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Federal Income Tax
South Texas College of Law Houston
Siegel, Mark R.

Seigel_Fed Inc. Tax_Spring_2013
 
Gross Income
Does not include:
1.       Gift, devise, bequest, inheritance
2.       Exceptions
  a.  Income from (1)
  b.  Where the gift, bequest (personal property), devise (real property), or inheritance is of income from
        property, the amount of such income is included in GI
  c.  Employee Gifts – are not excludable from GI except as shown in 132
 
Employer can only deduct gifts to non employees of $25 or less, or freebee advertising stuff of $4/unit or less
 
Employee Fringe Benefits
Section 132 – Qualified Fringe Benefits (not taxable)
Employee – definition includes present employees, retired & disabled ex employees and their spouses and kids
 
Per Code Section 132 – Can be excluded from GI as long a benefits offered to highly compensated employees are also offered to other employees on a non discriminatory basis – if discriminatory treated as gross income to highly compensated and excluded for other employees
1.       Employee eating facilities – excluded from gross income
2.       Qualified retirement planning services – excluded from gross income
3.       132(a)(1) No Additional Cost Services – excluded if services are offered for sale to customers in the same line of business as that in which the employee is performing services and the employer incurs no substantial additional cost in providing the service
4.       132(a)(2) Qualified Employee Discounts – must be no more than 20% discount for services, or employer's gross profit for goods ( percentage = aggregate sales price reduced by cost/aggregate sales price)
5.       132(a)(3)Working Condition Fringe – property or services employee could have deducted as business expense
6.       132(a)(4) De Minimis Fringe –  any property or service whose value is so small as to make required accounting for it unreasonable or administratively impracticable
7.       132(a)(5)Qualified Transportation Fringe – transportation in a commuter highway vehicle between an employee's residence and place of employment, a transit pass, token, fare card, voucher, or similar item for mass transit facilities or for a commercial transportation services, qualified parking provided on or near the business premises or on or near the location from employee is picked up by a commuter vehicle and reimbursement of employees who commute by bicycle
8.       132(a)(6) Qualified Moving Expense Reimbursement
9.       132(j)(4)Athletic Facilities
 
Additional Exclusions
Section 79 – Group Term Life up to $50,000
Section 112 – comp for military personel in combat zone and for periods during which person is hospitalized as a result of wounds, disease or injury incurred while serving in a combat zone
Section 129 – dependent care assistance up to a max of $2500 – $5000 for married couple filing jointly
Section 137 – employer payment of qualified adoption expenses
Section 134  – excludes some additional military benefits
Section 125 – Cafeteria Plan
 
For home or apartment to be excluded from GI, lodging must be
1.       On business premises
2.       Living there is a condition of employment
3.       For the convenience of the employer
 
Gain or Loss on Property
AR= Amount Realized  MINUS
AB = Adjusted Basis      EQUALS
GR = Gain Realized  or LR = Loss Realized
 
Must include capital gains in GI unless specifically excluded
Adjusted Basis = Sale Price – Depreciation (ACRS-Accelerated Cost Recovery System)
ACRS Allowed – what taxpayer claims on return and IRS accepts
ACRS Allowable – what code says taxpayer is entitled to take
 
Gifts
 
Hypo:
$50K AB/$150K FMV ——————> given to Donee
Donee's basis – same as donor or FMV, whichever is less – in this case $50K
 
Parent conveys property to child
$50K AB/$150K FMV ——————> conveys to child – child's basis is $50K
Child pays $80K in cash – child's basis is $80K; parent has $30K in cap gains
Child pays $40K in cash – child's basis is $50K; parent has $10K realized loss that is not recognized
 
Capital Improvements made to rental property by tenants aren't included in GI and don't increase Adj Basis
 
Hypo:
Painting worth $10K, bought with allowable 10% employee discount for $9K
Basis is $10K preserving exclusion of employee discount
 
In an exchange, if you can't determine the FMV of one side of the transaction, assume it's worth what was tendered on the other side of the transaction
 
Basis of Gift – lesser of donors basis or FMV when given (FMV only if sold at a loss by donee)
A gives to B              B's basis = A's basis if < FMV; if A's basis is > FMV, then B's basis is FMV
B gives to C              C's basis = A's basis + B's Capital Improvements – B's Depreciation or B's Adj Basis
                                   unless B's AB > FMV, is so then FMV if sold at a loss by C
 
Hypo:  Donor's Basis = $30,000     FMV = $20,000
Donee sold for $35,000  – $5,000 gain
Donee sold for $15,000  – $5,000 loss
Donee sold for $24,000 – no gain or loss realized
 
Donee may increase AB by the portion the gift tax attributable to the net appreciation in value at the time of the gift based on the following formula
 
Gift Tax Paid X (FMV of Gift – Donor's AB) / Amount of Gift
Hypo:  Donor ($50K AB/$150K FMV); Donor pays $60K Gift Tax
$60,000  X  ($150,000 – $50,000)/$150,0000  or
$60,000  X  2/3  = $40,000.00
Donee AB = $50,000 (donor's AB) + $40,000 (% of gift tax attributable to appreciation) = $90,000
 
Part Sale/ Part Gift
 
Hypos:
Parent gives child   $50AB/$150K FMV  —————–Child pays Parent $80K; no gift tax paid
Child AB = greater of Donee's Basis or Amount Paid = $80K
Parent – $30K Capital Gain
 
Parent gives child  $50 AB/$150 FMV ——————Child pays Parent $40K; no gift tax paid
Child AB = $50K  Donor's Basis
Parent -$10K Realized Loss NOT RECOGNIZED
 
Parent gives child  $200 AB/$150 FMV ————————-Child pays $40K ; no gift tax paid
Child AB  =  $150K
Parent – $160K loss NOT REALIZED
 
Donor's AB:   $40,000/ FMV = $100,000
Donee pays $45,000 donor for gift tax
Donor has $5,000 Capital Gain
Donee

ry loss
Sale of Both – $25K gain in ordinary income; $30K loss in ordinary income;  net loss $5K in ordinary income
 
Sec 1221 Gift of copyright, musical composition, letter or memorandum or govt publication from person who produced it or caused it to be produced is not a capital asset
 
Sale or Exchange
 
Hypos
Irrevocable trust to distribute $50K to beneficiary on her 25th birthday.   Distributes property instead of cash
Trustee
Basis $10k/FMV $50K – trust has $40K Cap Gain        Beneficiary's Basis – $50K
Basis $70K/FMV $50K – no cap loss for trust related parties- Sec 267(b)(1)   Beneficiary's Basis $50K
 
Executor of Estate
Basis (at death of decedent) $10K/ FMV $50K – Estate has $40K cap gain;  Beneficiary's Basis – $50K
Basis $70K/ FMV $50K – Estate has $20K cap loss;  Beneficiary – $50 basis
Sec 267 – when pecuniary bequest – amount of loss is recognized Sec 267(b)(13)
When residual bequest (not a specific $ amount) – amount of loss is not recognized
 
Hudson
Exchanging satisfaction of note or judgment for cash or goods is NOT Sale or Exchange but ordinary income
In Reaction to Hudson Sec 1271 was passed
If a natural debtor (private individual) issues a not after 6/8/97 or if a creditor purchases a note after that date (though issued before) creditor would have an exchange – Capital Gains Treatment
Judgment is still not treated as capital asset
 
Sale or Exchange
1.       Destruction (insurance proceeds following fire) – not exchange or sale – some statutes overrule this
2.       Foreclosure – YES – is sale or exchange
3.       Condemnation – imminent domain – YES – is sale or exchange
4.       Abandonment – if no loan – NO – not sale or exchange
If there is a loan – YES – is a sale or exchange whether recourse or non recourse loan
 
LTCG
Measure of holding period begins the day after acquisition (trade)
Must be greater than (not equal) to 1 year    leap year = 366 days
When multiple purchases – absent clear identification of which assets were sold – first in first out
Acquisition or Disposition Date – trade date (not settlement date)
Gifted Capital Asset – acquisition date is date after donor's trade date (unless FMV at time of gift is less than
        Donors basis – then basis is FMV and acquisition date is day after asset was acquired by donee)
 
1223(9) beneficiary of will or executor has automatic long term capital gain on assets sold regardless of when sold
(even if less than 1 year after death)