Professor Heath M. Field
I. Identification of Income Subject to Taxation
a) Gross Income: The Scope of Section 61
i. §61 – Basically any type of income goes under gross income.
1. Cesarini v. United States: Treasure trove to the extent of its value in US currency, constitutes gross income for the taxable year in which it is reduced to undisputed possession.
2. Old Colony Trust establishes: the form of the income does not matter. Therefore, even though the income is given in the form of stock it is still considered gross income.
3. Commissioner v. Glenshaw Glass Co: Income is “instances of undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.”
4. Dean v. Commissioner:The big difference in that case is that the corporation owns the house he is living in, and therefore the taxpayer has an accession to wealth and must pay a tax on this.
ii. §62 Adjusted Gross Income
1. Adjusted gross income = Gross income – deductions listed in §62
iii. §63(a) defines Taxable Income for Itemizers
1. Taxable income = Gross income – deductions (excluding standard deductions)
iv. §63(b) Individual not itemizing deductions
1. Taxable income = adjusted gross income – standard deductions – personal exemptions
b) Exclusion for Fringe Benefits
i. §132 (a) Exclusion from gross income – gross income shall not include any fringe benefit which qualifies as –
1. (1) No-additional-cost service, (2) qualified employee discount, (3) working condition fringe, (4) de minimis fringe, (5) qualified transportation fringe, (6) qualified moving expense reimbursement, (7) qualified retirement planning services
ii. §132 (j) Nondiscrimination Clause – applies to
1. No-additional-cost service requirements for qualifying:
a. Same line of business as that in which the employee is performing services
i. If you work for an airline for a company that also owns ships, you can only get free flights
b. No substantial additional cost in providing service to the employee
c. Nondiscriminatory basis
i. Offered the same to all employees
2. Qualified Employee Discount
a. Nondiscriminatory basis
b. Same line of business
c. Ceiling on the amount of exclusion
i. For services: exclusion may not exceed 20% of the price at which services are provided for customers.
1. If the customer charge is $100 à exclusion ≤ $20
ii. For property: “Gross profit percentage”
1. (Aggregate sale price – cost) / aggregate sale price = gross percent profit percentage
2. Multiply cost of property by the Gross profit percentage to determine exclusion limit
3. if there is a 25% limit then you can only get up to $250 of a $1,000 item excluded
3. Working condition fringe
a. Means any property or services provided to an employee of the employer to the extent that, if the employee paid for such property or services, such payment would be allowable as a deduction under section 162 – 167.
4. De Minimis Fringe
a. Small value
iii. 132(h)(2)(a) Use by spouse or child treated like use by employee
iv. 132(i) Reciprocal Agreements
1. Chain A contracts to get its employees discounts with Chain B is ok.
v. Miscellaneous Fringe Benefits
1. 79 = group term life insurance;
2. 129(a)(1) = excludes dependent care services up to 5k;
3. 117(d) = excludes the amount of tuition expenses (under the graduate level).
c) Exclusion of Gifts & Inheritances
i. §102(a) Gross income does not include the value of property acquired by gift, bequ
y tax on how much the value increased from when she had it.
ii. Rule: There is nothing in the constitution which lends support to the theory that gain actually resulting form the increased value of capital can be treated as taxable income in the hands of the recipient only so far as the increase occurred while he owned the property.
2. §1041 Carryover basis between spouses
a. There is carryover basis between spouses
b. No gain or loss recognized on the transaction
3. §1014 Transfer from Decedents
a. Stepped up basis. It takes the fair market value at the time of the transfer.
b. § 1014(e) must hold the property for at least 1 year in order to have the stepped up basis.
vi. §1016 Adjusted Basis
1. §1016(a)(1) allows adjustments for expenditures, receipts, losses or other items properly chargeable to capital account.
a. Increases the basis.
2. §1016(a)(2) allows adjustments for wear and tear (depreciation). These can be reported as deductions.
a. Reduces the basis.
vii. §1001(b) Amount Realized
1. Realization: When property is sold then gain or loss is realized.
2. Recognition: is reporting things as income
3. International Freighting v. Commissioner
a. They use stock as compensation to employees. The company has to pay tax on the difference the stock costs the company and how much the fair market value is.
4. Different types of loans:
a. Recourse means that if the taxpayer does not repay the loan then the bank can come after not just the asset that the taxpayer bought with the borrowed money, but can come after all of taxpayers other assets. Basically the bank has recourse!