Tax Spring ’08 Outline
WHAT IS TAXABLE?
– Gross income
o Section 61: Gross Income
§ Income from whatever source – any increase in wealth (see list in statute), unless there is a statute allowing exclusion (See Sections 101-139)
§ Discharge of obligation is income
§ If accession to wealth is non-cash, estimate the FMV of the wealth (ex: winning a prize)
§ Reg 1.61-2d: If non-cash things are given in exchange for a service it is considered income
· If employer pays your taxes, that is an accession to your wealth so it is still income
· If employer lets you stay in his condo, still income
§ Stocks and lost property will only be taxed as income when you sell them (as gain)
§ See Regs 1.61-1, 2, & 14 for other things that will be considered GI
o Section 62: Adjusted Gross Income
§ AGI is gross income minus any of the twenty deductions allowed in Section 62
o Section 63: Taxable Income
§ You can choose to take either itemized or standard deductions
§ §61 GI – §62 Deductions = AGI – Standard/Itemized Deductions – Personal Expenses = TI
§ If you do not itemize your deductions (standard),
· TI = §61 GI – §62 Deductions = AGI – Standard Deductions – Personal Expenses
· Standard deductions are a set amount that everybody in that category has to deduct (single female between ages 18 and 250
· Standard deduction = basic standard deduction + additional standard deduction
o Basic: $6,000 for married indivs filing jointly, $4,400 for heads of households, $3,000 for singles, $2,500 for marrieds filing separately
o Additional: allowed for blind and elderly people
§ $1200 if indiv is blind and over 65
§ If you itemize your deductions
· TI = §61 GI – §62 Deductions = AGI –Itemized Deductions – Personal Expenses
· Itemized deductions are the ones we were going through during class…the separate choices you can deduct
· 63d1: itemized deductions are the deductions allowed in arriving at AGI (Section 62 deductions) & deductions for personal exemptions (Section 151)
· Combine all deductions that are not above the line
· Section 67 imposes a 2% floor under many itemized deductions…those other than Section 62 (above the line), exemptions, and those under 67b, are miscellaneous
§ Choose between standard and itemized based on whichever one will give you the biggest deduction
o Sections 71-90: Specific Inclusions
o Helvering v. Ind Life Ins Co – cannot be taxed the value of living in your own home bc goes against 16th amendment….it would be a direct tax.
o Dean v. Commissioner – this is different from Helvering b/c although the taxpayer was living in his own home, it is in the corp’s name, thus corporate house (remember corp is a taxable individual/entity).
– Exclusion for fringe benefits Section 132
o 61a1 says fringe benefites are included so it it is not listed under 132, then it must be included in GI
o Generally, compensation for services is included in GI, but sometimes they are excluded as fringe benefits
o Must be in the same line of business
§ Ex: Flight attendant gets a discount staying at a hotel. Still included in income because hotel is in a different line of business…so if room was $200 and she paid $80, she has to include $120 in her GI (because that was $ she saved)…unless hotel and airline are owned by same conglomerate
o 132b: No additional cost service
§ (1) Service is normally offered to customers & (2) E’er incurs no substantial additional cost
o 132c: Qualified employee discount
§ Discount is only excludable to the extent of the gross profit usually made from the sale of goods
· (c2): (Revenue – Cost)/Revenue = profit
· Ex: (1million – 600k)/1million = 40%…employee can only deduct up to 40% from his discount. If he gets a 50% discount (so saved 1k), then 40% of that is excludable ($800) but the remaining 10% ($200) must be included in income
§ (c1B): Services allowed to discount up to 20% of normal price
o 132d: Working conditions
§ Property/services provided to employee on the condition that if employee paid for them he would be able to deduct it un Sections 162 (t/b expense) or 167 (depreciation)
§ Nondiscrimination rule doesn’t apply here
§ Ex: if company pays for A’s flight and accommodations in training, and A improves in skill and talent because of the training in t/b, then it is excludable
o 132e: De minimis fringe
§ Any service whose value is so small as to make required accounting for it unreasonable or administratively accountable is excluded as a fringe benefit
§ Ex: coffee or lunch near by
o 132f: Qualified transportation
§ Benefits provided to an employee by an employer in the form of transportation
§ Ex: token, fare card, transit pass
o 132g: Qualified moving expenses reimbursement
§ If employee gets money from employer as reimbursement for moving expenses and this m
, bequest, devise and inheritance.
§ Based on donative intent. Usually not applicable in employer/employee context.
o § 103: Excludes interest on state and local bonds, except where:
§ Issued for private purpose (e.g. construction of factories).
§ Distinguish between state/local and federal. Fed interest is included.
o § 104: Excludes compensation from:
§ Workmen’s comp for personal injuries or sickness;
§ Damages received (other than punitive) for physical injuries or physical sickness;
§ Amounts receive through accident or health insurance; see others also.
o § 106: Contributions by employer to accident / health plans
§ Excluded, “plan” defined broadly. Family covered.
o § 109: Excludes improvements by lessee on lessor’s property.
§ Any gain is deferred until sale of the land, per § 1019.
§ Meant to prevent situation where landowner must sell to cover tax liability.
§ If the improvements were a form of rent, then the value of improvements would be income to the lessor.
o § 117: Excludes amounts received from qualifying scholarship.
§ Only amounts attributable to tuition / fees or textbooks are excluded.
§ Important: “primary purpose test”. See above.
o § 119: Excludes meals and lodging provided by employer to employee. See above.
o § 132: Excludes employer provided fringe benefits.
§ Working condition fringes
§ No additional cost
§ Employee discount
§ De Minimis
§ Athletic facility
o § 305: Excludes stock dividends, stock splits. Except where:
§ S/H takes stock instead of money, at his option.
§ Disproportionate distributions – affects ownership %’s.
§ Some S/H receive common, others receive preferred.
o § 307: For distributions under 305, basis of old shares is apportioned amongst old and new shares.
§ 1001: Requires realization event before gain from sale of property is included as income.