Tax, Professor Monroe, Fall 2013
· I. Introduction—What is Income?
o Haig Simons—Income is changes in wealth + Consumption
§ The income tax taxes on what you could spend, rather than what you do spend, thereby including all wealth at least once.
§ Consumption, in this formula, only includes personal consumption. It taxes on money that is out-the-door, story over.
· But investment/business consumption should not be taxed, because the story is not over. So Haig-Simons would allow for business/investment deductions. Which effectively means you’re not being taxed on that potential consumption
o The real system allows for some deductions on personal stuff as well.
o § 61—Gross Income: …All Income from whatever source derived…
§ 61(a) provides a non-exhaustive list of examples
o The Real Income Tax—Instead of taxing changes in wealth and consumption, we do it with deductions, for administrability purposes.
§ Deductions have two characteristics:
· Real money out the door (rather than capitalized)
· And business and investment
o Important Policies of the Tax System
§ Horizontal Equity
· Treat similarly situation taxpayers the same
§ Vertical Equity
· Differently situated taxpayers ought to be taxed differently
· II. What is Gross Income
o Income & Realization; Cash Receipts; Cash and Non-Cash Windfalls
§ Eisner v. Macomber—Lady got dividends in the form of stock. The court says that her holdings have just been split up. There is no realization.
· Court says that “derived from” is the key phrase for realization. In order to be income, the fruit has to be plucked from the tree.
· Income is gains derived from labor, gains derived from capital, or gains derived from labor and capital combined.
· A cash dividend would have been a separation from the capital. Here there was a change in form without a change in substance.
§ Glenshaw Glass—a couple cases about unreported punitive damages. Court says that income is not definitionally limited by Macomber, which was just about stock dividends.
· Income is accessions to wealth, clearly realized, over which the taxpayer has complete dominion.
§ Cesarini v. United States—a couple finds some old-ass money in a piano. They sold it and made some money in this case. But the holding is broad enough to encompass even if they had not sold the old money. This seems to be a realization. This money is income. The domain of 61(a) is vast.
· Court holds that the tax came due “when it was reduced to undisputed possession;” so when it was found in 1964, not when the piano was bought in the fifties, per 1.61-14—The Treasure Trove Regulation
· This is the only time treasure trove has been applied to something other than cash. But it is the rule. Except, through press release, the IRS has assured that it won’t apply to home-run balls.
§ —On the other hand, if you bought a piano from a salvation army, and it turned out to belong to Bach, there is no realization. This is more akin to capital gains; no realization —
o Basic Property Transactions (sales or dispositions of property
§ CODE MECHANICS:
· § 1001(a)—
o Gain = Amount Realized (-) Adjusted Basis (if AR > A/B) (“excess of the amount realized over the adjusted basis provided in section 1011 for determining gain”)
o Loss= Adjusted Basis (-) Amount Realized (if AR < A/B) (“excess of the adjusted basis provided in such section for determining loss over the amount realized.”)
· § 1001(b)—
o Amount Realized= sum of any money received (+) FMV of property received
· § 1001(c)—
o Recognized Gain= entire amount of gain or loss, unless otherwise provided.
· § 1011(a)—
o Adjusted Basis= Basis
· § 1012(a)—
o Basis= Cost (unless otherwise provided)
§ Inaja Land Co. v. Commissioner—Inaja buys a lot of land for a fishing club for 61k. City comes in and starts doing a massive water project that diverts water through their property causing damage. They negotiate a settlement with the city for 49k for all kinds of stuff including easements.
· Government’s argument: damages are in lieu of lost profit, meaning it’s all taxable, because the profits would all be taxable.
· Taxpayer’s argument: payment is for damage for property, as well as the easement through the property. So it’s essentially a property transaction.
· Court goes with taxpayer’s argument, treat it as a partial sale of the land. Court doesn’t bother to divvy up the basis by what part is being sold, so their choice is 0 or 61k. They go with 61k.
o So the amount realized is 49k. This 49k goes to the 61k of the basis (as if they’re buying 49k of land with 49k, so there’s no gain; thus no taxable income)
§ So the adjusted basis in the land is reduced to 12k
o The Modern Realization Requirement
§ Cottage Savings Assn. v. Commissioner— S&L lending mortgages for low rates. Interest rates start to rise, and Cottage Savings finds itself caught in the Savings and Loan crisis. They want to sell the low-rate mortg
ry or sickness.
o BUT any real medical costs attributable to the emotional distress is excludable
· Basis on property received as 104(a)(2) damages is the FMV at time of payment of damages.
§ Amos v. Commissioner— Dennis Rodman kicks a camera-man. They settle out of court. Some of it is for crotch-damage. Some is to get the guy to shut up in the press. Cameraman treats it all as a 104(a)(2) exclusion.
· Court says no— you have to allocate, must look at the reasons underlying the damage award, the intent of the payor and allocate accordingly.
o Normally the lawyers do this, but they didn’t so the judge does it.
o The lesson is: Allocate
o Non-Cash Compensation
§ Basic Rule—
· Barter transaction is a realization event. Receipt of property for goods/services= income.
§ Rooney v. Commissioner— accounting firm. Collecting on client debts by accepting goods and services. Marking down the value because they believe it to be overpriced. Court says subjective valuation of fair market value is no good.
· Fair market value is sticker price.
o For the sake of administrability.
o Employee Fringe Benefits
§ § 132—
· (a)—Excludes the following fringe benefits from gross income:
o (1) No-additional-cost service
· Line of business requirement. [132(b)(1)]
· No substantial additional cost incurred to employer, including foregone revenue. [132(b)(2)]
§ 132(b)—service provided by an employer to an employee if it’s offered for sale to customers in the:
· ordinary course of the line of business in which the employee is working [(b)(1)]; and
· The employer incurs no substantial additional cost (including foregone revenue) in providing the service to the employee. [(b)(2)]
§ 132(h)—Expanded definition of employee—
· Ex-employees who left due to retirement/disability. [(1)(A)]
· Widow(er) of an individual who died while employed. [(1)(B)]