Federal Tax Practice Outline

GROSS INCOME
§ 63(a) – taxable income = gross income – deductions
Gross Income – all income from whatever source derived (§ 61)
·         Compensation from services, gross income derived from business; gains derived from dealings in property; interest; rents; royalties; dividends; alimony and separate maintenance; annuities; income from life insurance and endowment contracts; pensions; income from discharge of indebtedness; distributive share of partnership income; income in respect of a decedent; and income from interest in an estate or trust
Property – income is the FMV of the property
Glenshaw Glass – instances of undeniable accessions to wealth, clearly realized, over which taxpayer has complete dominion; source of receipt is irrelevant
Cesarini  – found money is taxable income when found
Illegal Gain – illegal income is income
Frequent Flyer Miles – won’t be gross income unless converted to cash or is compensation
Mere appreciation is not income
 
Imputed Income – TP receives satisfaction from goods owned/used by TP – NOT GROSS INCOME
Horizontal Inequity – created when two people w/same real income don’t pay the same tax; whenever certain types of income are favored, taxpayers change behavior
Swapping Services – generates income, barters must be reported
 
§ 108 Discharge of Indebtedness (included in GI § 61(a)(12))
Occurs when creditor writes off/collects amounts because he believes he won’t get back original amount; debtor has discharge of indebtedness income
 
a.       § 108 Exception
o        Excluded from GI if debtor is insolvent or in bankruptcy proceeding
o        Debtor must reduce tax attributes first (NOL, capital loss, and basis)
o        Applies to individuals and insolvent farmers (qualified farm indebtedness)
 
b.      § 108(e)(5) – purchase price adjustment is not discharge of indebtedness (just reduces basis)
 
c.       Zarin – no discharge of indebtedness if debt is not enforceable under state law (casino debt)
 
d.      Contested liability theory – taxpayer in good faith disputes amount of debt and subsequent settlement of dispute is treated as amount of the debt
 
e.      Mortgage Forgiveness Debt Relief Act (expires 2010)
o        Certain discharge of qualified principal residence indebtedness will reduce basis and not be counted as discharge of indebtedness (limited to initial/refinance loan; amounts limited)
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GROSS INCOME EXCLUSIONS
§ 102 Gifts/Inheritance Exclusion
Gross income doesn’t include the value of property acquired by gifts, devise, inheritance or bequest
 
Duberstein “Gift Test” – proceeds from a detached and disinterested generosity; out of affection, respect, admiration, charity or like impulse (look to transferor’s intent, mainsprings of human conduct)
 
Tips are included in GI
 
§ 102(c) – amount from employer to employee
·         GI includes amounts transferred from employer to employee
·         Regulation 1.102-1(f) – if employee can show it was extraordinary transfer not made in recognition of employment it will be considered a gift
 
·         § 102(c) will not apply to transfers between related parties unless circumstances of employment
 
§ 101(i) – victims of 9/11, Oklahoma City bombing, anthrax attacks, astronauts who die in line of duty
·         Employer provides benefits based on death are tax free (excludes those already entitled to)
 
§ 132 Fringe Benefits Exclusion – generally not included in gross income
 
a.       No-Additional Cost Services (§ 132(a)(1)) – employee is offered same service offered to customers, must be same line of business, can’t add substantial cost to employer or displace customers, no discrimination
 
b.      Employee Discount (§ 132(a)(2)) – tax free as long as not more than gross profit %, services may not exceed 20% discount; can’t discriminate, must be same line of business
 
c.       Working Condition Fringe (§ 132(a)(3)) – something that would have been a business expense had it been directly incurred by employee (ex. attending convention, use of car)
 
d.      Qualified Transportation Fringe (§ 132(a)(5)) – no non-discriminatory rule, parking, transit passes, tokens, etc.; transportation btwn employee’s home and business ($100/mth transportation, $220/mth parking)
o        § 132(f)(4) allows option of receiving cash or parking, no constructive receipt
 
e.      De Minimis Fringe (§ 132(e)) – property/services whose value is so small it would be inefficient to report; no non-discriminatory rule
 
Non-Discriminatory Rule – § 132(j)(1)
o        Exclusion doesn’t apply if not available on substantially same basis for all employees (no discrimination in favor of highly compensated employees ($105k or 5% ownership))
 
Spouses, Dependent Children – § 132(h)
o        § 132(h)(2) – any use by spouse/dependent child is treated as use by employee
o        § 132(h)(3) – use of air transportation by parent is treated as use by employee
 
Other Fringe – qualified moving expenses, use of gyms, retirement planning services, military base realignment and closure
 
§ 119 Meals and Lodging Exclusion
Excluded from GI if:
·         Furnished at employer’s convenience (non-compensatory business purpose)
·         Furnished on business premise (adjacent/across ok)
·         If lodging, must be a condition of employment (contract, state statute not determinative)
o        Look to circumstances of employment/industry practice
 
*Cash reimbursement of meals IS included in GI
 
§ 107 Parsonages
For minister of gospel, GI doesn’t include:
·         rental value of home as compensation; rental allowance as compensation not to exceed FMV
 
§ 74 Prizes and Awards – generally ARE included in GI
 
a.       § 74(b) Exception
o        Prizes/awards recognizing religious, charitable, scientific, education, artistic, literary, or civic achievement are EXCLUDED from gross income:
§         Awards are transferred to charity
§         You didn’t apply for the award and don’t have to work for it
§         Must be transferred to government or charity pursuant to a designation
 
b.      § 74(c) Employee Achievement Awards
o        EXCLUDED from GI
o        Includes retirement gifts, awards for length of service (de minimis), must be awarded as part of a meaningful ceremony, must be tangible property
 
§ 117(a) Scholarships and Fellowships
Excludes from GI qualified scholarships to candidates for degrees at educational institutions
 
a.       § 117(b) Qualified Scholarship – tuition, fees, books, supplies/equipment (NOT room/board)
 
b.      § 117(c) – doesn’t apply to portion representing payment for services required as condition of receiving scholarship (apply taxable portion to services first)
 
c.       Athletic Scholarships – IRS has allowed exclusion where participation in sport is not required and scholarship is not cancelled if student fails to participate (now given yr. to yr. to avoid taxation)
 
d.      §117(d) Qualified Education Reduction – employee whose children receive reduc