STETSON UNIVERSITY COLLEGE OF LAW
FEDERAL INCOME TAXATION I
SPRING 2014
Professor Janice Kay McClendon
Gross Income
I. Code Section § 61
a. All income from whatever source derived
b. Including but not limited to the following
i. Compensation for services, fees, commissions, fringe benefits, and similar items
ii. Gross income derived from business
iii. Gains derived from dealings in property
iv. Interest
v. Rents
vi. Royalties
vii. Dividends
viii. Alimony
ix. Annuities
x. Income from life insurance and endowment contracts
xi. Pensions
xii. Income from discharge of indebtedness
xiii. Distributive share of partnership gross income
xiv. Income in respect of a decedent
xv. Income from an interest in an estate or trust
II. Income realized in any form
a. Does not matter if money, property, or services
b. If services are paid for in property, the FMV of the property is the measure of compensation
c. If services, the value of the services received is the amount of compensation
d. Realization requirement
e. Imputed income not taxed (owning home vs renting saves money)
III. Bargain Purchases
a. Where the price paid is less than the FMV of the item/asset
b. Two Rules
i. In an arm’s length transaction, the bargain element is not taxable (gain on sell is, basis is what you pay for it)
ii. In non-arm’s length transaction, look at the reason for the bargain element
1. If gift then not included
2. If not a gift, it is an income inclusion
c. EE-EO relationship is the warning sign here… If property is transferred as compensating for services in an amount less than its FMV the difference between the FMV and amount paid is gross income (EO give EE $500 stock in exchange for $100, $400 income inclusion for EE)
IV. Employer paying for trip
a. Arguments for exclusion (NOT INCOME
i. Requirement to go
ii. Not based on employee obtaining specific goal
iii. Predominant business component
iv. Only paying for meals, lodging, transportation and not FUN STUFF
b. Arguments for inclusion (INCOME)
i. Based on performance
ii. Looks like a bonus
iii. No real requirement to attend
iv. Pleasure component (3 day conference, only a 2 hour meeting
c. Officer’s trips usually not included in their income because they usually are required to be there
Gifts, Bequests, and Inheritances
I. What is a gift
a. In a statutory sense proceeds from a detached and disinterested generosity, out of affection, respect, admiration, charity or like impulses”
b. Most critical consideration is the transferors intent
II. Exclusions
a. Income from property received as a gift (dividends interest etc.
b. Any gift by employer to or for the benefit of employee
of the decedent’s death
b. Step-up or step-down basis (any built in gain or loss is forever disregarded)
c. Anti Abuse Rule Code Section 1014(e)
i. If appreciated property is acquired by decedent (person who dies) by gift during one year period before death, and then given back via devise to the donor, the basis in the property shall be the transferred basis of the person who dies immediately prior to death
ii. Example – Mary owns stock with a FMV of $100,000 and an AB of $25,000. One month prior to her father’s death, Mary transfers the stock to her father. Father then bequeaths the stock to Mary. Mary’s basis will be $25,000…. She does not get the stepped up basis
Effect of Obligation of Repay
I. Treatment of Loans
a. Not included in gross income
i. Must be a TRUE LOAN
ii. Cannot be a contingent repayment obligation, this is included in gross income
b. Repayment is not a deductible expense
i. Interest MAY be deductible
ii. Interest received is included in income
II. Claim of Right Doctrine
a. Money received under a claim of right without restriction as to its disposition is income
b. The contingent obligation repayment does not allow the receipt to be treated as a loan
c. If money or property is subsequently returned, TP is then entitled to a deduction, or possibly a reduction in taxes
d. Code Section 1341
