Federal Income Tax Outline
ü A TP wants to Postpone the payment of taxes [Basic Assumption For TP’s] ü The Treasury wants present payment of taxes [Basic Assumption For Treasury] o ALL ABOUT THE TIME VALUE OF THE $ (72/x)
o This means that disputes generally about a deferral vs. present payment of the tax, not usually about total forgiveness of the tax.
ü Watch for Double-Dipping
1) Taxable Income: Gross income – Allowable Deductions = Taxable Income
a) Functionally makes taxable income like net income/ net profit
2) Gross Income (§61)- “All income from whatever source derived” (wages and salaries, dividends, interest and rents, gains from the sale of investments)(watch out for capital gains & dividends)
3) Exclusions: Those things that are never included in the reach of gross income, never enter into computation of the tax. Basically has the effect of taxing excluded item at 0%.
4) Deductions: Outlays that are subtracted from gross income to reach the taxable income.
a) Marginal tax rate∙ amount deducted = after tax $ benefit of deduction
i) Business expenses (the costs of earning gross income)
ii) Personal Deductions are disallowed but there are some exceptions:
(1) Extreme medical, Casualty loses, Interest on home mortgage loans, Charity expenses
(2) Three Justification categories for allowing personal deduction (1) Personal expenses that Congress wants to encourage, (2) extreme expenses that are involuntary or unusually (3) state and local taxes.
iii) The standard deduction: an alternative to the above deductions for people who do not itemize
5) Credit: Credits are subtracted from the tax that would otherwise be payable. A $ for $ reduction of the actual tax to be paid (rather than a subtraction from gross income). Not a factor in taxable income.
a) Lower income benefit from credit, higher income benefit from deduction.
6) Gain Realized: gain on sale – taxpayers adjusted basis
7) Capital Gains: Long v short term
8) Basis: the amount that the tax system says you should be able to recover before it can be said that you have been enriched.
a) Hypo: Gold bar is found, worth $500, reported in Y1, and taxed. In year 2 it is sold for $600, only taxed on the $100. (Often it will be about running something through the tax system in order to earn as basis)(tax-free merger vs. taxed merger-buying goodwill).
Income & Income In Kind
1) Gross Income [Always step one in tax questions].
a) §61: Gross income: “all income from whatever source derived”
b) Cases: Interpretations of the question, what is gross income?
i) Eisner v Macomber (1920).
(1) Introduced a “gain from labor” definition. Proved difficult to apply. What if no labor ( A finds gold bar?, A wins the lottery?).
ii) Commissioner v. Glenshaw Glass Co. (1955)
(1) Income: “accessions to wealth, clearly realized, and over which the taxpayer have complete dominion.” (Recognizes Congress’ intent to tax gains).
(2) Provides a workable definition of income, and makes;
(a) punitive damages taxable (punitive damages are part of gross income)
(b) “Source” irrelevant
(c) Income questions about enrichment.
c) Items which are not income
i) Imputed Income (Key Concept: Don’t avoid income)
ii) Capital Recovery
iii) Loans/Borrowed Money (Key Concept for Later Problems)
2) Income In Kind
a) Income received “in kind” are those receipts in a form that is not cash. In kind income obviously creates problems; importantly in valuation and realization.
b) Accession to wealth v. Realization of wealth.
i) Not taxed on all accessions to wealth (home gaining value, stocks gaining value, etc.), not taxed until it is sold and that wealth is realized. [Watch out for realization but no recognition].
c) Old Colony v. Comm.
i) Payment of a TP’s tax obligation by another results in income to the TP. Willy Wood got taxes paid for him. Court: payment of tax grew out of employment context/ is compensation for services. Was a benefit/gain and is taxable. An “accession to wealth, clearly realized.”
ii) Repayment of a personal expense is includable in taxable income. [Ex’s: If my employer pays my credit card bills, or my car loan, or my VISA bill it is all taxable income.]
d) P. “Don’t be fooled by separate transactions,” — Just get from A to B.
i) 1 check for $110 ($100 & $10 to you to pay taxes) or 2 checks ($100 & $10 to IRS for your taxes). The form of payment makes no difference, it is the benefit that matters- accession to wealth.
ii) Could not be a gift. (See) (Cannot have gift between employer and employee).
iii) Zeno’s Paradox Fails
e) Arthur Benaglia
i) Allowed to exclude room & board from his gross income. Convenience of the employer. Court wil
benefits only to highly paid executives(2) Providing to only highly-paid would also increase the likelihood that it is just non-cash compensation, conflict with Old Colony.
3) §132(a) Gross Income does not include fringe benefits which qualify as a:
a) No additional cost service:
i) Must be in the ordinary course of business (the line of business limitation).
ii) employer must incur no substantial cost in providing the service
(1) Non-discrimination applies §132(j)
b) Qualified employee discount:
(1) (Can Not be real property/investment property) Cannot exceed gross profit percentage.
(1) 20% at which offered to customers
iii) Non-discrimination applies §132(j)
c) Working Condition Fringe
i) Provided to employee to extent that it would be deductible under §162 (trade/business) or §167 (depreciation). (Ex. Employer supplies professional journal, which employee could deduct if bought herself; office equipment, meals, lodging and transportation while on business).
d) De minimis fringe
i) If FMV is too small doesn’t have to be included (cumulative/frequency included)
(1) Eating facilities are included if
(a) On or near business premises and
(b) The facility at least breaks even
e) Qualified transportation fringe
i) Includes commuter transportation, transit pass, qualified parking
ii) BUT the aggregate of those cannot exceed certain $ caps
(1) 60 (for commuter transportation + transit pass) or 155 (for parking spot)
f) Qualified Moving Expense Reimbursment
i) As long as it would be deductible as a moving expense under §217
g) §132 (h) Certain Individuals Treated as Employees
i) Retired/disabled + spouse,
ii) Spouse & dependent children
h) §132(i) Reciprocal Agreements
i) For no-additional cost services can have reciprocal agreements with others