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Federal Income Tax
University of California, Hastings School of Law
Lind, Stephen A.

TAX OUTLINEBASIC STRUCTURE OF FEDERAL INCOME TAX1) GI [not including exclusions from GI] – all deductions [including §62 deductions and all other deductions, but not the standard deduction] = TI; or2) GI – §62 deductions (above the line) = AGI – [personal exemptions + std deduction] = TI3) Whichever gets you to the lower TI is what you do. 4) Tax Sections Overview:a. Sec. 1- Amount of taxb. Sec. 61- Defines gross income (lists items)c. Sec. 62- Adjusted Gross Income = Income – deductions (lists deductions) i. (a)(1)- business deductions if not employeed. Sec. 63- Taxable income = gross income – deductions (lists deductions) i. Standard vs itemizede. Sec. 441(a)- Taxable income shall be computed on the basis of the taxpayer’s taxable year.f. Sec. 446(a)- Taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books.IDENTIFICATION OF INCOME SUBJECT TO TAXATIONGross Income §611) Definition According to SC: any undeniable accession to wealth, clearly realized, and over which the taxpayers have complete dominion. [Glenshaw Glass]a. However, there are both administrative and statutory exceptions to the is general definition2) General Rules from Problems p. 63:a. If the income you receive is in the form of property (e.g. won watch), the value will be equivalent to the objective FMV of the itemb. FMV of any services received [if received for free or in exchange for other services] is also considered income c. Treasure Trove i. Considered income in year that it is reduced to undisputed possession [e.g. money in Piano – Cesarini] ii. SOL – three years from later of date of filing or April 15 of the year filed. Begins when income is first becomes taxable.d. All arms length transactions are considered to be done at FMV [otherwise too hard to police] i. So you get a great deal at a flea market, good for you.e. Generally, you tax the person who performed the services even if the “income” technically went to someone else i. E.g. dad’s company gives his son a car. f. Illegal income is still incomeg. Technically, mileage credits are of value, but the IRS has announced it won’t tax credits (earned for business use) as long as they aren’t converted to cash [Charley] b/c it is administratively too difficult to do.   i. Note: if flyer receives credits as part of buying a ticket for a personal trip, there is no income b/c the credits are part of purchase price.h. Imputed Income – benefits or satisfactions you get from either property you own or goods or services that arise from your own efforts i. Such income is not taxed in the U.S.Specific Inclusions in Gross IncomeGains from Dealing in Property1) §61(a)(3) tells us that gains from property must be included in GI, but doesn’t definea. Regs 1.161-6(a) does say that when a portion of larger piece of property is sold, must calculate gain on that portion and recognize gain immediately2) §1001 starts telling us how to calculate such gains – a. Gain = AR – AB i. AR = amount of money + FMV of property received on disposition ii. AB = cost of property (See §1012) as adjusted (See §1016)b. Entire amount of gain or loss is included in GI (unless excluded elsewhere)c. Applies to all sales and “other dispositions” of property (e.g. trading property)3) Basisa. §1012 – defines basis as the cost of property [excluding amount paid that is attributed to real property taxes] i. Cost can mean 1) actually paying for the property, or 2) having paid tax on the value of the property already.  1. E.g. Employer gives employee land worth $10K. Employee pays tax on 10K. Employee’s basis in property is now $10K. b. §1015 Basis of Property Acquired by Gift i. Rule: Donee’s basis in the gift is the same as the donor’s adjusted basis1. Exception: if when donee sells the property and is expecting a loss, then the loss will be calculated using the FMV on the date gift was made if FMV was less than the donor’s adjusted basis.a. See problem p. 125(b)(2)&(3) for good example [1.30.08] ii. I don’t understand the rest of this section (d)(1)(A), (d)(4), (d)(6)c. §1014 Basis of Property Acquired by Decedent i. Rule: basis of property acquired from decedent is the FMV of the property on the date of decedent’s death1. Applies to transfers made during decedent’s lifetime if the value of such transfer is required to be included in decedent’s gross estate ii. Property is considered acquired from a decedent if – 1. Property was acquired by bequest, devise or inheritance, or by the decedent’s estate from the decedent;2. It is property representing the surviving spouse’s one-half share of community property a. This means that community property will now have a FMV basis even though only one spouse died  i. E.g. Wife dies. Husband’s new basis in the entire house is now FMV (in example below, H’s basis would be 100K).  ii. Contrast w/ e.g. A&B own property as joint tenants with right of survivorship, property has FMV of 100K and 20K AB.  A dies. B’s basis is $60K.  ii. Rule (e) – prevents a scheme of giving property to old people only to have it transfer back upon death by saying that if such a transaction happens within a year of death, basis will be the old basis.d. §1041 Transfers of Property b/w Spouses or Incident to Divorce iii. General Rule: No gain or loss shall be recognized on a transfer of property from an individual to 1. A spouse, or2. A former spouse, but only if transfer is incident to divorce.a. Considered incident to divorce if transfer occurred within 1 year after date on which marriage ceases, or is related to the cessation of the marriage iv. Rule: The basis of such transfers to spouse or former spouse will always remain the basis of the transferor (even if computing loss – so a little different than gift rules).e. §1016 – Adjustments to Basis v. (a)(1): basis increased for expenditures, receipts, losses, or other items, properly chargeable to capital1. E.g. improvements to propert

f you take insurance proceeds and then go buy an annuity with them.  ii. Similar to an annuity, a portion of the payments received in the future will be excluded b/c it will represent the lump sum amount you could have taken. 1. Exclusion = total investment/life expectancy iii. Difference from Annuities: 1. If you live beyond life expectancy, you continue to take the exclusion that you were taking before. 2. If you die before expected, you get no final deduction on your last tax return for the portion of lump sum not yet excludedDischarge of Indebtedness [§61(a)(12); §108]1) General Rule: if you are able to borrow money and then don’t have to repay it, you have a benefit and must realize GI. a. Kirby Lumber     i. Co. issued bonds (debt) and then repurchased the debt at less than face value.  Difference b/w face value and the repurchase price is GI.b. Note: this is not a GAIN b/c you have not had a disposition of property.c. Exception: i. If you are insolvent (total liabilities > assets), §108 allows you to exclude any discharge of indebtedness to extent of your insolvency1. Not total forgiveness, just a deferral. 2) Don’t forget:a. E.g P borrowed 10K from R.   i. P repays by giving a painting to R valued at 8K w/ 5K basis.1. 3K gain; 2K GI from discharge of indebtedness. ii. P repays R w/ services worth 10K.1. 10K GI from performing services.  No GI from discharge of indebtedness.   iii. P’s employer pays R 7K.1. 7K GI for compensation; 3K GI from discharge of indebtednessDamages and Related Receipts [part inclusion/part exclusion from GI]1) Main inquiry: determine the nature of the recovery – why is taxpayer getting money? [Raytheon]a. General Rule: recoveries for something that you would have been taxed on if received without a lawsuit/settlement will be taxed (e.g. profits recovered).  But if you wouldn’t be taxed normally and instead are just recovering capital lost – then you aren’t taxed (e.g. recovery of goodwill/destruction of business).  i. Note: in the latter situation, you will only not be taxed to the extent of your original cost (capital).  Anything over cost will be treated as a gain or gross income.  ii. Exception: whenever damages are received for personal injury or sickness, must consider §104 exclusions from GI (See above)2) §104(a)(1)-(3) [main section] – Compensation for injuries or sicknessa. Following damages excludable from GI: