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

Case Name                                                                                                                                 Federal Income Tax
Court Ruling                                                                                                                                    Professor Siegel
Important Info                                                                                                                                       Spring 2016
 
Gross Income:
Definition (Generally)
IRC: §61(a)
Except as otherwise providence in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:
(1) Compensation for services, including fees, commissions, fringe benefits, and similar items; (normal compensation for labor)
(2) Gross income derived from business;
(3) Gains derived from dealings in property;
(4) Interests;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Alimony and separate maintenance payments;
(9) Annuities;
(10) Income from life insurance and endowment contracts;
(11) Pensions;
(12) Income from discharge of indebtedness;
(13) Distributive share of partnership gross income;
(14) Income in respect of a decedent; and
(15) Income from an interest in an estate or trust.
Reg. 1.61-1:
All income from whatever source derived, unless excluded by law. Includes income realized in any form, whether in money, property or services. It may be realized in form of services, meals, accommodations, stock, or other property, as well as in cash.
Case Law:
:
Treasure Trove = Gross Income
Money found in a piano that was purchased years before
Congress definition of GI broad all – inclusive; and no statutory exclusion
Statutory scheme:
Old Colony:
Taxes paid on individual’s behalf as part of compensation = Gross income
Glenshaw Glass:
Supreme Court defines GI:
“Undeniable accession to wealth, clearly realized, and over which the tax payer has complete dominions”
Thus, exemplary damages meet criteria as “undeniable accession to wealth; Gains or profits and income derived from any source whatsoever.”
The “realization principle”
Fluctuations in value are not taken into consideration until profit is clearly realized by a “realizable event” like selling the property. Other realizable events include: anything that causes you to no longer on the property. Otherwise you’d have to account of fluctuations in value every year in your taxes.
Economist Def. Gross Income:
Hague Simons:
Gross Income = Net Worth ((FMV of assets – liabilities) + consumption during that period).
Your worth more because of appreciation went up and your assets are worth more.
Under this theory, gross income is broader
Exclusions from Gross Income:
Gifts, Bequests, Devises, and Inheritances:
IRC § 102(a)
Gross Income does not include the value of property acquired by a gift, bequest, devise or inheritance. (rule of exclusion)
Example:
Receipt of stock from mother
Inherit house
Devise of condo
Devise of personal property
Case Law:
Commissioner v. Duberstein:
Given a car from his employer = Gross Income, intended by payer as a recompense for past services or an inducement for future services
Statutory Gift definition by the Supreme Court:
“.”
Lyeth v. Hoey:
Settlement pursuant to heir-ship, dispute ruled to be still pursuant to bequest, and thus excludible under §102(a).
Wolder v. Commissioner:
Although bequeathed money, the intent was mere compensation for services, and therefore fell outside of §102(a)…this is includible in gross income
Exceptions to §102(a)
IRC §102(b)
Income. – Subsection (a) shall not exclude from gross income –
(1) the income from any property referred to in subsection (a); or
(2) where the gift, bequest, devise, or inheritance is of income from property, the amount of such income.
Examples: §102(b)(1)
Examples: §102(b)(2)
Receipt of dividends from gift of stock
Money from property sold
Receipt of rent from devised property
Money from sale of real estate
IRC §102(c):
In General. – Subsection (a) shall not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, an employee.
Exceptions:
Reg. 1.102(2)
 Reg. 1.102(a) & (f)
Employee achievement
Retirement/Anniversary Gifts (de minimis fringe benefits)
§102(c) will not apply to amounts transferred between related parties (father/son) if reason for transfer can substantially be attributed to the familial relationship and NOT to their employment
§102 Does not apply to:
Prizes and awards (§74)
De minimis fringe benefits (§132)
Reg. 1.61-2(d)(2)(i):
If property is transferred by an employer to an employee or an IC, as compensation for services, for an amount less than its FMV, the regardless of whether the transfer is in the form of a sale or exchange, the difference between the amount paid for the property and the amount of its FMV a that the time of the transfer is compensation and shall be included in the gross income of the employee or IC. In computing the gain or loss from the subsequent sale of such property, its basis shall be the amount paid for the property increased by the amount of such difference included in gross income.
Example:
Duberstein’s car:
If paid 30K for a 40K car, his GI is 10K.
If he subsequently sells the car for 45K (his AB would be considered 40K with only a 5k GR and Rec.)
Certain Fringe Benefits
IRC §132(a):
Exclusion from gross income. – Gross income shall not include any fringe benefit which qualifies as a –
(1) No-additional-cost service
(2) Qualified employee discount,
(3) Working condition fringe,
(4) De minimis fringe,
(5) Qualified transportation fringe,
(6) Qualified moving expense reimbursement,
(7) Qualified retirement planning services
IRC §132 Definitions:
IRC §132(b): No-additional-cost services
NACS means any service provided by an employer to an employer for use by such employee if –
(1) Such service is offered for sale to customers in the ordinary course of the line of business of the employer in which the employee is performing se

sum of any money received + FMV of the property (other than money) received
IRC §1001(c): Recognition of Gain/Loss
Except as otherwise provided in this subtitle, the entire amount of the gain or loss, determined under this section, on sale or exchange shall be recognized. §165
IRC §165(c): Limitations on Losses:
In the case of an individual, the deductions under subsection (a) are limited to –
(1) Losses incurred in a trade or business
(2) Losses incurred in any transaction entered into for profit, though not connected with a trade of business
(3) Except as provided in subsection (h), losses of property not connected with a business or a trade or a transaction entered into for profit, if such losses arise form fire, storm, shipwreck, theft or other casualty.
Adjusted Basis for Determining Gain or Loss
Adjusted Basis Calculation:
Philadelphia Park:
Cost basis under §1012 for exchange of property is property received.
If you can’t determine this, you look at FMV of property given if dealt at arm’s length.
Code:
IRC §1011(a): Adjusted Basis for Determine gain or loss
AB for gain/loss form sale or other disposition of property is the basis as determined by §1012 & adjusted per §1016.
See Philadelphia Park
IRC §1012(a): Basis of Property – Cost – General
The basis of the property is the cost of the property
IRC §1016(a): Adjustments to basis:
General Rule. – Proper adjustment in respect of the property shall in all cases be made –
(1) For expenditures, receipts, losses, or other items properly chargeable to capital account
IRC §1019: Not applicable if made by lessee & chargeable under §109
IRC §1016(a)(2): Exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent of the amount –
Allowed as deductions in computing TI
No less that the amount allowable under this section (greater amount allowed & allowable)
This is where the ACRS allowed/ACRA allowable comes into play
Adjusted Basis for property acquired by gifts/transfers of trusts
IRC §1015: acquired by gifts
(a) the basis for property acquired by gift is same as it would be in the hands of the donor, except that if the AB (adjusted by 1016) is greater than the FMV of the property at the time of the gift, then loss shall be determined by the FMV.
Two Prong Exception Rule to §1015(a)
Donee receives by gift if –
Prong ONE: FMV is less than AB at time of gift
Prong TWO: if done sells for a loss, then Donee’s AB is the FM