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Federal Income Tax
St. Johns University School of Law
Crimm, Nina J.

Introduction:
 
I. Policy of the Income Tax:
–   1- Raise revenue
–   post 1980s, the goal has been to reduce tax rates, but to increase the tax base- ie the amount of taxable income subject to income taxes
–   Progressive Tax: increasing marginal tax rate as taxpayer’s income increases and passes certain amounts
–   See statute p. ix
–   2 – Further Social Policy
–   encourage certain types of socially beneficial behavior
–   Example: Deduction for charitable donations
–   3- Further Economic Policy
–   encourage/stimulate economic activity
–   Example 1: Deductions for business expenses
–   Example 2: recent change to depreciation- section 168(k) 50% bonus
 
II. Course Overview:
Realized Gross Income
– exclusions(income realized but ommitted)
= Reportable Gross Income
     – Deductions FOR AGI“above the line deductions” “dollar for dollar”
            = Adjusted Gross Income
             – Deductions FOR AGI (Itemized or Standard) “below the line deductions”
               = Taxable Income
 
Miscellaneous Notes:
– Tax Credits: taxable income= tenatative tax liability, apply dollar for dollar reduction in TAX LIABILITY
– Alternative Minimum Tax: policy:
– Effect:
– Formula:
 
 
 
 
 
 
TIming Principles and Accounting Methods
A. Cash Method Tax Payer. Section 446(c):
–   Definition: Cash Method: general method of accounting that generally reports income when cash is collected and reports expenses when cash payments are made
–   1- Rule: Actual Receipt Receipt of Income reportable in year received
–   a- Cash, checks, secured notes are reportable when received
–   b- Unsecured notes are not reportable when received:
–   Example: Employer throws Christmas party and gives employee a bonus check but it is upstairs. Employee told to get it, but does not and does not actually get it until January 2nd of the following year. The check is reportable as income for year 1
–   Deferred Compensation Examples:
–   1- Employer promises to pay 80,000 salary plus bonus of 90,000 per year for services rendered that year, for each year employee works until terminated. The 90,000 bonus is not gross income until it is received by taxpayer e’ee
–   2- Employer promises to pay 80,000 salary plus bonus of 90,000– consisting of annuity with NPV 1,000,000 that makes 90,000 payments per year–money given to employee when he is terminated. Employee has gross income of 1 million in year 1
–   c- Things subject to substantial restrictions are not reportable at the time, but until actually received, or substantial restriction is removed (such that it can then be constructively received)
–   Substantial Restriction: post dated checks, receipt of a check knowing there is insufficient funds by the payor
–   d- Actual receipt includes things that has value that can be realizable in some way at the time.
–   Example: Check given on 12/31 after banks have closed. Because it can be assignable for value in year 1, the receipt of that check is realized gross income for year 1
–   2- Rule: Constructive Receipt: requires that income though not reduced to “actual possession” be available to the Tp, and if it is, reportable as gross income in the year of constructive receipt
–   Example: Case: Hornung v. Commissioner: Corvette awarded to Super Bowl MVP winner on 12/31. Player does not actually receive it until January, the following year. Car not available to him at the time of the game (year 1). Key factor- no title such that the Tp could say it was “his” or that he had some sort of possession of it. Other factors- did not receive the keys, no dealers open to get the car from (could not have gone to get it, even if he wanted to).
–   3- Installment Land Sale Contracts: Section 453 (available to both cash and accrual Tps)
–   Default 453(c): where 453(b) installment sale applies, the default rule is that the receipt of gross income by the taxpayer can be included as gross income over the life of the contract
–   Exception: Election out: Tp may elect out and choose to realize all of the total contract price as gross income immediately
–   Installment sale 453(b): where disposition of property where at least 1 payment is to be received after the close of the taxable year in which the disposition occurs
–   Purpose: Relief of Liquidity Constraints: congress recognizes liquidity constraints of people who sell property but do not get paid immediately and therefore cannot afford the entire tax up front
–   Example: T enters into 10 year contract to sell land for 100. T will receive 10 over 10 years and 453(c) default will recognize that income as 10 over 10 years, unless elect out to report 100 in year 1.
–   4- Avoiding Receipt of Income and Assignment
–   1- Case: Lucas v. Earl: Rule: Husband may not assign income to wife to avoid tax liability
–   2- Case: Commissioner v. Giannini: Rule: Control/Benefit
–   Tp employee wants nothing to do with bonus and tells company that he does not want it and relinquishes all rights to it. The company, without his direction, uses the funds to create a foundation in his name. Although the money is for services past rendered, because he relinquishes all control of the funds, he never receives the use or benefit of it and he never dominates control over the money
–   3- Case: Helvering v. Horst: Gross income to holder of income generating assets: receipt of coupon payments off bonds and then assigned is still taxable income to the bond holder even though he is assigning the payments. Taxable income acc
–   1- Assigning- Lucas v. Earle no
–   2- Assigning- Giannini- relinquishing all rights to and possession o
–   5- Deductions
–   General Rule: for timing, deductions to cash method tax payer are deductible when paid
B. Accrual Method Taxpayers
–   Definition: an attempt to match the income derived in a traceable year with the expenditures that are generating income for that year; the method accelerates reporting and results in more money for the treasury
–   Rule for Receipt of Income:  Income recognized when:
–   1- Right to receive the income is secured
–   2- The amount can be determined with reasonable accuracy
–   Prepayment Accrual Rule: where there is prepayment receipt for an accrual method Tp, Tp reports the income when received
–   Example: Landlord and Tenant enter into contract for 2 year lease at 25,000 per year. T prepays entire 50,000 upfront in year 1.
–   1- Rule: Landlord reports all 50,000 in year 1, or
–   2- Exception: Escrow Account: Landlord may keep escrow account to keep 25,000 separate and report 25,000 as income each year
–   Prepayment for Deductions: Section 461: Deductions are taken pro rata for the allocable year when prepaid upfront (and not fully deductible in year 1)
–   Case: Boylston Market Association: prepayment of insurance premiums are allocable over the life of the asset and not fully immediately deductible, when the life of the asset is greater than 1 year
 
What is Gross Income?
–   A. Realized Gross Income s 61, 1001(a), (b), 1011(a), 1012, 1016(a)(1),(2), 109, 1019, Regs 1.61-1,-2(a)(1); -2(d)(1); -14(a)
–   Section 61: Broad- inclu

frequent flyer miles from your own account is not taxable income because a certain portion of the ticket price is imputed to basis, and therefore basis in miles equals the AR of the miles
–   Note: Technically basis of miles and AR do not match, but the IRS realizes they cannot keep track of all the differences. It is only the case when- the fair market value of the miles is less than the cost of the imputed amount in the ticket (does not really matter)
–   Flyer Miles Rules:
–   1- Using own miles= not taxable
–   2- Using someone else’s miles= taxable (Charley)
–   3- Selling Miles= Gross income, when FMV miles > cost imputed to the ticket of the miles, then AB will be less than AR and a taxable gain (hard to administer though)
–   5- Revenue Ruling 79-24: Where 2 parties exchange services, the FMV of services received by exchanging party is includable in gross income
–   SEE LANDLORD TENANT EXAMPLES
–   Calculating value of services rendered:
–   Where 2 or more parties exchange services for one another, the services are presumed equal so only need to calculate the value of one of the items/services
–   Cost Basis in Services Rendered
–   Example: Tp Dentist needs his taxes done and one of his clients, a CPA, needs a dental checkup. If they swap dental checkup for taxes, then they both have realized gross income in the amount of value received, and basis in what they paid for what was given
–   Exception: 1031 like kind exchanges for certain types of property exchanges
–   6- Helvering v. Ind. Life. Ins. Co.: Imputed income is not treated as realized gross income, therefore not reportable (no realization event for performing services for yourself) (one party transactions)
–   Imputed Income: value one gives oneself through own services
–   Example: I clean my car
–   Example: Tenant refinishes the floor of his apartment where not asked to or contracted for by landlord (see above)
–   Policy:
–   1- Disincentivizing: if taxed, you wouldn’t do these things
–   2- Administration: hard to keep track of everything you do for yourself and your family
–   3- Incentivize people to save and spend on other things
–   7- Dean v. Commissioner: Structure affects taxable income
–   Facts: H and W are sole SH of company. They are living in real estate owned by the corporation. Held– Tp have gross income in the amount of the FMV of the occupancy.
-Not imputed income-disguised compensation. Distinguish Ind. Life:
–   1- 2 party transaction: Corporation and SH (indy was 1 party)
–   2- Foregone Rent= Compensation
-Tax Outcome:
–   To SH: Taxable benefit of 5,000 received
–   To Corp: Receipt of Income= 5,000 + 5,000 deduction for ordinary and necessary business expenses for compensation, effect is 0 taxes
–   8- Miscellaneous Considerations:
–   Rule: Employees have no basis in their labor (1.61-2(d)(2))