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Federal Income Tax
South Texas College of Law Houston
Musselman, James L.

Federal Income Tax Spring 2014 Musselman

Overview

With any disposition of property, apply these general steps:

1. Apply § 1001 – AR – AB = RG or RL

2. If disposition of property results in RG, is it excludible from GI? Apply § 121

3. Does the RG or RL have to be recognized? Apply § 1041 or other applicable non-recognition section; all RG or RL must be recognized under § 1001(c) unless the Code provides otherwise

4. If disposition of property results in RL, is it deductible? Apply § 165

5. Characterize the RG or RL as either ordinary or capital

a. If the RG or RL is ordinary, simply include it in income or deduct it in the same way as other income or loss

b. If the RG or RL is capital, determine whether it is LT or ST

6. Aggregate the capital gains and losses and net them (see Ch. 21)

Ch. 2 – Definition of Gross Income, § 61

Gross income – focuses on what you receive

Deductions – focuses on expenditures

Gross income — deductions = taxable income X rates

Gross income (Glenshaw Glass, p. 48)

1. Accession to wealth (ATW)

a. Increase to a TP’s wealth; receipt of financial benefit

2. Clearly realized

a. Realization principle – ATW is not realized in two instances:

i. When property fluctuates in value while held

ii. When you purchase something at arm’s length for cash or debt

1. Presumption is that cost = FMV, so no ATW

3. Dominion and control

a. Ownership and timing

i. When title vests depends on state law (Cesarini v. United States, p. 40)

Cesarini v. United States (N. Dist. Ohio 1969, p. 40)

– When federal law is silent, court must look to state law (i.e., when title vests)

– Gross income includes treasure troves (finding stuff)

Old Colony Trust Co. v. Commissioner (U.S. 1929, p. 44)

– Discharge by a third person of an obligation to him is equivalent to receipt by the person taxed

o The substance of the transaction is the same

Property acquired by incurring personally-liable debt

– When property is acquired by incurring debt for which TP is personally liable in an arm’s length transaction, TP is deemed to have paid FMV for the property

Income Without Receipt of Cash or Property

Imputed income – things you do for yourself that aren’t taxed

– Not taxed because would be impossible to calculate

Helvering v. Independent Life Ins. Co. (U.S. 1934, p. 55)

– Rental value of building owned and occupied by TP does not constitute income within the meaning of the Sixteenth Amendment

Rev. Rul. 79-24 (1979, p. 55)

– Barter transaction – exchange of services or property (as opposed to money) are includible in GI

o If the value of one is undetermined but the value of the other is determined, the value of the undetermined will be presumed equal to the value of the determined

Dean v. Commissioner (U.S. Ct. of App. Third Cir. 1951, p. 56)

– Follows Chandler v. Commissioner – if sole shareholder uses corporate assets for personal use, he must include the FMV of it in GI

Ch. 3 – Gifts & Inheritances

§ 102(a) – GI does not include the value of property acquired by gift, bequest, devise or inheritance

Gifts

– Donee takes AB of donor

Inheritance

– Beneficiary’s AB = FMV at date of death

L

d employee discounts

– Working condition fringe

– De minimis fringes

– Qualified transportation fringe

– Qualified moving expense reimbursement

– Athletic facilities

*see corresponding Code supplement for more detailed information on each fringe benefit

Limitations

– Employee must include in GI the amount by which the FMV of the fringe benefit exceeds the sum of:

o The amount the employer paid for the benefit PLUS

o The amount specifically excluded from GI by some other Code section

Nondiscrimination

– Nondiscrimination rules for fringe benefits apply only:

o To no-additional-cost services and qualified employee discounts; and

o With respect to highly compensated employees

– Requires:

o That the benefit be available on substantially the same terms for all employees

§ If groups, look to each group and see if each gets the benefit on the same terms

o If groups, benefit must not discriminate in favor of highly compensated employees

§ Question: does one group have a substantially larger number of highly compensated employees than the other?

– If employer is violating the nondiscrimination fringe benefit rules:

o If you are a highly compensated employee, you can’t take the exclusion

o If you are a non-highly compensated employee, you can still take the exclusion