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Tax
Temple University School of Law
Knauer, Nancy J.

Knauer, Federal Income Tax, Fall 2010 Outline
I.                   Introduction to What, How and When We Tax
A.                 In General

–          Taxable income = gross income – deductions

–          §1: imposes tax on taxable income

–          Taxation is the process by which a government transfer resources from the private to the public sector

–          Why does tax exist?
o   government needs to raise revenue to pay the bills
o   don’t view tax as a penalty
o   Tax code assess an individual’s ability to pay

–          How do we determine ability to pay?
o   Proportional Tax base
§ head tax
§ divide the amount needed to raise by the number of taxpayers equally
§ today many consider this unfair

o   Wealth Tax
§ tax based on the fair market value of the assets you own
§ will fluctuate year to year

o   Consumption Tax/Vat Tax
§ Tax based on spending
§ might encourage people to not spend and save
§ criticized as being regressive (our tax system is progressive)
·         no exemption for lower income people

o   Income
§ our tax system
§ best measures ability to pay
B.                 Found Money

–          Cesarini v. United States
o   In 1957, couple bought piano for $15
o   In 1964, couple found $4,467 in the piano
o   Should this found money be included in gross income?
§ yes: money found inside piano was gross income to the taxpayers in the year they discovered the money inside the piano

o   Court cited Glenshaw Glass, as well as a revenue ruling and treasury regulation, both of which provided that a taxpayer must include the value of “treasure trove” in income in the year in which the taxpayer discovers it and reduces it to possession
§ §1.61-1 (treasury regulation)
·         §61 lists the more common items of gross income for purpose of illustration…however gross income is not limited to the items enumerated
·         gross income includes money, property, or services, meals, accommodations
§ §1.61-14: Treasure trove, to the extent of its value in United States currency, constitute gross income for the taxable year in which it is reduced to undisputed possession


–          §61(a): “Gross income means all income from whatever source derived”
o   includes a not exhaustive list (just illustrative examples) of items included in gross income
o   very expansive definition of gross income/broadly construed

–          §63(a): Taxable income means gross income less certain deductions

–          §1:          Tax is imposed on “taxable income”

–          Tax rate x Taxable income = tax due


Glenshaw Glass definition of Gross Income
o   net accession to wealth
o   clearly realized
o   complete dominion and control



–          the form of receipt does not determine taxability/affect the inclusion of compensation in gross income
o   can be property, cash, services
o   the amount of the income is the fair market value of the transferred property
C.                 Other windfalls

–          Haverly v. United States
o   Whether the value of unsolicited textbooks sent by publishers to a principle, which he subsequently donated to the school’s library, and for which he claimed a charitable deduction, constitutes gross income to the principal?
§ income? Yes
§ Glenshaw glass income? Yes
·         when receive book, there is a net accession, clearly realized, upon which you exercise dominion and control

§ However, based on revenue ruling…
·         NOT income, until taxpayer attempts to get a tax benefit (take a deduction for charitable donation)

o   Held: unsolicited samples must be included in gross income if a tax deduction is taken as a charitable donation
§ otherwise, a taxpayer does not have gross income from “free samples” because the primary benefit of the sample inures to the provider

–          What if Professor Knauer gives the book (as a gift) to a 2nd taxpayer? Does the 2nd taxpayer have gross income?
o   yes gross income
o   but would be excluded under §102 as a gift if it is detached and disinterested
II.               What is Income?
A.                 Compensation for Services
1.                  Form of Receipt

–          Old Colony Trust Co. v. Commissioner
o   Taxpayer’s employer offered to pay all income taxes of its employees
o   This constitutes additional compensation, regardless of whether or not employee wanted the company to pay for him or not
§ Example
·         pay check: $978,725
·         tax due and amount that taxpayer was relieved from paying: 681,169
o   §61(a)(12): gross income includes “income from discharge of indebtedness
o   Held: payments by a third party on behalf of the taxpayer for services performed by the taxpayer are treated as compensation paid to the taxpayer
§ the payment of the tax by the employer was in co

employees
§ Benefit includes Spouse/Children [§132(h)] ·         any use by the spouse or a dependent child of the employee shall be treated as use by the employee

o   Qualified Employee Discount [§132(c)] § Employee purchasing goods can exclude a discount up to the employer’s gross profit percentage
·         Employer sold goods for $100,000
·         Employer bought goods for $60,000
·         Gross profit percentage is 40%
o   Employer could offer its employees tax free discounts of up to 40%

§ An employee purchasing services may exclude a discount of up to 20% of the price at which the services are being offered by the employer to customers
·         Example
o   $100 jeans
o   You get 20 % off
§ $20 is part of your income, but excluded from gross income

§ Limited to goods or services sold in the line of business in which the employee is providing services

§ Non-discrimination provision applies [§132(j)] ·         Requires that the benefit be made available to a wide cross section of employees, including non-highly compensated employees
§ Benefit includes Spouse/Children [§132(h)] ·         any use by the spouse or a dependent child of the employee shall be treated as use by the employee

o   Working Condition Fringe [§132(d); §162 definition] § An item that could be deducted as a business expense if paid directly by the employee is excludable
·         §162: property or services provided to an employee of the employer to the extent that, if the employee paid for such property or services, such payment would be allowable as a deduction under §162 or §167

o   De Minimus Fringe Benefit [§132(e)] § Any property or service the value of which is so small as to make accounting for it unreasonable or administratively impracticable
·         Coffee
·         Soft drinks
·         Local phone calls
·         Occasional parties

o   Other fringe benefits Rules
§ §132(f) – Qualified Parking