case-by-case analysis
b) Transferor’s intention is the most critical consideration
c) Gift must issue from a detached and disinterested generousity
d) Not a gift if made:
(1) For consideration of any kind, even past consideration
(2) with an incentive of anticipated benefit,
(3) from a moral duty
e) However, the mere absence of a legal or moral obligation to make a payment does not establish that it is a gift. (Old Colony)
3. Determining Donee’s Basis (IRC §1015(a), Duberstein)
a) IF FMV > Donor’s Basis: Donee’s Basis = Donor’s Basis.
b) IF FMV < Donor’s Basis: Donee’s Basis = FMV at time of gift.
C. Gifts of divided interests:
1. The gift of an income interest must be included in gross income by the recipient. (IRC §102), except when the donor retains the remainder interest, in which case the donor is liable for the tax on the income. (IRC §102(b))
D. Gifts Through Bargain Sales
1. Bargain “sales” to individuals
Income to the donor: If donee gives value, even if it is through discharge of donor’s gift tax liability, donor
