I. Tax Tools
A. Legislative Materials
B. Administrative Materials
C. Judicial Materials
D. Secondary Materials
II. Overall Tax Calculation (§61, 62, 63)
– §62 Deductions
= Adjusted Gross Income (AGI)
– Itemized Deductions OR Standard Deduction
– Personal/Dependant Exemptions
= Taxable Income
IDENTIFICATION of TAXABLE INCOME
I. Gross Income (§61)
A. §61 GROSS INCOME: “all income from whatever source derived”
– Compensation for services (incl. fees, commissions, fringe benefits, and similar items)
– Gross income derived from business
– Gains derived from dealings in property
– Alimony and separate maintenance payments
– Income from life insurance and endowment Ks
– Income from discharge of indebtedness
– Distributive share of partnership gross income
– Income in respect of a decedent
– Income from an interest in an estate or trust
1. Any economic or financial benefit conferred as compensation
(a) Old Colony Trust: Unless excluded, all accessions to wealth will be included in Gross Income. Employer pays employee’s taxes. This is consideration for the employee’s staying/services and is included in the employee’s gross income.
(1) Note: form of income does not matter.
(b) Glenshaw Glass: All accessions to wealth, clearly realized and over which TPs have compete dominion are included in GI.
(c) Cesarini: Found money in a piano, a treasure trove, is part of GI. Statute of limitations begins when treasure trove is found.
(a) Services received
(1) Revenue Ruling 79-24: Services received in exchange for services rendered, will be taxed at FMV. [See Treas. Reg. §1.61-2(d)(1)] (b) Miscellaneous Inclusions [Treas. Reg. §1.61-14(a)] (1) Treasure Troves (ex: $ in piano, fly away balls)
(3) Illegal income (also see James)
(4) Shifting payment to a relation in exchange for employee services (i.e. giving spouse a car as compensation)
(c) Income disguised as excluded income
(1) Dean: Cannot disguise income. TP occupies property owned by his corporation (two separate entities), must pay taxes on rental income.
(a) Purchase of item below FMV (limited to arms length tranx)
*Arms Length Tranx à presume a FMV exchange
(1) These items will be taxed upon sale
(2) Does not extend to unreasonable or disguised transactions. (i.e. Each car is Oprah’s giveaway sold for $1, will still be taxed like a prize)
(b) Services provided to one’s self (imputed income)
(1) Helvering: No tax on renting a place in an apartment that you own
(2) Childcare, housekeeping
(3) Policy rationale: administratively difficult
i Arg in favor: valuation of work
B. §62 ADJUSTED GROSS INCOME: “gross income minus the following deductions” – note: these deductions are above the line
C. §63 TAXABLE INCOME DEFN: Gross Income minus deductions
1. §63(b): If TP does not itemize deductions, “deductions” equal the standard deduction and personal exemptions.
2. §63(d): Itemized deductions do not include the standard deduction and personal exemptions.
II. Specific Exclusions (not included in gross income)
A. Fringe Benefits (§132)
1. Enumerated Benefits
(a) No Additional Cost Services [§132(a)(1)]
(1) In the ordinary line of business of employer/employee, AND,
(2) No substantial additional cost to employer
** Ex: airline/railroad seats, telephone service
(b) Qualified Employee Discount [§132(a)(2)] (1) Employee can exclude the discount to the extent of…
i Property: gross profit percentage or profit margin offered to customers (this is the profit margin of all goods in line of business)
ii Services: 20% of amt customers regularly pay
(2) In the ordinary line of business of employer/employee
(c) Working Condition Fringe [§132(a)(3)]
(1) Property or services provided to the employee to the extent that such property/services would be deductible under §162 (business expenses) or §167 (depreciation deductions) if paid for by the employee
(2) Example: auto salesmen demonstrations use
(d) De Minimis Fringe [§132(a)(4)] (1) Minimal benefits that would make accounting for them unreasonable or adm
are excluded from gross income [§102(a)] (b) Income derived from gifted or inherited property (like rent) is includable in gross income [§102(b), further clarified in Treas. Reg. §1.102-1(b)] (c) Transfers from employers to employees shall not be excluded as a “gift” [§102(c)] (1) Exception for extraordinary circumstances [Prop. Reg. §1.102-1(f)] (2) Note that this does not prevent an employer “gift” from being excluded as a fringe benefit
2. §102 Does Not Include [Prop. Reg. §1.102-1(f)]
(a) Prizes and awards (inc. employee achievement awards, see §74)
(b) Certain de minimis fringe benefits (see §132)
(c) Transfers from employer to employee (see §102(c))
(d) Qualified scholarships (see §117)
3. What is a gift?
(a) Factual inquiry into the dominant reason for the transfer
(b) Standard: A gift proceeds from a “detached and disinterested generosity,”…”out of affection, respect, admiration, charity or like impulses.” (Duberstein)
(c) Duberstein: One businessman gives a business colleague a Cadillac in gratitude for having received pertinent business information. This is not a gift under the standard; it is compensatory for future behavior.
4. What is a bequest, devise, inheritance?
(a) Includes money, property that has been executed in a will, has been determined by court settlement in response to an attack on the will (See Lyeth)
(1) Lyeth v. Hoey: Petitioner attacks will as an heir and reaches a compromise. The exemption for inheritance shall apply to these cases.
(b) Excludes services (i.e. giving daughter 20K for being executrix)
III. Gain from Dealings in Property
A. Gains from Dealings in Property are included in Gross Income [§61(a)(3)] 1. *Losses must be allowed [§165]