Federal Taxation
Introduction, Ch. 1
· Taxable income (tax base) is computed by subtracting personal exemptions & a standard deduction, effectively specifying a base not subject to any tax at all.
· Undistributed income of trusts & estates taxed at same marginal rate as individual income but with narrow brackets for lower rates.
· IRS has authority to investigate & examine taxpayers & their books of account & other sources of information to determine if taxes have been properly paid. If return not filed the Secretary can make one on behalf of a taxpayer.
· Government can assess & collect deficiencies without going to courts but aggrieved taxpayers can go to court to contest government’s determinations. Can sue for refund after paying of the tax or go to Tax Court for redetermination of deficiency prior to assessment.
· Tax Court jurisdiction is confined to tax cases & consists primarily of hearing taxpayers’ petitions for redetermination of deficiencies preliminarily determined by the IRS.
· Most generally applicable statute of limitation in determination of tax liability is 3 years for claims filed for refunds by taxpayers. Deficiencies must be assessed by government within 3 years after a return is filed. No statute of limitations against assessment if no return is filed or if deficiency is attributable to taxpayer’s fraud or willful attempt to evade tax. If omission from gross income of more than 25% the government has 6 years instead of 3 to determine a deficiency.
Income
Income in Kind, Ch. 2
Most income is received in the form of cash (including checks) but the direct provision in kind of items that would otherwise be purchased may be a substitute for money income. More fundamentally real income is real goods & services consumed or accumulated rights to such goods & services whether they are purchased with money income or received in kind.
Old Colony Trust Co. v. Commissioner, pg. 35
An ER paying income taxes for an EE still constitutes income to the EE, especially where that benefit is only offered to select EEs or executives.
· American Woolen Co. adopted resolutions whereby they would pay income taxes for company officers & some staff out of corporation treasury.
· Court’s Analysis: payment of tax by ER was in consideration of services rendered by EE & was a gain derived by EE from his labor. Was also part of compensation he received per resolutions the company passed.
o Form of payment makes no difference; immaterial that the taxes were directly paid to the government.
o Discharge by a 3rd person of an obligation to him is equivalent to receipt by the person taxed
· Tax wasn’t a gift: even though payment for services was voluntary it was nevertheless compensation for services within the statute.
· If this EE got away with paying less tax on income by using a deduction method than everyone else would be paying higher taxes. A fundamental fairness problem. Need to have a fair base used consistently for all taxpayers.
Arthur Benaglia, pg. 39
If meals & lodging are for the benefit of the ER then it might not be taxable to EE.
· Benaglia works for hotel, compensation includes a suite of rooms for him & his wife as well as meals, was on call 24 hours a day.
· Court’s Analysis: residence wasn’t compensation for services, not for personal convenience to him, were solely because he couldn’t otherwise perform the services required of him.
o EE’s duties were continuous, required him to be on call.
o EE wouldn’t consider this type of job & ER wouldn’t consider hiring someone without having the EE live there.
· Value of meals & lodging isn’t income to EE even though it may relieve him of an expense he’d otherwise bear.
o But if Commissioner finds they were received as compensation & holds it to be taxable income it will be taxpayer’s burden to prove they were not.
o Here the evidence proves meals & lodging were for convenience of ER.
· Why does case come out this way? Where would Benaglia have said he would have lived & eaten? Relatively easy to measure benefit to ER (cost of room & food) but difficult to measure the benefit to the EE. Easier answer to not include in income at all.
Reginald Turner, pg. 43
If not retail, some sort of value should be included in taxpayer income for prize winnings.
· Husband & wife filed won cruise, name was picked randomly out of phone book. Husband negotiated with cruise company to surrender 1st class tickets & got 4 lower-class tickets. They reported income of $520 (income from award of tickets). Commissioner increased it to $2,200 – representing retail price of 2 tickets, 1st class.
· Court Analysis: winning tickets didn’t provide them with something they needed in ordinary course of their lives & for which they would have made an expenditure, was just a luxury.
o Value to them wasn’t equal to retail cost.
o They weren’t transferable, couldn’t sell them, other restrictions on their use.
· Could have refused the tickets & avoided the tax problem but they chose to take a free cruise with their sons, enjoyed the pleasure of the trip.
o Seems proper that a substantial amount should be included in their income on account of winning the tickets.
· Court cited precedent for valuation, nobody disagreed there shouldn’t be an amount to include in income, question was how much.
· Court went to midpoint between numbers given by Service & Turner.
· Taxpayer had no resale market, if so that would have been used to determine taxable value.
Haverly v. United States, pg. 46
When tax deduction taken for free items received & subsequently donated their value must be included in income.
· Haverly received unsolicited textbooks from publishers, market value was $400, he donated the books to school library & they agreed it was a charitable donation of $400. Taxpayer didn’t report $400 in income but took the deduction.
· Court’s analysis: §61(a) encompasses all accessions to wealth, clearly realized & over which the taxpayers have complete dominion.
o Receipt of textbooks is clearly an accession to wealth, taxpayer recognized their value when he donated them & took the charitable deduction.
o Possession of books increased taxpayer’s wealth
o Although receipt of unsolicited items may raise issue of whether taxpayer manifested intent to accept or exercise complete dominion over them there’s no question this was satisfied when taxpayer took the charitable deduction.
· Act of claiming a charitable deduction evinces intent to accept property as one’s own. Retention of books doesn’t make them includable income, nor does donating them without claiming a charitable deduction for them.
· Question of when does it become income? Here it’s when you try to use it as a deduction without including it in income.
Statutory Exclusions: Me
exclude value of meals or lodging furnished by ER for convenience of ER.
o TEST for EEs not being taxed on amounts charged for meals:
§ 1. Meals furnished by ER
§ 2. Charge for meals that has to be paid irrespective of what EE eats
§ 3. Meals are furnished for convenience of ER
§ 4. Charge equals value of the meals
· While ER didn’t purchase & supervise preparation of meals & didn’t withhold the charges for the meals from their pay, they facilitated preparation of meals & required EE’s to participate in mess/meals as condition of employment.
· Commissioner relies on Kowalski but court says it’s distinguishable: firefighters had to eat their meals on the premises & were required to pay for them whether they ate them or not.
· Meals in question were furnished in kind by ER on the business property by a device conceived & established by ER for its convenience. Thus, taxpayers should be able to exclude what they paid for the meals from gross income under §119.
Certain Other Fringe Benefits: §132
· Excluded fringe benefits are those benefits that qualify under 1 of the following categories:
i. No-additional-cost service
ii. Qualified EE discount
iii. A working condition fringe
iv. A de minimis fringe
v. A qualified tuition reduction
· Exclusion applies with respect to benefits provided to officers, owners, or highly compensated EEs only if the benefit is made available to EEs on a basis which doesn’t discriminate in favor of officers, owners or highly compensated EEs.
· Any fringe benefit that doesn’t qualify for exclusion & isn’t excluded under another statutory fringe benefit provision of the Code is taxable to the recipient under §§61 & 83 and is includable in wages for employment tax purposes, at the excess of its fair market value over any amount paid by EE for the benefit.
· §117 (d): qualified tuition reduction
· Driving or commuting to work isn’t deductible, ER providing payment for those services is excludable from gross income though.
Imputed Income:
· Income that results from the investment of capital or performance of services for one’s own personal or family use. No effort made to tax imputed income generally, omission represents such a settled interpretation that to tax it now would require legislative effort.
Owner-Occupied Housing
Omission of imputed rental income is only a matter of excluding the net return on the investment, not the whole gross value of housing services received. Our tax law further favors homeowners by allowing deductions for mortgage interest and real estate/property taxes.
Other Consumer Durables
Also refers to other items such as automobiles, appliances, yachts, jewelry, paintings, etc.
Household Services
