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Federal Income Tax
Thomas Jefferson School of Law
Winchester, Richard

PROF. WINCHESTER – FEDERAL INCOME TAX – FALL 2011 – FINAL OUTLINE

I.       Scope of Gross Income
A)    GENERAL RULE- Section 61(a): IF income is derived from any source THEN it is gross income UNLESS there is an exception in the subtitle.
1)      Form doesn’t matter
(a)    RULE- FMV of services or goods received counts as income (Treas. Reg. 1.61-1A)
(b)   if the goods or services are rendered at a stipulated price then that price is presumed to be the FMV in absence of evidence to the contrary
(c)    another example is the use of  property
(d)   When two unrelated parties are dealing at arms length the court presumes that they are transferring goods or services that are equal in value
2)      Source doesn’t matter—(e.g. punitive damages)
3)      RULE Income- (1) an undeniable accession to wealth (2) clearly realized (3) over which the taxpayer has complete dominion (Commissioner v. Glenshaw Glass Co.)
(a)    Accession to Wealth
(1)   NOTE- in a Barter situation FMV is the value (Treas. Reg. 1.61-2d1)
(2)   RULE- Loans- are not considered an accession to wealth because there is a reciprocal promise to repay (Glenshaw Glass)
(3)   RULE- Treasure trove is gross income for the taxable year in which it is reduced to undisputed possession (Cesarini v. United States)
(4)   RULE- Illegal gain is still income despite a legal obligation to make restitution
(5)   RULE- The rental value of a building used by the owner does not constitute income within the meaning of the Sixth Amendment (Helvering v. Independent Life Ins.) HOWEVER,
(i)     The rental value of a building used by the owner of a corporation that owns the building IS income (Revenue Ruling 79-24)
(b)   Clearly Realized= unlock or convert the value into cash or other property (e.g. piano that is worth more than the buyer thought when he first bought it)
(1)   converting property
(2)   naked receipt of something that is valuable
B)    Exception to Gross Income: Gifts, Bequests, Devise, or Inheritance
1)      RULE- IF property is acquired by gift, bequest, devise, or inheritance THEN it is not included as gross income (IRC § 102(a))
(a)    Definitions
(1)   Gift- see below
(2)   Bequest- personal property transferred by will
(3)   Devise- real property transferred by will
(4)   Inheritance- personal or real property obtained without a will
(b)   Gift
(1)   RULE- Intent of the Giver- a gift proceeds from a detached and disinterested generosity (Commissioner v. Duberstein)
(2)   The court will consider all the facts and circumstances
(c)    Bequest (Wolder v. Commissioner)
(1)   Intent of the Parties
(2)   Reasons for the Transfer
(3)   Whether Parties’ Performance was in accordance with their intentions
2)      Gross income shall NOT exclude any amount transferred by or for an employer to, or for the benefit of, an employee (IRC § 102(a))
(a)    UNLESS extraordinary transfers AND
(b)   to the natural objects of an employer’s bounty AND
(1)   e.g. a father who employs a son and gives him a gift
(2)   the context of the gift is NOT based on their employment relationship
(c)    employee can show the transfer was NOT made in recognition of his employment THEN
(d)   not considered transfer to, or for the benefit of the employee (Treas. Reg. § 1.102-1(f)(2)
3)      Gross income shall NOT exclude the income from property acquired by gift, devise, bequest or inheritance THEN it is not excluded under the gift exception (IRC § 102(b)(1))
4)      SPECIAL RULES- (1) certain traditional retirement gifts are treated as de minimus fringe benefits (IRC § 132(e)) (2) certain employee achievement awards (IRC § 74(c))
5)      Fringe Benefits- IF no-additional-cost service THEN not included in gross income (IRC § 132(a)(1)).
(a)    No-additional-cost service (IRC § 132(b)(1))-
(1)   Any service
(i)     ordinarily offered for sale
(ii)   employee works in the same line of business
1.      former employees (IRC § 132(h)(1)(A))
2.      widows/widowers (IRC § 132(h)(1)(B))
(2)   Provided by an employer to an employee
(i)     Reciprocal Agreements- requires a written agreement between the two parties (IRC § 132(i))
(3)   For the use of the employee
(i)     Spouses (IRC § 132(h)(2)(A))
(ii)   Dependent children (IRC § 132(h)(2)(A))
(iii) Former employees (IRC § 132(h)(1)(A))
(iv) Widows/widowers (IRC § 132(h)(1)(B))
(4)   Offered at no substantial additional cost
(i)     excess capacity- e.g. employee of airline flying for free only when there is room (Treas. Reg. § 1.132-2(a)(2))
(5)   Non-discrimination Limitation (IRC § 132(j))
(i)     IF a highly compensated employee receives a no-additional-cost service AND such benefit is not available to each member of a group of employees on substantially the same terms THEN it is not excluded under the fringe benefit exception for the highly compensated employee
(ii)   NOTE- it’s okay under this rule to discriminate against the highly compensated employees
6)      Employer Provided Meals/Lodging
(a)    Meals (IRC § 119(a)(1))
(1)   IF meals are provided to an employee for the employer’s convenience AND
(i)     “for a substantial non-compensatory reason (Treas. Reg. § 1.119-1(a)(2)(i))
(2)   the meals are furnished on the business premises
(3)   THEN the value is excluded from the gross income of the employee
(b)   Lodging (IRC § 119(a)(2)
(1)   IF lodging is on the business premises of the employer AND
(2)   for the convenience of the employer AND
(3)   it is a condition of employment
(i)     “required to accept the lodging in order to enable him properly to perform the duties of his employment” (Herbert G. Hatt)
(4)   THEN the value shall be excluded from gross income
(i)     NOTE- In theory there are three elements above, but in practice there are only two: if the condition element is met then the convenience element is also met.
(c)    NOTE- if employer is already providing lodging then meals will also be excluded.
(d)   NOTE- emplyer might also be able to deduct these under § 162 as a business expense
C)    Some Prizes Not Included in Gross Income
1)      RULE- Prizes and Awards count as gross income Except (§ 74(b)):
(a)    Prizes or awards received in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement ONLY IF:
(1)   the recipient was selected without any action on his part to enter the contest AND
(2)   the recipient is not required to render substantial future services as a condition to the award AND
(3)   the prize or award is transferred to a governmental unit or organization pursuant to a designation made by the recipient
(b)   Employee Achievement Awards (as defined by 274(j)) so long as the employer’s cost doesn’t exceed the allowable deduction
(1)   HOWEVER, if the cost d

(e))
6)      Transfers that are Part Gift and Part Sale (Treas. Reg. § 1.1015-4(a))
(a)    The cost basis is the greater of:
(1)   amount paid by the transferee for the property OR
(2)   the transferor’s adjusted basis for the property at the time of the transfer
(b)   How to recognize a part gift part sale:
(1)   the transfer is the product of detached and disinterested generosity OR
(2)   parties that are related and not dealing at arms length
7)      Dividing a Parcel
(a)    When calculating basis on a parcel that is being split, the basis is split proportionally.
III. Income Realized by the Discharge of a Debt
A)    General RULE- when a lender forgives a debt for less than the amount owed on the debt the borrower has gross income. (IRC § 61(a)(12))
B)    Formula
1)      Debt – Amount paid to satisfy the debt = Income from discharge of indebtedness
(a)    Amt. Paid- only applies on the last payment (for a  multi-payment loan) where the total amount paid out is LESS than the value of the debt. (Kirby Lumber)
2)      Exceptions Resulting in Exclusion IRC § 108(a)(1)(A)
(a)    Bankruptcy- When the discharge occurs in a Chapter 11 proceeding
(b)   Insolvency- When a discharge occurs while the borrower is insolvent
(1)   Insolvency = liabilities – FMV of assets
(2)   RULE- the exclusion for an insolvent borrower may not exceed the amount by which the taxpayer is insolvent.
3)      Exceptions Resulting in Other  
(a)    Loan From Seller (IRC § 108(e)(5))
(1)   IF:
(i)     Taxpayer is not insolvent
(ii)   Taxpayer is not in bankruptcy
(iii) Taxpayer borrowed money from someone who sold property to taxpayer
(iv) Taxpayer used the loan to buy the property
(v)   Seller/lender reduces the amount the taxpayer must repay
(2)   THEN
(i)     the reduction is a purchase price adjustment for both buyer and seller
(b)   Personal Residence (IRC § 108(h))
(1)   IF:
(i)     Debt is discharged
(ii)   Qualified personal residence indebtedness
1.      up to $2M on the money borrowed to buy principle residence
2.      debt is acquired at acquisition of the principle residence
(iii) Before 2013
(2)   THEN
(i)     Reduction must be applied to the Basis
4)      RULE- when a borrower is able to exclude their discharge of indebtedness they must reduce their tax attributes.
(a)    in effect this is the government giving a goodie on the day that the discharge is excluded but taking it back down the road by forcing the taxpayer to reduce their tax attributes.
(b)   Tax Attributes (applied in the following order):
(1)   Net Operating Loss
(2)   General Business Credit
(3)   Minimum Tax Credit
(4)   Capital Loss Carryovers
(5)   Basis Reduction
Etc.