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Tax
Temple University School of Law
Ting, Jan C.

. Themes
A. 5 questions
1. What is income?
2. What is deductible?
3. Who is a taxpayer?
4. When does taxpayer have income?
5. What kind of income/deduction?
B. PURPOSES:
1. (1) raise revenue
2. (2) easy to administer
3. (3) fair
C. Calculations PUT EVERYTHING INTO ONE OF THESE CATEGORIES:
1. Gross income – §62 deductions = AggregateGrossIncome
2. AGI – personal exemptions – either standard or itemized deduction = taxable income
3. Taxable income x tax rate = tentative tax
4. tentative tax – tax credits = tax due/refund

·Income·
II. Chap 2. What is Income? Pgs 46-58, 60-66, citations pgs 47 & 64.  Problems pgs 63 & 66.
D. DEF: gross income defined as all income “from whatever source derived” §61a
1. “accession to wealth, clearly realized and over which the taxpayer has complete dominion” Glenshaw Glass
a. TEST: “the fact remains that Π was wealthier after the transaction than before” Charley
2. broad: §61 is intended to encompass “the full measure of its taxing power” Glenshaw Glass
3. List: (non-exclusive)
a. compensation
b. gross income from business
c. gains from property
d. investment income
i. imputed interest
ii. annuities
e. alimony 
f. discharge of debts
g. prizes (See §74)
h. illegal gain
i. embezzlers must include the proceeds of their embezzlements in their gross income unless they can show the embezzlement was like a loan
E. Traditional exceptions (not in statute)
1. imputed service: your own services, using your own property ¹ income
a. value of services performed for yourself, or your family ¹ income
b. value of the use of your own personal property ¹ income
2. capital recovery ¹ income
a. when you sell property, you only have to pay taxes on the profit (ie: you can get your original return—basis—back without paying taxes on that)
b. PS: timing of recovery is legislative determination
3. loans ¹ income
a. creation and repayment of loans ¹ income
b. BUT interest to the loaner = income
c. AND forgiveness or discharge from loans may be income
F. Receipt of cash and property = income
1. Found income = income (because its not a §101 exception)
a. income = when found in piano Cesarini p.47
b. found = when “reduced to undisputed possession” (based on Ohio’s state statute)
c. not capital gains why???
2. Compensation for services = income §61a (form of payment makes no difference)
a. Agreement to pay someone else’s taxes = income Old Colony Trust p.52
i. Employee’s contracted compensation package, which includes agreement for Employer to pay taxes of Employee = discharge of an obligation = income
3. Actual and punitive damages = income Glenshaw Glass p.54
a. actual damages that compensate for damages actually incurred = taxable
b. THUS, punitive damages = taxable
4. Illegal gain = income James p.61 (even though may later have legal obligation to make restitution)
a. Frequent flier miles converted into cash = income Charley p.58
i. either conversion of property into cash = income (sale of property, capital gain?)
ii. OR Employer’s compensation = income
5. Prizes = income §74
a. EXCEPT if award transferred to charity
i. IF: (1) winner selected without applying (2) no future service (3) transferred to charity
b. Some Employee achievement awards ¹ income
III. Chap. 3:  Are Gifts Income?  Pgs 67-88 and citations pgs 67, 78, & 80.  Problems pgs 80 & 88.
EXCEPTIONS; Things that are Not Income:
A. Gifts ¹ income §102
1. interpret narrowly
2. Christmas is not taxable
3. DEF: gift = voluntary payment IF motive is “detached and disinterested generosity” or “affection, admiration, charity or like impulses” Duberstein pg 69, p.67 lists factors
a. motive = what the “basic reason for his conduct was in fact—the dominant reason that explains his action in making the transfer”
i. factors: whether done reported as business expense; did donor get benefit;
ii. strike benefits = compensation because union’s motive is not charitable
1. BUT jury found strike benefits for non-union member = gift
b. fact-based, so must trust fact-trier
4. Inheritance = gift
a. legal settlement of inheritance dispute = gift Lyeth p.80 (taxpayer was due money because he was the heir-in-fact)
b. employment compensation = income, even if tucked into will Wolder p.85 (bequest is taxable because “dominant motive” is payment for services)
i. But compensation to executors may be excepted and count as a bequest/gift
5. Scholarships ¹ income §117
a. DEF: ¹ income if (1) student and (2) money used for “tuition and related expenses” (ie: books, supplies, fees at institution)
b. NOT workstudy
c. tuition reductions (similar to scholarships) ¹ income
6. BUT employee gifts = income to Ee §102c; §274b1
a. Employer can deduct gifts of less than $25 as gift §274b1 AND anything more than $25 as compensation §162a1
IV. Chap. 4:  Are Employee Benefits Income?  Pgs 89-103 and citations on pgs 89 & 99.  Problems on pgs 98-99 & 103.  Chap. 5:  Omit, but read Code sections 74 & 117.
A. Employee benefits
1. no additional cost service ¹ income (§132a1) §132b
a. Employer incurs no substantial additional cost and such service is offered for sale to customers
b. ALSO:
i. Employee’s family, retirees and widows can still get benefits §132h2 (only for §132a1-2)
ii. can apply to highly paid employees, so long as everyone else gets too §132j
2. employee discount ¹ income (qualified—must meet requirements) (§132a2) §132c
a. (1) same line of business as Employee
b. (2) services or property?
i. services = 20% discount
ii. property = same percentage as business’s overall profit margin
c. ALSO:
i. Employee’s family, retirees and widows can still get benefits §132h2 (only for §132a1-2)
ii. can apply to highly paid employees, so long as everyone else gets too §132j
3. working condition ¹ income
a. DEF: if benefit is a valid business expense under §162/§167
4. de minimis ¹ income §132e
a. DEF: any property or service whose value is so small as to make required accounting for it unreasonable or impracticable
b. LOOK FOR: frequency that Employers give this to Employees
5. transportation ¹ income §132f
a. commuting between home-work up to $100/mo
b. parking up to $175/mo
6. moving expenses ¹ income
a. if deductible under §217
7. retirement planning ¹ income
8. meals and lodging provided by Employer ¹ income IF
a.  (1) “for convenience of the Employer”
b. (2) food = on business premises
c. (3) lodging =
i. (a) required to accept as condition of Et OR
ii. (b) continued presence at business is required Herbert Hatt p.99 (funeral home mgr; rent-free = tax-exempt)
d. Very fact-based
i. compared other business Hatt (most funeral homes require mgr live on premises)
ii. usually must be on premises (But see Anderson p.102 (motel across the st = tax exempt)
9. Medical insurance payments by Employers ¹ income §106a
a. POLICY: encourages Employers to pay health care
B. Life Insurance Benefits ¹ income §101
1. death benefits ¹ income §101a
a. but the interest must be taxed (so anything more than what was paid into the program)
b. exempt for other beneficiaries of death benefits after death §101d
2. accelerated death payments (before death for terminally ill) ¹ income §101g
3. Annuities = income for the portion that exceeds the initial investment §72
a. The percentage received received over the investment = income §72b1
b. but if the annuity ends before recovering full investment, that nonrecovered portion is deducted for the decedant’s last taxable year §72b3a (or for a deduction to the person to whom the payments go to)
V.  Chap. 6:  Gains & Losses.  Pgs 114-131, citations pgs 114, 115, 119, 126 & 129.  Don’t agonize over Philadelphia Park case.  See problems 1(a), (d), (f), (g) on pg 118, problem 1 on pg 125, and problems on pgs 128, 130.
A. Basis
1. DEF: “cost of such property” or “fair market value” or …figure it out.
a. Look at the value of the property when received Phila Park p.115
i. *Remember doesn’t matter if get the property at a discount; basis is still the value of it when received.
b. If can’t tell property when received, judge by value of property/services/cash transferred (sold for it) Phila Park
c. mortgage does not effect basis Crane p.134
2. Adjustments to basis can be made for expenditures, receipts, losses §1016
a. BUT not for income earned §1019 or of improvements made by lessee on taxpayer’s property §109
3. property by gift §1015, pg 119
a. If gain, basis = donor’s basis. If loss, basis = FMV at time of gift. (no loss is recognized).
b. Taft v. Bowers, pg 119
c. stocks given in consideration of marriage (signing pre-nup) ¹ gift Farid-Es-Sultaneh p.121 (law has since changed, but at the time she wanted the stocks to be a sale so she wouldn’t have to pay tax on it)
4. property from divorce §1041d, pg 126
a. basis always stays the same—its as if the same person owns it
b. no gain or loss is recognized
5. property from decedent §1014, pg 128
a. basis = fair market value on date of death (stepped

re, interest in corp, pro sports franchise; etc
7. Sept 11 exception §168k
a. subtract 30% of unadjusted basis before depreciation calculation above
b. POLICY: intended to stimulate sagging economy post 9-11
8. §179 Bonus depreciation
a. Permits bonus depreciation up to amount listed in chart §179b1
b. Only applies to §1245 property—with limit when total property put in service in one year exceeds $200k.
c. POLICY: to encourage investment
9. Luxury cars depreciate slower §280F
a. but note loophole for giant, overweight RollsRoyce, which isn’t a passenger vehicle and thus is excluded §280F5ii
10. Realty credits
a. Historic structure rehab = 20% credit (before depreciation calculation as above) §47a2
b. Rehab of building built before 1936 = 10% credit §47c1
c. Low-income housing = For construction costs of used property placed in service after 1987 and conventionally financed, credit of 7% per year is allowed for each of 10yrs (70% total). If financed through tax exempt bond, then 3% per year for 10yrs (30% total). Another 3% of aggregate acquisition costs are allowed as a credit over 10yrs for acquiring qualified used property. In qualified census tracts, the 70% and 30% may be increased to 91% and 39%. Note, the basis is not depreciated, merely credited before depreciation. §42
VIII. Chap. 9:  Damages.  Pgs 180-191 & citations pg 183.  Problems – pgs 182-183 & 190-191.  Chap. 10:  Divorce.  Pgs 192-205 & citations pgs 192 & 202.  Problems on pgs 200-202 and problem 1, pg 204.

Damages §104
A. Court damages = income, if more than value lost Raytheon p.180.
B. TEST: What was the settlement paid for?
1. lost capital damages ¹ income
a. ie: burnt house replaced at Æ basis ¹ gain, merely compensatory
2. damages for lost profit = income
3. punitive damages = income
4. if compromise settlement, then looked to claimed damages in complaint
5. EXCEPT damages for phys injuries (or emotional if w/physical injuries) §104a
a. punitive damages along with phys injury still = income (unless wrongful death and sole recovery §104a2)
C. Payments “on account of physicial injury” ¹ income
1. medical expenses for phys injury ¹ income if paid by: 
a. workers comp §104a1
b. court damages §104a2 (even if thru annuity)
c. medical insurance §104a3
d. military pension §104a4
e. disability due to terrorist attack §104a5
2. includes emotional injuries if w/physical injuries §104a (or solo psychiatric expenses)
3. punitive damages = income
4. Restrictions on Employer-medical plans (not workers’ comp)
a. payments up to actual amount paid for medical care ¹ income §105b
i. but = income if exceeds amount of medical care actually paid §105b
b. payments not exempt if they were previously paid by another insurance provider §104a3 (prevent doubling up)
c. permanent disfigurement payments ¹ income so long as not related to work days lost §105c
d. Employer’s payments to accident/medical plans ¹ compensation (¹income) §106
i. POLICY: encourages Employers to provide health care (w/o this, medical care would be counted as compensation)
5. POLICY: suffered enough
6. HYPO: annuity paid out as injury settlement ¹ taxable §104a2 (affirmed in Revenue Ruling 79-313 p.189)

Separation and Divorce §71/§215, pg 192
A. Alimony:
1. Alimony = income to payee §71
2. Alimony = deduction to payor §215.
a. POLICY: divorced/separated people may allocate taxability between them
b. PS: tax liability can be litigated to vary from §71/§215
3. DEF: Alimony IS: §71b1
a. (1) in cash
b. (2) by spouse under divorce/separation agreement
(3) not litigated as no