Todres
Tax
Spring 2011
I. Gross Income § 61
1. “All Income From Whatever Source Derived”
– Income from whatever source
– Source does not have to be cash – look at value of property or services received
– TP must point to a specific exclusion
2. Reg. 1.61-1(a)
– Income realized in any form, whether in money, property, or servicses.
3. Judicial Definition:
– In Glenshaw Glass the Supreme Court defined “gross income” as an “undeniable accession to wealth, clearly realized, and over which the taxpayer has complete dominion.”
o ONE: An ACCESSION TO WEALTH
§ An accession to wealth is an increase in the taxpayer’s ASSETS; the GAINS from a sale in excess of investment.
o TWO: That is CLEARLY REALIZED
§ RECEIPT of cash or property in a SALE or EXCHANGE marks a point of clear realization of wealth.
§ Unrealized Appreciation
· Investments (house, stock) which have gone up in value in the hands of the taxpayer, BUT have NOT yet been sold or exchanged have NOT been clearly realized and therefore do NOT yet constitute gross income.
· Ex: A taxpayer purchases stock for $700 and holds it for a year. At the end of the year the stock is worth $1,000.
o If the taxpayer does NOT sell or exchange the stock the $300 increase in the value of the stock is UNREALIZED APPRECIATION and therefore is NOT included within gross income.
o BUT, if the taxpayer exchanges the stock for a painting worth $1,000, the exchange is a realization event and the $300 gain must be included within gross income.
· The requirement of clear realization is NOT constitutionally necessary; rather it is a rule of judicial convenience.
o THREE: Which the taxpayer has COMPLETE DOMINION over
o FOUR: There is NO consensual obligation on the taxpayer to REPAY the money
§ A LOAN is NOT included within gross income because the taxpayer’s “net worth” has NOT increased; there is NO accession to wealth because when a taxpayer receives a loan the taxpayer’s assets go up by the amount of the loan, BUT his liabilities also go up by the amount of the loan.
o FIVE: Which is NOT a return of an investment
§ The RECOUPMENT of the taxpayer’s initial investment in the property is NOT gross income.
§ The taxpayer’s basis is subtracted from the amount received to calculate the gain on the transaction.
o SIX: Which is NOT specifically EXCLUDED by the Code from the concept of Gross Income
§ Ex: Gifts are EXCLUDED from gross income by the Code § 102.
4. Cesarini – Found money is taxable as ordinary income in the year in which the taxpayer attains uncontested possession of it. (Treasure Trove)
b. In many cases, the tax on treasure cove must be delayed for many years due to court battles over the ultimate possession
c. It is not necessary treasure be reduced to cash, Appraisal value can be deemed taxable
1. Old Colony Trust – the payment by an employer of the income taxes assessed against his employee constitutes additional taxable income by the employee – (not unrealized appreciations because it is as if he never owned the property before.)
2. Glenshaw Glass –The general definition of gross income includes all amounts recovered as the result of a lawsuit that represents an increase in wealth to the recipient and not merely compensation for non contractual losses
– ANALYSIS
o Personal injury lawsuit recoveries are not subject to tax on the theory that they are roughly analogous to a return of capital and do not represent an increase in wealth to the recipient, but rather a compensation or restoration of a loss.
o Contractual damage recoveries are taxable since they represent reimbursement for amounts that would have been taxable had they been receives as provided for by the contract
3. Charley v. Commissioner – travel credits accumulated and retained by an employee in the course of his employment constitutive gross income subject to taxation.
– In order for the asset to be realized, it must be sufficiently definite and identifiable.
4.
FMV is value willing B&S not under compulsion and knowledgeable of all facts
Main Exception:
a. compensation primarily for the benefit of employer
Gotcher -look to dominant intent from standpoint of payer
However To get deduction for spouse
1. spouse must be employee of TP
2. bona fide business trip
3. expense would have been deductible
if paid directly by tp or s
).
2. Duberstein Test for Gift – intent of donor should not be for compensation, expected economic return, but for what most would consider a gift no legal or moral duty – a detached disinterested generosity our of respect admiration, charity or like impulses
– Look at donor’s subjective intent through objective eyes
o Not a gift if made for anticipated future benefit, or made in return for services rendered
3. EXCEPTIONS FOR GIFTS
– 102 (b) – income from property or gift of income from property
– 102(c) – (a) Does not apply to Employer for benefit of employees
o Possible Exceptions
§ Retirees
§ Coworkers
§ Ministers
§ Widow
o Note: under §274(b)(1) – employer may deduct up to $25 per employee per year for gifts
§ If business payer transfers gift that is excluded from GI through § 102, payer can deduct transfer as business expense, but only up to 25
§ But if not a gift payer can take full deductions under § 162
§ 1.102-1(f) – ok if employee can show that the transfer was not made in recognition of the employee’s employment
o §132(e) De Minimus Fringe under $25 and can not be cash
4. Duberstein Business Gifts Analysis
– By rejecting the Government’s test that gifts should be limited to personal, non-business transactions, the Court leaves open the possibility that some gifts might be made even if part of an employer-employee relationship. However, any gifts that are made by a business can only be deducted up to 25$, as provided in 274(b). Thus, should a business seek to deduct more than that, it must show that the payment was made for valid business reasons, and is thus deductible under § 162. Of course, a showing that dominant motive for payment was business would necessarily tend to negate a showing of a gift by the recipient of such payment.
