Article I. Introduction to WHAT, WHEN and WHY we tax
Found Money (Cesarini, §1(a)-(c), §63(a), §61(a), Regs. §1.61-1(a) and §1.61-14(a))
· Cesarini v. US
o People bought piano in 1957, found money in it in 1964…is it taxable?
§ No such thing as non-taxable windfall
§ Taxes are NOT penalties
§ Gross income – All income from whatever source derived (§61(a))
· All-inclusive language of Code is used by Congress to exert the full measure of taxing power under the 16th Amend.
o Income from all sources is taxed unless can point to an express exemption
§ Regs. §1.61-14 – Treasure trove is income in the year when it is reduced to undisputed possession
o CASENOTES: Found money is taxable as ordinary income in the year in which the taxpayer attains uncontested possession of it
· §1(a)-(c) – Sets out tax brackets
· §63(a) – “Taxable income” – Gross income minus deductions allowed
· §61(a) – “Gross income” – Except as otherwise provided, gross income means all income from whatever source derived ((1)-(15))
· Regs. § 1.61-1(a)
· Regs § 1.61-14(a)
Other windfall (Haverly)
· Haverly v. US
o Principal donates sample textbooks to school library, tries to claim deduction
§ Books not compensation or gifts
o What is “income”?
§ Glenshaw Glass standard
· ALL accessions to wealth
· Clearly realized
· Over which the taxpayer has complete dominion
§ Form of receipt doesn’t matter
· If you get services or somebody gives you a donated item, you are taxed on the fair market value of that service/item (NOT what it cost that person to give it to you)
o HYPO: Professor Knauer’s sample textbooks
§ Prof. has all these Tax books from publishers trying to get her to use them…what are the tax consequences of those books?
· When she tries to sell them or take a tax benefit from their receipt, they are income (fully realized, with her exercising dominion/control over it)
o Until then, they are kind of unsolicited gifts (NOTE: unsure of this language), and shouldn’t be worried about
Article II. What is INCOME?
· No definition…left to the courts
o Glenshaw Glass (p.90) – All accessions to wealth…clearly realized…Over which the taxpayer has complete dominion
§ This definition stands for the proposition that “income” should be broadly construed in the absence of a specific congressional directive to the contrary.
o Haig-Simons definition – The algebraic sum of (1) the market value of rights exercised in consumption and (2) the change in the value of the store of property rights between the beginning and end of the period in question
o Eisner v. Macomber – “Income may be defined as the gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through a sale or conversion of capital assets”
§ NOTE: Abandoned as too narrow (wouldn’t include windfalls)
Compensation for services
Form of receipt (Old Colony Trust Co., Regs §1.61-2(d))
· Old Colony Trust Co. v. Commissioner
o Company was going to pay executive’s income tax as compensation for labor
o COURT: The discharge by 3rd person of an obligation to him is equivalent to receipt by the person taxed”
§ Wood’s wealth was increased by the payment…the payment was compensation for his services…the payments were not a gift
o Not all payments to employees are gross income…ask whether the payment was compensatory in nature
o This case shows the problem with fringe benefits and considerations of equity
o CASENOTES: The payment by an employer of the income taxes assessed against his employee constitute additional taxable income to the employee
· Regs. §1.61-2(d) – If services are paid for in property or other services, the FMV of those property or services taken must be included in income as compensation
o In-kind benefits transferred to an employee
o May be add’l compensation or may be essential to the performance of the employee’s job
o Many are excluded from the income tax because Congress has chosen to treat them specially (tax expenditures)
§ Tax expenditure – When Congress doesn’t tax something, it is the same as collecting
· A person receiving $15000 cash and a person receiving $10,000 cash and $5000 tax free fringe are not taxed the same despite being in the same economic position.
· Failure to tax benefits induces employers to offer them.
· It would be fairer and more efficient to exclude a portion of labor income from tax of all taxpayers regardless of the from in which it is received
· Difficulty in both theory and administration of the tax laws in distinguishing in kind compensation from goods or services related to an employee’s work.
· Congress unwillingness to accept the principle that all noncash compensation designed to reward the employee for services rendered should be subject to income tax.
§ Statutory Provisions
· Work-related fringe benefits (IRC § 132(a)-(d), (h), (j))
o §132(a) – Employee’s gross income does NOT include any fringe benefit that is a…
§ “no-additional-cost service”
· EX – Free standby flights to airline employees; getting tax/divorce/immigration advice at the law firm you work at
§ Qualified employee discount
· EX – Sale of merchandise to store employees at cost
§ Working condition fringe
· EX – Parking facilities (to a point.., security guard protection
§ De minimis benefit
· EX – Company picnics, baseball tickets – but not a box for the seas,
· NOTE: Something is only de minimis if there is a statute that provides for it
§ Qualified transportation fringe
§ Qualified moving expense reimbursement
§ Qualified retirement planning service
§ Qualified military base realignment and closure fringe
o Athletic facilities
§ On site athletic facilities excluded. Employer (§274) may deduct if provided primarily for the benefit of employees.
o Tuition Reimbursement §117(d)
§ Reduction of tuition provided to an employee of educational institution is excluded if:
· Tuition below graduate level
· Provided to current or retired employee, spouse or dependent child of either
· Certain nondiscriminatory provisions met
o Nondiscriminatory requirements
§ Cannot discriminate in favor of only highly compensated employees
§ Sporting event ticket
· If you give an employee a sporting event ticket, it is covered under de minimis…what if you give to an employee AND their spouse? Employee AND their friend?
o Under Glenshaw Glass, it was income (net accession to wealth, fully realized, dominion/control exercised)
o Form of receipt doesn’t matter…the ticket has a FMV
· Regs. §132(e) – Occasional sporting good ticket as explicit example of de minimis fringe benefit
· FILL IN MORE HERE AFTER E-MAILING HER
§ Parking (§132(f))
· What is the tax consequence when a law firm pays an employee $250/month for the parking garage at the firm?
o §132(f)(1)(C) – Qualified transportation fringe
§ POLICY: Encourage carpooling
§ MAX of $175/month (§132(f)(2)(B))
§ BUT see p. xii – $220/month (because that $175 might not be enough over time)
§ SO the employee has received $250 in benefits, and can exclude up to $220 (the rest can’t be de minimis because A) it’s cash and B) §132(f)(7) says that “working condition” fringe and de minimis fringe shall not include any qualified transportation fringe
o Business Travel (Gotcher)
· The economic benefit will be taxable to the recipient only when the payment of expenses serves no legitimate corporate purposes
· TEST (from VW/Payor’s point of view)
o Is there a legitimate/predominant corporate purpose?
o Is it connected with an inducement to buy/invest?
o Is there an incidental gain (to the payee)?
§ NOTE: Usually disregarded if corporate purpose is present
· CASENOTES: Value of any trip that is paid by the employer or by a businessman, primarily for his own benefit, should be excluded from the gross income of the recipient (BUT his wife’s should not)
§ US v. Disney – Court found it necessary for Mrs. Disney to accompany her husband b/c she assisted his performance of business duties…reimbursement of her expenses was includable in gross income, but allowed the Disneys to deduct these expenses under §162
o Meals and Lodging (Com’r v. Kowalski, §119(a), Regs. §1.61-2(d)(3)
§ Benaglia v. Com’r
· Manager of 2 Hawaiian resorts and his wife occupied a suit of rooms and took meals free of charge at the hotel “entirely for the convenience of the employer”
· Holding: Taxpayer can exclude the items because he could not perform his duties otherwise (room & food wasn’t for compensation for services or for his personal convenience/comfort/pleasure)
§ Com’r. v. Kowalski
· CASENOTES: §119 covers meals furnished by the employer and NOT cash reimbursements for meals.
o Must be on business premise of employer. Dissent argues that a trooper’s business premise is anywhere he is on duty.
· BUT in Christey, the 8th Circuit let state troopers deduct the costs of meals that they were required to eat at public restaurants near the highway while they were on duty under §162(a) as ordinary and necessary business expenses
· Excludes from income meals on the business premises of the employer served to the employee and his spouse/dependents
· NOTE: Lodging also must be a condition
ards are excludable from income.
§ Must be tangible personal property for length of service
§ Cannot exceed $400 generally
· Political Contributions
o Political contributions are not taxable to a political candidate to the extent used for expenses of a political campaign. However, any amount diverted for personal use is taxable.
· Support provided by family members, like intrafamily gifts, is not included in gross income. Also, most government benefits excluded such as welfare.
· Bequests are excluded from income under §102, and as with gifts, questions sometimes arise whether a particular transfer qualifies as an excludable bequest.
· A transfer in the form of a bequest was the method that the parties chose to compensate Mr. Wolder for his legal services and that transfer is therefore subject to taxation. Wolder v. Commissioner
· The Supreme Court stated the test was that the legatees had to perform the services in order to earn the bequests.
o If yes than income under §61 and not excludable under §102.
Scholarships, Fellowships, Prizes and Awards
· See § 74 above
· The exclusion for scholarships and fellowships under §117 is limited to amounts used by degree candidates for “qualified tuition and related expenses.”
o Qualified expenses are
§ Tuition and fees for enrollment or attendance by a student enrolled in a school
§ Fees, books, supplies, and equipment required for the course of study.
o There is no exclusion for room and board.
o Scholarship received for teaching, research or other services required as a condition for receiving the scholarship is not excludable §117(c)
· The exclusion applies only if the terms of the grant or scholarship do not earmark or designate its use for nonqualified expenses and do not specify that the funds cannot be used for tuition or course related expenses.
Capital Appreciation and Recovery of Basis
Introduction to basis
· Section 1001 describes a gain as the excess of the amount realized from the sale over the amount realized from the sale over the taxpayer’s basis for the property.
· Section 1012 provides that the basis of property is usually its cost to the taxpayer, except as otherwise provided
· 3 ways a taxpayer accounts for costs
o Immediately deductible expenses
§ The Purchase price or cost is taken into account only when the asset is sold or exchanged
§ Periodic deductions are allowed for the asset’s cost
· Often the substance of the transaction is the sale of property in exchange for cash or services. Where a bargain purchase is in substance a substitute for salary, the amount of price reduction is included in income and the purchaser is treated as acquiring the asset for fair market values.
o EX. Employee is allowed to purchase stock worth $100 for $80 the employee would be taxed on $20 and his basis would be $100.
· Section 1015 – Provides that for all gifts and transfers in trust since 1921, the basis of property for computing gain in the hands of a done shall be the same as the basis in the hands of the donor. Called carryover basis or transferred basis.
o The basis for determining loss, however, is either the donor’s basis or the fair market value at the time of the gift, whichever is lower.
o If taxpayer cannot establish the donor’s basis section 1015(a) provides that the done must attempt to attain such facts from the donor and if impossible, the basis will be the fair market value at the date the property was acquired by the donor.
· Basis of property acquired from a decedent – Section 1014 provides that the basis of property acquired from a decedent is “the fair market value of the property at the date of the decedent’s death.”
o Stepped up basis
Policy decision that death is an inappropriate time to tax accrued gain on property passing to others from dece