I. What is Income?
a. IRS Code § 61
i. Income= “An undeniable ascension to wealth, clearly realized and over which the taxpayer has complete dominion”
ii. Gross Income means all income from whatever source derived, unless excluded by law. Gross income includes income realized in any form, whether in money, property, or services. Income may be realized, therefore, in the form of services, meals, accommodations, stock, or other property, as well as in cash. Including but not limited to:
1. Compensation for services, including fees, commissions, fringe benefits, and similar items;
2. Gross income derived from business;
3. Gains derived from dealings in property;
8. Alimony and separate maintenance payments;
10. Income from life insurance and endowment contracts;
12. Income from discharge of indebtedness;
13. Distributive share of partnership gross income;
14. Income in respect of a decedent; and
15. Income from an interest in an estate or trust.
iii. §1.61 – 2(d)(1): non-cash income is counted at fair market value or stipulated price
iv. §1.61 – 14(a): Miscellaneous items including punitive damages, illegal gains or treasure trove are all income
i. Casarini v. United States (1970): Cesarini’s bought a used piano in 1957 and in 1964, found $4,467 in it. Not a gift. All income is taxed unless expressly exempt!
1. Rev. Ruling 61: Treasure trove constitutes gross income for the taxable year in which it is reduced to undisputed possession = year of discovery (otherwise could resell w/o ever finding and have income).
ii. Old Colony Trust Co v. Commissioner (1929): company paid the income tax of its CEO by contract, IRS rules that as further income since given by employer as compensation. Anything you receive in exchange for your services is compensation. Doesn’t matter what form the payment is in.
i. Commissioner v. Glenshaw Glass Co. (1955): compensatory damages are not income but punitive damages are. Income= “An undeniable ascension to wealth, clearly realized and over which the taxpayer has complete dominion”
c. Illegal gain
i. James v. U.S.: illegal gain (money embezzled, stolen, etc) is income.
i. If a car company gives away $5,000 when you buy a new car? NOT income – not an accession to wealth because you paid over $5,000 for the car. You’re not better off…more like a discount. That’s the market value/price today…
e. Frequent flyer miles & other award programs
i. Charley v. Commissioner (1996): Employee had frequent flier miles. He booked economy class tickets, converted up to first-class ticket w/ff miles, then billed his employer for a first class ticket. He was essentially converting the frequent flier miles to cash. = income
ii. What if the employee used frequent flier miles for his personal vacation (w/employer’s permission)? No ruling on this….too many people do it, the service has declined to rule.
f. Income without receipt of cash or property
i. Dean v. Commissioner (1951): Husband & wife transferred ownership of their house to their corporation, but continued to reside in it. The fair rental value of the property = income. Encourages home/property ownership
ii. Rev. Ruling 79-24: if services are paid for other than in money, the fair market value of the property or services taken in payment must be included in income.
iii. We don’t tax the value of owning a home. Why not? There is a benefit derived from owning, from not having to pay rent… Who does this benefit? People who own a lot of property…rich people.
II. Gifts and Inheritances
a. Section 102: Gross income does not include the value of property acquired by gift, bequest, devises & inheritance.
b. What is a gift?
i. Commissioner v. Duberstein (1960): Berman gave him a Cadillac in thanks for recommending a client. Berman’s company (Mohawk) deducted the Cadillac as a business expense; Duberstein did not list it as income because it was a gift. Income (ultimately compensation for past services or inducement for future service).
ii. Stanton v. U.S.: Stanton worked for Trinity Church, resigned, received $20K as a “gratuity” for his services, and Trinity was released from obligations to pay out further pension and retirement benefits (which it did not owe – this was in the contractual language out of an abundance of precaution). Gift
iii. A fact based inquiry into the reality of the transaction, donor intent not necessarily dispositive, is there an anticipated benefit? Moral or legal duty?
1. A gift proceeds from a “detached and disinterested generosity…out of affection, respect, admiration, charity or like impulses”. “What controls is the intention with which payment, however voluntary, has been made.” Does the donor get/expect to get any benefit or service as a result???
2. It is not a gift if it proceeds primarily from the constraining force of any moral or legal duty OR from the incentive of anticipated benefit of an economic nature. Where the payment is in return for services rendered, it is irrelevant that the donor derives no economic benefit from it
c. Employee Gifts – IRS Code §§ 102(c); 274(b)
i. Section 102(c): An employee shall not exclude from gross income any amount transferred by or for an employer to, or for the benefit of, an employee.
1. Exception for “extraordinary transfers to the natural objects of an employer’s bounty…if the employee can show that the transfer was not made in recognition of the employee’s employment”
2. Familial relationship rule proposed §1.102-1(f)(2): exempts related parties from §102(c)
d. Bequests, Devises & Inheritences – IRS Code §102(a), (b) and (c)
1. Lyeth v. Hoey (1938): P received $$ in inheritance, but originally contested the will and the money he received was the result of a settlement agreement with other heirs. He is an heir. He acquired the property because he was an heir – wouldn’t have had standing to contest the will & enter the settlement if he weren’t.
2. Wolder v. Commissioner (1974): Legal services contracted for in exchange for bequest at death. Will was merely a postponement of payment for those services. Court must look at the intent of the parties – reason for the donor’s conduct.
III. Employee Benefits
a. Exclusions for Fringe Benefits – IRS Code § 132. Fringe benefits may be excluded under § 132 under certain circumstances – some fringes may qualify under more than one section
i. No-Additional Cost Services [§132(b)] – services provided in the same line of business as that in which the employee is employed (if employer incurs no substantial additional cost in providing the service). *Non-discrimination rule
ii. Qualified Employee Discounts [§132(c)] – “courtesy discounts” on items purchased from his employer for use by the employee, subject to no-additional-cost services exclusion. *Nondiscrimination and same-line-of business limitations apply.
iii. Working Condition Fringe [§132(d)] – any property or services provided to an employee, the cost of which, if the employee had paid for the property or services, would have been deductible by the employee as a business expense or by way of depreciation deductions. (i.e. use of company car)
iv. De Minimis Fringes[§132(e)] – any property or service whose value is so small as to make required accounting for it unreasonable or administratively impracticable.
v. Qualified Transportation Fringe [§132(f)] – value of benefits provided to an employee by an employer in the form of transportation in a “commuter highway vehicle” between an employee’s residence and place of employment; a transit pass, token, fare card, voucher, or similar item for mass transit facilities or for a commercial transportation service; qualified parking; and reimbursement of employees who commute by bicycle.
vi. Qualified Moving Expense Reimbursement [§132(g)] vii. Athletic Facilities – Employees may exclude from gross income the value of the use of any on-premesis athletic facility.
viii. Relatives and Dependents treated as Em
o the estate tax, the appreciation itself entirely escapes the income tax.
2. Gives property that appreciates during decedent’s ownership a “stepped-up” basis with no income tax cost to anyoneè results without deductible loss if property declines in value during decedent’s ownership. There’s no appreciation tax, but depreciation is not tax deductible
3. Surviving spouse also gets 1014 tax basis.
c. Amount Realized (IRS Code §1001(b)) – The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received.
i. International Freighting Corporation Inc v. Commissioner: Taxpayer is paying bonus to employees in stock. Cost of stock at date of delivery was $16K, fair market value was $25K. $25K is the compensation employer paid employees (taxable/deductible amount)
1. Gain = Amount Realized – Adjusted basis. Basis is $16K. Amount realized is market value of the services. Philadelphia Park! Amount Realized = fair market value received. Services = fair market value of the stock = $25K. Gain = $25K-$16K = $9K
ii. Crane v. Commissioner (1947): Mrs. Crane inherited a building and a lot on which the building was located. Building and lot worth $262K, subject to $262K debt (coincidence that debt was equal to value). Sold the building for $3,000 cash and incurred $500 in expenses. $255K principal on debt was lifted. Depreciation of $28,000.
1. Amount realized = $2,500 ($3,000-500) + $255K = $257,500.
2. Adjusted basis is not 0 (262-262). It’s the fair market value of the property = $262K. She took $28,000 in depreciation. Therefore, Adjusted basis = $262K-$28K = $234K
3. Gain = $257,500 (amount realized) – $234K (Adjusted basis) = $23,500
iii. Commissioner v Tufts – taxpayer built apartment complex, borrowed $1.8mil and paid $44K cash, recession drops value to $1.4 mil, sells to buyer for $500 + debt assumed. Taxpayer argues they never would have paid the debt. Since taxpayer got money there was value in it and therefore Amount Realized includes debt even if not intending to pay it
iv. Deidrich v Commissioner – Taxpayer made a gift so long as donee pays debt; basis 1K, Value 10K, Donee pays 3K debt. This was an exchange not a gift – 10K property in exchange for $3K debt assumption. Amount Realized = $3,000 debt paid – $1,000 basis = $2,000.
VI. Insurance and Annuities
a. Life Insurance proceeds – IRS Code § 101(a) (c) (d) and (g)
i. When insurance company pays beneficiaries upon death of insured, proceeds are excluded from the gross income of the recipient (“suffered enough”) – must be paid by reason of death of the insured.
ii. § 101(a)(2): Transfer for valuable consideration- if policy is cashed out before death, then excess paid out (gain) beyond premium payments paid in (basis) are taxable.
iii. § 101(g): Accelerated Death benefits received from a life insurance policy on the life of a “terminally ill” or “chronically ill” insured person are not income – paid “by reason of the death of the insured”.
1. Terminally ill – having an illness or physical condition that can reasonably be expected to result in death within 24 months
2. Limited to costs of qualified long-term care or to payments of $175/day, both reduced by any reimbursements from medical insurance proceeds.
3. § 101(d): Payouts other than lump sum – amounts are prorated and excluded up to original lump sum payout
4. § 101(c): Interest payments received on premium is income