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Tax
Temple University School of Law
Knauer, Nancy J.

How much tax do we pay?
§ 1 tells us what percentage different people pay for tax
–          (a) married couples
–          (b) heads of households
–          (c) unmarried individuals

What do we pay taxes on?
–          income from all sources is taxed unless the taxpayer can point to an express exemption
–          from whatever source derived
–          income is to be interpreted very broadly to exert full measure of taxing power under 16A
–          §61(a) defines gross income as all income from whatever source derived and gives examples but the list is NOT exhaustive
–          §63 says that taxable income is gross income minus deductions
o       Cesarini v. US [where the taxpayer purchased a piano and found money in the piano – the found money was taxable] –          Gifts are not considered income if they stem from a detached and disinterested generosity §102
–          If you receive unsolicited samples in the mail it will constitute taxable income if you exercise complete dominion and control by taking a tax donation for donating them Haverly v. US [principal received math textbooks then donated them to charity] –          We have a marginal rate system in which the marginal rates increase when income increases
o       Your next dollar earned will be taxed at the highest level

What is income?
–          Glenshaw Glass test
o       net accession to wealth
o       clearly realized
§         fluctuating market values of assets are not “clearly realized” until the asset is sold
o       dominion and control
–          the term “income” is not defined in the Code or the Regulations
–          § 61 requires that compensation for services be included in GI
o       If property is transferred the FMV is used for income
o       If someone pays your taxes for you as part of your compensation then you have received income
o       The employer’s payment of the employee’s obligation is equivalent to the receipt of the amount of the obligation
o       The form of the receipt does not matter – if employer paid in groceries you would still have income
§         Old Colony Trust Co. v. Commissioner [where company paid the taxes for CEO after tax was introduced – CEO had to pay tax on additional income] –          Fringe Benefits
o       Definition – in-kind benefits transferred to an employee which may be additional compensation [vacation] or they may be essential to the performance of the job [chalk for teachers] o       There is an incentive to provide tax free fringe benefits
§         An employee who is taxed at 35% receives same benefit for receiving $100 or a $65 fringe benefit if it was something that he would hav spent the money on
o       §132 excludes from GI any fringe benefit which qualifies as ALL OF THESE EXCEPTIONS REQUIRE AN EMPLOYER/EMPLOYEE RELATIONSHIP. Also be careful that this does not mean it is not GI – just that it is excluded from taxable income
§         No additional cost service
·         (b) one regularly provided to the public by the employer, which the employer can provide to the employee w/o incurring significant additional cost ex/ airline lets employees fly for free
§         Qualified employee discount
·         Any discount w/ respect to qualified property or services but the discount cannot exceed
o       In the case of property – the gross profit percentage of the price at which the property is being offered to the customers
§         Ex/ university offers 25% discount to employees and the aggregate sales price was 100K and cost was 65K – thus the bookstore has a 35% gross profit and the discount does not exceed so it is ok
o       For services cannot be over 20%
§         Working condition fringe
·         This is a benefit to the employee that if he or she had paid for it personally it would have generated a business deduction as a trade or business expense under § 162 or as a depreciation under §167
§         De minimus fringe
§         Qualified transportation fringe
§         Qualified moving expense reimbursement
§         Qualified ret

is low and you expect the value to rise. However, you do not get a deduction if the vale decreases
–          Interest Free Loans – §7872
o       The forgone interest is treated as transferred from the lender to the borrower
o       Retransferred by the borrower to the lender as interest
o       If you do not charge income at or over the Annual Federal Rate the government will tax this amount
o       Tries to replicate what happens in real life with loans
§         You would receive 100K loan from bank and give them a promise to pay
·         No net accession to wealth since each side is equal
§         You would pay interest on the loan
·         The money you used to pay the interest came from taxable income and thus was already taxed
§         The interest you pay the bank is considered GI for the bank and taxed
o       What 7872 does is say that both sides received a benefit
§         You will want to argue that the lendee received a gift if family relationship
–          Imputed Income
o       The benefits derived from labor on one’s own behalf from the ownership of property
o       Usually not treated as income for tax purposes
o       Results in similarly situated taxpayers having different tax consequences
§         A and B make same amount of money and B works one extra hour and receives $10 and pays someone $10 to walk his dog while A leaves early and walks her own dog. Because B has to pay taxes on the $10 he is receiving less and paying 10 – thus worse off then A
–          Gifts and Bequests
o       To be considered a gift it must proceed from a detached and disinterested generosity