Hutton Spring 2010 Federal Income Tax Outline
CONFIGURATIONS OF GROSS INCOME
I. s.61: lists sources, pretty much any increase in wealth
A. 1.61-14 – misc. items of GI (e.g. treasure trove @ FMV)
i. Distinguish from “bargain purchase” = no GI until property sold
II. Low-s.100’s – exclusionary provisions from GI
A. s.109 – no GI for lessor for improvements on land made by lessee, upon end of lease
A. Employer withholds tax – GI is amount earned, not taken home.
B. Employer pays income taxes – whatever paid is included (see 1.61-14)
C. Property received as compensation – income @ FMV of property (see 1.61-2(d))
i. Rent free-use of condominium, free to sublet – GI included in year employee gets to use land, include all money owed to employee immediately; basis = compensation owed
a) If he rents the condo out, he can amortize this basis over year 2
D. Cash dividends are included as income; not stock splits or increases in value
A. s.101(a)(1) – if payable by death to true beneficiary, then proceeds are excluded
i. Regardless of whether it’s a term or whole life policy
a) term – when policy has run, you have nothing
b) whole life – an investment; at end of payment period, you get money back
B. s.101(a)(2) – someone buys the policy, proceeds must be included. Purchaser entitled to exclude their basis (cost + premiums paid).
i. EXCEPTIONS (i.e. entire amount excluded):
a) s.101(a)(2)(A) -transferee who takes a carryover basis from transferor (i.e. gift)
a) s.101(a)(2)(B) – transfer is to the insured, his partner/partnership/corporation
C. 1.1015-4 (part gift/part sale) – if transferor’s basis at the time of the sale/gift is > the amount paid, then the transferee takes the transferor’s basis
i. therefore all is excludable when used with 101(a)(2)(A)
V. Gifts, Bequest, Devise, Inheritance
A. s.102(a) – generally excluded from GI
i. Motive of donor is controlling – “mainsprings of human conduct”
B. s.102(c) – EXCEPT in the context of employer/employee relationships
A. s.119(a)(1) – exclude meals furnished on business premises
i. food prepared @ recognized occasions; payments for groceries not excludable.
B. s.119(a)(2) – exclude lodging, required as a condition of employment, also on premises
i. Both of above must be for the convenience of the employer
VII. State Municipal Bonds
A. s.103(a) – exclude interest on State or local bond
VIII. Judicial Settlements/Damage Awards
A. s.104(a)(2) – must be attributable to personal physical injuries or physical sickness
i. Punitive damages are included
B. Damage awards paid now for future medical expenses – can exclude once at beginning
i. No s.213 deduction on top of s.104 deduction
A. s.117 – amounts paid for tuition/fees, books are excluded
i. Primary Purpose Test – whether purpose is to further education of recipient in his individual capacity, and amount is not compensation
B. Athletic scholarships – PPT – qualifying as long as not conditional on playing the sport
EMPLOYEE FRINGE BENEFITS
I. s.132 generally – exclusions listed in (a), then subsequently defined
II. Working Condition Fringe
A. Expense provided to employee which, if paid himself, would be deductible under s.162
A. Ordinary course of business in which the employee performs services; AND
B. No substantial additional cost to the employer
C. s.132(h)(2) – spouse/child treated as use by employee
D. s.132(i) – Reciprocal Agreements – allows another employer to provide the service to the employee and the employee to still exclude the value of that service.
i. Limitations – same line of business, written agreement, no substantial additional cost
E. s.132(j) – must be on nondiscriminatory basis – not just highly compensated employees
i. no exclusion whatsoever
F. s.132-2(a)(5)(ii) – no substantial additional cost if services incidental to primary service
i. e.g. in-flight services of flight attendant
A. Discount only excludable to the extent of gross profit usually made from sale of goods
B. Discount on services excludable up to 20% of price usually given to customers
i. e.g. hotel rooms; insurance policies
C. s.132(j) applicable (anti-discrimination discrimination clause) – no exclusion whatsoever
V. Qualified Transportation Fringe
A. s.132(f)(1) – includes 1) transportation in commuter highway vehicle, 2) transit pass, 3) qualified parking, 4) qualifying bicycle commuting reimbursement
B. s.132(f)(2) – limitation: shall not exceed $100/month (for #1 and 2 above), and $175/month for qualifying parking
C. Parking excludable if on or near business premises
VI.De Minimis Fringe
A. Property/service value of which is so small as to make accounting unreasonable or administratively impracticable.
i. Regs: frequency determined in regards to the specific employee
VII. On-Premises Athletic Facility
A. s.132(j)(4) – excludable if on premises, operated by employer, and substantially all use by employees/family
VIII. Contributions by Employer to Accident and Hea
Also if holder’s basis is determined, in whole or in part by reference basis of the property in the hands of either the creator or person for whom it was produced
II. s.165(c) deductions by individuals limited to:
A. losses from trade or business
B. losses from transaction entered into for profit
C. losses from casualty/theft
III.To determine character of gain, consider 3 elements:
A. Capital asset (s.1221)?
B. Held for more than 1 year?
C. Recognized by sale or exchange?
IV.Netting Capital Gains and Losses
A. When you have capital gains (whether long or short term), they become part of GI
B. Then must ask whether losses are realized, recognized, and allowable:
i. s.165(c) limits losses
ii. s.165(f) → capital losses limited by s.1211 and 1212
C. s.1211(b) – capital losses are allowed up to the extent of capital gains + $3,000
D. Once you decide the loss is allowable, must figure out where it comes out from
i. s.62 tells you whether it’s above or below the line
E. s.1222(11) – “net capital gain” = net LTCG – net STCL → preferential tax rate
F. If loss is > $3,000 in excess of gain, there is carryover. What character? s.1212(b)(1)
i. First off, change in AGI is capped at -3k because of limit
ii. (A) – excess of NSTCL over NLTCG = STCL in next year
iii. (B) – excess of NLTCL over NSTCG = LTCL in next year
G. BUT, have to consider the incremental allowance of s.1211 (the $3k) as well
i. s.1212(b)(2)(A) creates an artificial short term gain of 3kwhich you add to your STCG
a) THEN go back to s.1212(b)(1) calc with this new STCG
V. When to Sell Capital Asset
A. ALWAYS prefer short term loss to long term loss.
i. How do you measure?
a) Ignore date of acquisition (use the next day), but count the day of disposition.
· Ex: buy on 2/10. Holding period technically begins midnight, 2/11. For short term treatment, you must sell on 2/10 of the next year (less than) one year.
b) “Last day rule” – if you acquire stock on last day of the month, have to sell the 1st of the month a year later for 1 year status