Taxation – Professor Jan Ting – Spring 2011
A. What is Income?
a. Introduction to Income – IRS Code § 61
i. Income is all income from whatever source derived
ii. Regulations of § 61 give examples and reinforce expansive definition
1. §1.61 – 1: ALL income unless excluded by law
2. §1.61 – 2: Wages, salaries, tips etc
3. §1.61 – 2(d)(1): non-cash income is counted at fair market value or stipulated price
4. §1.61 – 14(a): Miscellaneous items including punitive damages, illegal gains or treasure trove are all income
b. Equivocal Receipt of Financial Benefit
i. Cesarini v US – Piano bought by family later found to contain $4,500 cash, paid taxes on it then sued to recover – 2 issues
1. Is treasure trove income? § 1.61 -14 on point, CT: yes, income
2. When is the income counted? P: income when piano purchased and statute of limitations has run. Ct: property must be reduced to undisputed possession before it is counted (otherwise could resell w/o ever finding and have income)
ii. Old Colony Trust Co. v Commissioner – company paid the income tax of its CEO by contract, IRS rules that as further income since given by employer as compensation.
1. USSC agrees: since given in consideration of services and relieves a burden from taxpayer
iii. Commissioner v Glenshaw Glass Co. – are punitive damages income?
1. CT: compensatory damages are not income but punitive damages are
2. Income: “An undeniable ascension to wealth, clearly realized and over which the taxpayer has complete dominion”
iv. What about embezzled funds?
1. Loans are not income but embezzled funds are (James v US) this is a reversal of Wilcox.
a. Owe the embezzled money back AND it is income!
c. Income without receipt of cash or property
i. Helvering v Independent Life Insurance Co. – Rental income is not income if the family is living on the premises – owner occupied
ii. Dean v Commissioner – Rental income is income when the house is owned by a corporation
1. This recurring benefit makes homeownership a type of tax haven
iii. Revenue Ruling 70-24 – Bartering: Must pay tax on fair market value of services received. Form of payment makes no difference.
B. Gifts and Inheritances
a. Rules of Inclusion and Exclusion – IRS Code § 102(a) & (b)
i. Gifts and Inheritances are NOT income
i. Income tax meaning of gift
1. Commissioner v Duberstein – two cases merged; (1) car given to associate who referred customer w/no prior agreement (2) end of employment bonus of pastor because “well liked”
a. CT: must be a fact based inquiry into the reality of the transaction, donor intent not necessarily dispositive, is there an anticipated benefit? Moral or legal duty?
i. Duberstein (1) = income
ii. Stanton (2) = gift
ii. Employee Gifts – IRS Code §§ 102(c); 274(b)
1. Almost any amount from employer is income
a. §61 is broad and 102 exceptions are very narrow
2. Familial relationship rule proposed §1.102-1(f)(2): exempts related parties from §102(c)
c. Bequests, Devises and Inheritances – IRS Code §102(a), (b) and (c)
i. Lyeth v Hoey – contested will was altered to give more $$ to devisees
1. Is this additional money income? NO; whole inheritance, even altered settlement is not income
ii. Wolder v Commissioner – Legal services contracted for in exchange for bequest at death
1. CT: this is income just as Duberstein since it was made in consideration for services rendered
C. Employee Benefits
a. Exclusions for Fringe Benefits – IRS Code § 132
i. Fringe benefits may be excluded under § 132 under certain circumstances – some fringes may qualify under more than one section
1. No additional cost service [§132(b)] – offered to customers in ordinary course of company’s business and incurs no substantial cost to employer or forgo revenue
2. Employee Discounts [§132(c)] – held to percentage of profit on sales of entire biz, not just profit margin on item in question
3. Working Condition Fringe [§13
Carryover basis: last person NOT to acquire property by gift is the basis used
a. Except if such basis is greater than the FMV and then basis is FMV
2. Taft v Bowers – Donees of stock from parent to child, appreciated btwn then and sale. IRS taxed on basis from parent not just appreciation post gift.
a. CT: Donee assumes the position of the donor
3. Farid-Es-Sultaneh v Commissioner – stock given pre marriage “in case he died before the marriage”, after marriage she signed away all marriage rights in exchange for that already received stock plus new. When she sold them what was the basis?
a. CT: she was a purchaser since it was in exchange for renouncing marital rights etc. get basis at time of exchange not gift carryover basis.
iii. Property Acquired btwn Spouses or Incident to Divorce – IRS Code §1041
1. Transfers between spouse or incident to divore means no gain or loss is realized
a. Treated as a gift and basis of transferee is the AB of the transferor – treat couples as one unit
b. Incident to divorce – 1 year after divorce or related to the cessation of marriage
iv. Property Acquired from a Decedent – IRS Code § 1014(a), (b)(1)&(6), (e)
1. Basis is FMV at time of death of decedent
2. §1022 was put in to make up for lapse in Estate Tax for 2010 – gave carryover basis for 2010 to prop acquired from decedent
3. Congress worried about death bed transfers & bequeaths §1014(e)
c. The Amount Realized – IRS Code §1001(b)
i. International Freighting Corp v Commissioner – Corporation paid bonus to employee in stock which had appreciated – Basis = $16K; Value at Transfer = $24K