FEDERAL INCOME TAX (Moore_Summer 2009)
What is Income?
§61 Gross Income defined – all income from whatever source derived
The starting point for determining for taxable income (taxable income is ultimately what need to know)
How do you receive gross income?
Payment for services (e.g. receipt of salary)
In kind transactions (e.g. I rent out my home to B who fixes my roof in exchange for rent; swap $500 of services for $500 of services)
Value = FMV of that which you received
Gains from sale of property
Other (e.g. prizes/awards, non familial employer gifts)
Old Colony Trust Co. v. Commissioner
Company agreed to pay income taxes for employees (paid the IRS directly, taxpayer never received money). Employer paying off my personal obligation = indirect income because they have reduce my legal obligations.
When is a benefit excludable and when is it added to gross income?
§119 Meals or lodging furnished for the convenience of the employer
Deals with taxpayers who are receiving meals and lodging pursuant to their employment
Tres. Reg. §1.119-1 = tells us what is excludable
Breaks up into inquiries over meals and inquires over lodging
Value of meals shall be excluded if 2 tests are met
Must be furnished on the business premises
Must be furnished for the convenience of the employer (facts and circumstances test)
Value of lodging shall be excluded in 3 tests are met
Must be furnished on the business premises
Must be furnished for the convenience of the employer
Must be required (in contract for the job)
Kowalski
Police Officers were reimbursed for their meals because they were always required to be in the car. Premises = municipality but reimbursement does not count as furnished.
What if they employer puts 2 contracts in front of you; A pays $125k and I can live where I want and B pays $100k and includes free lodging? The fact that employer is willing to negotiate eliminates the requirement prong.
Imputed Income
M grows vegetables and has harvested them while at the same time N has gone to the grocery store and paid $100 for vegetables. Not gross income (incredibly difficult to book keep).
What if M harvests his vegetables and sells them for $100? Gross income.
Gain = sale amount – basis (e.g. cost of seeds, labor, etc.)
What if M trades his vegetables to his neighbor in exchange for rides to school (FMV of rides = $100)? Gross income.
Amount realized = $100
§83 Property transferred in connection with performance of services
Business plan including 3 people
Person 1 = provides $15 in exchange for 1/3 interest
Person 2 = provides $15 in exchange for 1/3 interest
Person 3 = manages business in exchange for 1/3 interest (1/3 = $10)
Interest is subject to forfeiture (must manage business for 5 years)
Company is formed in year 1 à is the $10 gross income? So long as it is subject to forfeiture (must be written on shares), it is not gross income (no accession to wealth).
At the end of year 5 company is worth $90 (1/3 interest = $30) à is the $30 gross income? §83(a) = it is income when the chance of forfeiture passes and it is valued at that date.
§83(b) = taxpayer can elect to include 1/3 interest as gross income in year 1 (@ $10 value)
Not income in year 5 (benefits the taxpayer because the inclusion in gross income is less)
If you forfeit before year 5 you cannot reverse the inclusio
r $140k. Is the $140k gross income and how do we measure it? Court found the lease does not get any basis applied to it (son argued the basis should be based on actual value of lease so he could take a loss; IRS argues the basis should be 0). $140k = gross income.
§1014c = tells us that §1014 does not apply to property which constitutes a right to receive income in respect of decedent (money that person would have received had he lived).
Annuities
I pay $10k for an annuity which pays me $1k annually till I die (assume you die in 11 years)
Overtime I have received $11k, but only paid $10k = $1k of income
§72 tells us that each annual payment has 2 components
Partial return of investment
Partial gross income
B purchases a single life annuity with a no refund feature for $48k. B is to receive $3k per year, for life. B life expectancy is 24 years.
Year 1-24 à $1k = gross income, $2k = not gross income
§72(b) ratio = investment in the contract/the expected return (life expectancy x annual payout)
48,000/(24 x 3,000) = .66 (2/3)
§72(a) = $1k in gross income
§72(b) = $2k not gross income
§72(b)(2) = there is no exclusion for payments made after year 24
§72(b)(3) = a deduction is allowed is allowed if B dies before year 24
§101 Certain death benefits
§101 Roadmap
Is someone receiving an amount under a life insurance policy?
