Federal Income Tax Outline
Adjusted gross income – personal exemptions
Executive’s taxes were paid by the corporation he worked for; income?
This is income; a gain is derived by the employee from his labor
Glenshaw – modern definition of income
Receives punitive damages; unreported
Income – “gains or profits and income derived from any source whatever
Source is irrelevant
Here – undeniable accessions to wealth, clearly realized.
72/x = rate at which your money doubles, where x equals interest rate
When confused, try changing each step of transaction to a cash transfer
Double-dipping is always a bad thing
Income in Kind
Petitioner worked for a hotel company as a manager; received room, meals
Not income – for the convenience of the employer
Dissent – he benefited; Glenshaw; would otherwise have to pay for meals/lodging
The fact that he didn’t have a choice makes it difficult to value what to tax him
Liquidity – tax system prefers money in hand to pay tax and feels its unjust to subject someone to a tax without there being a transaction or cash in hand.
This is why we don’t tax appreciated property until there’s a realization
Wins steamship tickets; reported income of 520; award is worth 1400
would cost 2220 if they had bout them separately
Judges notes that this is more than they would have ever spend on their own – but a substantial portion should still be included as income
119 and 132 are in response to this case
119 – Meal or Lodging Furnished for the Convenience of the employer
IRS doesn’t like this statute and limits it in Reg 1.119-1(f)
Fringe Benefit Problems
Employee of a national hotel chains stays in one of the chains’ hotels in another town rent-free on his vacation. The hotel has several empty rooms. At what point in time should we determine whether a room is empty?
§132 (b) à This is a no additional cost fringe, so the cost is excluded from income. The room can be empty either at the time of checking (likely IRS argument) or when the employee books the room (likely employee argument).
b. Same as (a), above, except that the desk clerk bounces a paying guest so Employee can stay rent-free.
§132 (b) does not apply because this does not come at no additional cost. BUT, §132 (c)(1)(B) does apply. This is a qualified discount, and employee gets to exclude 20% of the cost of the room from his income.
c. How do you know whether the renting of a hotel room is a service? How else might you characterize it?
The hotel is providing a service because the employer in this situation is not receiving any real property or any property from the hotel. He only receives the benefit of staying at the hotel.
d. Same as (a), above, except that Employee’s spouse and dependent children traveling without Employee use the room on their vacation.
§132 (h)(2)(A) à Use by a spouse and/or a dependent child = use by the employee.
e. Same as (a), above, except that Employee stays in the hotel of a rival chain under a written reciprocal agreement under which employees pay 50% of the normal rent.
§132 (i) à employee can exclude the amount he pays for the room.
f. Same as (a), above, except that Employee is an officer in the hotel chain and rent-free use is provided only to officers of the chain and all other employees pay 60% of the normal rent.
§132 (j) à The employee gets no fringe benefit in this case, not even the discounted rent that regular employees get. The non discrimination clause in §132 applies only to §132 (a)(1) and (2), however…
g. Hotel chain is owned by a conglomerate which also owns a shipping line. The facts are the same as in (a), above, except that Employee works for the shipping line.
§132 (b)(1) à this employee is not in the same line of business as the discounted room. He can get a discounted passage on a ship, but not a hotel room… No other provisions in §132 provide for exclusion, so no exclusion…
h. Same as (g), above, except that Employee is comptroller of the conglomerate.
§132 (b)(1) à does apply in this situation because the employee is in the same line of business as the employer in this case. Done to appease executives who donate lots of money to campaigns…
i. Employee is a salesperson in a home electronics appliance store. During the year the store has $1,000,000 in sales and a $600,000 cost of goods sold. Empl
lude the gain that would otherwise be recognized
Edward H. Clark
Petitioner hired tax attorney to do taxes; due to negligence, petitioner overpaid by 20k; received 20k in compensation for negligence
Com included 20k in petitioner’s gross income; argument is that this is Old Colony
Petitioner argues that this is compensation for damages/loss caused by error; court agrees – this is compensation for loss, the fact that it was taxes doesn’t change anything; not taxable
Raytheon Production v. Com
Antitrust claimed and won by Raytheon; Raytheon claimed 60k as income (value of patents) and treated the remaining 350k as realization from a chose in action and not as taxable income
Court – reimbursements for lost profits would be taxable, since the income (if received not in assistance of the suit) would be taxable. Where suit is for injury to goodwill, the recovery represents a return of capital and is not taxable. Here it is not for loss profits, it is for goodwill. But that does not mean not taxable income – this is the equivalent of a forced conversion, and Raytheon has no basis in its goodwill
Important – income streams do not come with a basis; assets come with a basis
Purchaser can get a basis in goodwill
Problem 2 on 88: Buy stock with adjusted basis of 20; FMV=90; sold for 88; claims loss of 2
She does not have a loss; she has a gain of 68 (Amount realized – basis)
Basis is not FMV
Part 2 of Problem
Taxpayer buys land for 5 (to basis); builds house for 10 (to basis); 5k for other people’s labor (to basis); 15k of his own time and effort (not basis; no basis in your own time; this is imputed income); basis = 20k; if sold for 50k, 30k of gain – now the system is taxing the imputed income because it has been captured in an asset