Federal Income Tax Richard Winchester Fall 2010
Scope of Gross income
GI
– Deductions
Taxable Income
x Tax Rate
Tax Liability
§61(a) Gross income means all income from whatever source derived
“Undeniable accession to wealth, clearly realized and over which the taxpayer has complete dominion.” Comm’r v. Glenshaw Glass Co., 348 U.S. 426 (1955)
Income can also come from a gain on disposition of property. Charley v. Comm’r, 91 F.3d 72 (9th Cir. 1996).
IF you earn it THEN it is included in GI (Lucas v. Earl)
IF you renounce control over the income THEN you did not earn it (Comm’r v. Giannini)
If you are merely acting as an agent for your employer in receiving income THEN you did not earn it (Rev. Rule 74-581)
IF you exercise control in the disposition of income then you have earned it (and it is included in GI see assignment of income below)
· TR §1.61-1(d)(1) GI includes income realized in any form, whether in money, property, or services.
· TR §1.61-1(d)(1) If services are paid for in property, the FMV of the property taken must be included in GI. If services are paid for in exchange for other services, the FMV of such services must be included in GI. If services are rendered at a stipulated price, such price will be presumed to the FMV of the compensation received in the absence of evidence to the contrary.
o Rev. Ruling 79-24
· TR §1.61-14 Miscellaneous items of GI all of the following are included in GI
o Punitive damages
o Another person’s payment of the TP’s income taxes
§ Corp pays the income taxes of the officers, the payment of the taxes by the Corp constitute GI for the officers Old Colony Trust Co. v. Comm’r
o Illegal gains
o Treasure trove – to the extent of its value in US currency, constitutes GI for the taxable year in which it is reduced to undisputed possession
§ Not reduced to undisputed possession until actual discovery Cesarini
· Income from all sources is taxed unless the TP can point to an express exemption. Cesarini v. U.S.
The rental value of a building owned and operated by TP does not constitute GI to the TP Helvering v. Independent Life Ins. Co.
The rental value of a building owned by a corp and used by the TP (the sole shareholder) as a residence is included in GI
Gain or loss from disposition of property
o (§1001(a)) A taxpayer must compute gain or loss upon sale or other disposition of property
o (§1001(a)) Amt Realized (§1001(b))
– Adjusted Basis (1001(a))
Gain or loss (§1001(a))
o Adjusted Basis (§1011(a)) Cost of Property (§1012)
– Adjustments (§1016)
Adjusted Basis in property
§ Property acquired by purchase (§1012)
· Gen Rule the basis in property shall be the cost of such property
§ Property acquired by gift (§1015(a) & TR §1.1015-1(a)(1))
· Gen Rule the basis in property is the same basis as that of the last preceding owner by whom it was not acquired by gift (go back to the last person to receive the property in some other way than by gift)
o Except TR§1.1015-1(a)(1)
§ IF the basis of last preceding owner by whom the property was not acquired by gift is GREATER than FMV of the property at the time of the gift
§ AND the taxpayer is selling the property for a loss
§ THEN the basis in the property is the FMV at the time of the gift
· The effect of acquiring the donor’s basis is that the donee must include any appreciation in value while in the donor’s hands in GI. Taft v. Bowers
§ Property acquired in part by gift and in part by sale
· If a transaction constitutes a part gift-part sale
· Then the transferee’s adjusted basis in the property will be the higher of two amounts:
o The amount paid by the transferee for the property, or
o The transferor’s adjusted basis for the property at the time of the transfer TR 1.1015-4(a)
§ Property acquired between Souses or Incident to Divorce (§1041(a)(1) & TR §1.1041-1T(d) Q-10 and A-10)
· No gain or loss shall be recognized on transfer of property from an individual to, or in trust for benefit of, a spouse
· (§1041(b)) Consequences of receiving property from a spouse
o IF property is transferred from one spouse to another spouse, or in trust for the benefit of the other spouse
o THEN the property shall be treated as being acquired by gift and the basis of the transferee in the property shall be the adjusted basis of the transferor
· (TR §1.1041-1T(a) Q-2 and A-2 & Q-4 and A-4
o §1041 applies only to transfers of property between spouses, whether real or personal, or tangible or intangible; and regardless of whether the transfer is a gift, sale, or exchange between spouses at arms length (i.e. divorce)
§ Property acquired from a Decedent (§1014(a)(1))
· Gen Rule: an individual’s basis in property that was acquired from a decedent is the FMV of the property at the date of the decedent’s death
§ Property acquired by exchange (Philadelphia Park Amusement Co. v. US (1954))
· When property is exchanged for property the taxpayer is taxed on the differe
s – 1,000 – 500
Value +1,000 +1,000
Gain/Loss 0 + 500
Special rules
Purchase money reduction for solvent debtor (automatic reduction in basis) §108(e)(5)
IF:
T not insolvent
T not bankrupt
T borrowed money form someone who sold property to taxpayer (a “seller/lender”)
T used loan to buy the property, and
Seller/lender reduces the amount the taxpayer must repay
THEN:
Such reduction shall be treated as a purchase price adjustment (reduction in basis on the property)
Transfer of property to satisfy debt (TR§1.1001-2(a)(2)
IF:
Owner transfers property to a lender, and
Lender discharges a recourse loan it made to owner, and
The amount discharged is greater than the value of the property transferred (w/o this element the entire amount would be included in amount realized)
THEN:
Amount realized equals the value of the property transferred, and
Any excess debt discharged counts as income
Damage awards
Lost profits (Raytheon Prod. Corp v. Comm’r (1944)
IF damages are awarded to compensate for lost profits
THEN the entire amount of the award is included in GI
Lost property (Raytheon Prod. Corp v. Comm’r)
IF damages are awarded to compensate for lost property
THEN the excess received over the basis of the property is included in GI
Physical injury/sickness (§104(a)(2))
IF the amount received in damages is on account of physical injuries/sickness to the taxpayer
THEN the amount received is not included in GI
(If physical injury/sickness is the root of the recovery then this rule applies and all amts received are not included in GI; even emotional distress)
As a Gen Rule emotional distress shall not be treated as a physical injury or physical sickness (§104(a))
IF the amount received in dmgs is for emotional distress
THEN any excess over the cost of treatment is included in GI (§104(a))
Amt Received
