Tax/McGovern Fall 1999
A. Sources of Income Tax Law
1. Legislative Branch
a. writes internal revenue code (IRC)
b. legislative history- committee reports will show what congress was trying to do
2. Executive Branch (treasury dept)
a. IRS is a bureau of the treasury dept.
b. treasury regulations- interpret the IRC, inferior to code
c. revenue rulings address a specific set of facts and issue a conclusion, they are intended to be relied upon
d. revenue procedures
e. private letter rulings are issued only to a specific TP and only they can rely on it
a. Tax ct.- you don’t have to pay first to seek relief here, considered to have a higher expertise, no min. amnt., bench trials only
b. U.S. Dist. ct.- must pay first, hears other cases, you can have a jury trial
c. U.S. Claims ct.-must pay first, hears other cases, bench trials only.
d. you should look at precedent in all of the cts before you choose one
B. The Big Picture
1. What tax rate applies?
2. What is the taxable income? § 63, GI minus itemized deductions= taxable income
II. Gross income
A. Provisions in the Code
1. §61- Gross Income (GI) defined
2. 31- Credit shall be allowed for taxes withheld
3. 85- Unemployment Compensation is GI
4. 86- Social Security is GI
B. Treasury Regulations
1. 1.61-1- GI is all income, from whatever source, unless excluded by law. GI includes income realized in any form- money, property or services. GI is not limited to the items enumerated.
2. 1.61-2(a)(1)- wages, salary, commission paid, tips and bonuses, severance pay, jury fees are all included in GI.
3. 1.61-2(i)- except as otherwise provided, property transferred to employee or independent contractor, as compensation for services, is gross income.
4. 1.61-8(a)- rents and royalties are included in GI
5. 1.61-9(a)- dividends are included in GI.
6. 1.61-14(a)- miscellaneous items- punitive damages, treble damages, another person’s payment of a TP’s taxes, illegal gains, treasure trove.
C. Cases & Definitions
1. Glenshaw Glass- are punitive damages included in GI? based on Eisner, no. But, Eisner was not intended to limit the definition of GI. GI is defined as accessions to wealth, clearly realized, and over which the TP has complete dominion.
3. Old Colony- (Co. was paying taxes for employees) The discharge by a 3rd person of an obligation to repay is GI to the obligor.
3. Access to Wealth- wealth is not taxed until it is realized
4. Imputed Income- not taxed, but no specific exclusion, it is unrealized potential value of a piece of property.
5. Eisner v. McComber- stock dividends were distributed in the form of more stock, the Supreme Ct held that this was not taxable income because it had not been realized. Income is gain derived from capital, labor, selling a capital asset.
6. Marginal- the highest rate that applies to a particular income
7. Duberstein- leading case on gifts, must have disinterested generosity.
8. Cessarini- treasure trove is included in GI in the year it becomes reduced to your possession.
9. RR 91-36- reduction in price not included in GI, the fact that it is in the form of a rebate or credit is irrelevant.
10. McCann- the cost of spouse’s trip was GI to the employee.
11. Pellar- No taxable income results from the purchase of property assuming that the transaction is at arm’s length. In this case, the builder has a business relationship with the buyer and sold it over cost but substantially less than FMV. No taxable income resulted because there is nothing to indicate that the sale was compensatory.
12. RR 79-24- in a barter exchange, the GI is the FMV of the services.
III. Obligation to Repay
A. Code Provisions
1. §61(a)(1)- GI defined, if compensation is a service, add te value of the service.
2. 1341(a)(1)- Claim of Right- if an item was included as gross income for a prior taxable year because it appeared that the TP had an unrestricted right to such item,
3. 1341(a)(2)- a deduction shall be allowed if it was est. that the TP did not have such a right,
4. 1341(a)(3)- and the amount of the deduction exceeds $3000
B. Treasury Regulations
1. 1.61-8(b)- Advance rental payments, cancellation payments- are included in GI the year that they are received.
2. 1.61-8(c)- Expenditures by lessee are additional rental income to the lessor, if expenditures constitute in whole or part, a substitute for rent.
5. 1.61-9- Dividends
6. 1.61-10- Alimony and annuity payments constitute GI unless excluded by law.
8. 1.61-12- Income from dis
ity associated with debt.
3. Recourse debt, Tufts- included in TP’s cost
4. Crane- Non-recourse is treated the same as recourse debt.
5. Philadelphia Park- the cost basis of property received in a taxable exchange is the FMV of the property received (in arm’s length transactions).
V. Gifts, Bequests and Inheritances
A. Code Provisions
1. 102- As a general rule, GI does not include the value of property acquired by gift, bequest, devise or inheritance.
2. 274(b)(1)- No deduction shall be allowed under 162 or 212 for any expense for gifts made directly or indirectly to any individual to the extent that such expense, when added to prior expenses of the TP for gifts made to such individual exceeds $25.
3. 1014(a)- The basis of property acquired from decedant is the FMV of the property at the date of the decedant’s death.
4. 1014(b)(1)- Property acquired from decedant- property passed by bequest, devise or inheritance,
(6)- Property which represents the surviving spouse’s 1/2 share of community property held by the decedant and the surviving spouse under the community property laws.
6. 1014(e)- Appreciated property acquired by the decedant by gift within 1 year of death, and acquired from decedant by donor (or spouse of donor), the basis shall be the AB of the property in the hands of the decedant, immediately before death.
7. 1015(a)(1)- Basis of property acquired by gifts and transfers in trust shall be the same as it would be in the hands of the donor or the last proceeding owner by whom it was not acquired by gift, except if such basis is greater than FMV of the property at the time of the gift, them for the purpose of determining loss the basis shall be FMV.
8. 1015(d)(1)(A)- Increased basis for gift tax paid- the basis shall be increased (but not above the FMV at the time of the gift) by the amou