A. Glossary of Basic Terms and Issues
1. Taxable Income: Gross income minus allowable deductions
2. Gross Income: All income from whatever source derived. §61
a) Adjusted Gross Income: The taxpayer’s gross income less her trade or business expenses. Defined in § 62
3. Marginal tax rate: The applicable rate of tax at each bracket level
4. Average or Effective Rate: The tax rate that is applicable to the taxpayer’s income as a whole
5. Amount Realized: Consideration. The actual amount exchanged
6. Gain Realized: Amount Realized – basis
7. Tax Credit: Is subtracted from the tax otherwise payable and does not enter into the computation of taxable income. It operates to give every taxpayer a tax reduction equal to the dollar amount of the allowable credit. Better for low bracket tax payers
8. Deduction: Only reduces taxes by the amount of the allowable deduction multiplied by the taxpayer’s marginal tax rate. Better for high bracket taxpayers
9. Personal Expense Deduction: Personal Consumption expenses must obviously be treated as non-deductable on the whole but a few exceptions:
a) Medical expenses, casualty losses, contributions to charity, interest on home-mortgage loans, and state and local income or sales taxes
b) Can be broken up into 3 categories:
(1) Involuntary and unexpected outlays which are large enough to exhaust a significant proportion of a taxpayer’s annual income. Extraordinary medical expenses for example
(2) Outlays which Congress wishes to encourage and subsidize. Contributions to charity is an example
(3) State and local taxes
II. Income in Kind
A. §61:Gross Income Defined (page 62)
1. Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to)….
B. Commissioner v. Glenshaw Glass Co. 348 U.S. 426 (1955)
1. Δ was awarded a payment for punitive damages for fraud and antitrust violations. Δ did not report the payment for the income tax of the year involved
2. Issue: Are punitive damages awarded in a suit for fraud and antitrust violations considered income?
3. Holding: There was an instance of undeniable accessions to wealth, clearly realized, and over which the taxpayer have complete dominion. The mere fact that the payments were extracted from the wrongdoers as punishment for unlawful conduct cannot detract from their character as taxable income to the recipients
C. Old Colony Trust Co. v. Commissioner 279 U.S. 716 (1929)
1. Facts: Employer was paying for employees taxes
2. Issue: Did the payment by the employer of the income taxes assessable against the employee constitute additional taxable income to such employee?
3. The payment of the tax by the employer was in consideration of the services rendered by the employee and was a gain derived by the employee from his labor. The form of the payment is expressly declared to make no difference.
D. Arthur Bengalia 36 B.T.A. 838 (1937)
1. Facts: Employee has been employed as a manager in full charge of several hotels. Employee was on constant duty and for proper performance of his duties and entirely for the convenience of his employer, he and his wife occupied a suite of rooms in the Royal Hawaiian hotel and received their meals at and from the hotel. His salary was fixed without reference to his meal and or lodging, and neither him or his employer ever regarded the meals and lodging as part of his compensation or accounted for them
2. Issue: Should the fair market value of the lodging and meals be included in Bengalia gross income?
3. Holding: There remains no doubt that the employee’s residence at the hotel was not by way of compensation for his services, not for his personal convenience, comfort or pleasure, but solely because he could not otherwise perform the services required of him. Under such circumstances, the value of meals and lodging is not income to the employee, even though it may relieve him of an expense which he would otherwise bear.
a) The advantage to him was merely an incident of the performance of his duty, but its character for tax purposes was controlled by the dominant fact that the occupation of the premises was imposed upon him for the convenience of the employer. When no free will it is much more difficult for the system to tax someone
b) Burden Shift: If the commissioner finds that it was received as compensation and holds it to be taxable income, the taxpayer contesting this before the board must prove by evidence that it is not income.
E. § 119: Meal or Lodging Furnished for the Convenience of the Employer (See pg 1077 §1.119-1(f) for examples)
1. Meals and Lodging furnished to Employee, His Spouse, and His Dependents, Pursuant to employment: There shall
-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 (definitions found throughout the statute)
2. Pay Attention
a) Reciprocal Agreements §132(i) pg 131: For purposes of paragraph (1) of subsection (a) (no-additional cost service), any service provided by an employer to an employee of another employer shall be treated as provided by the employer of such employee if
(1) Such service is provided pursuant to a written agreement between such employers, and
(2) Neither of such employers incurs any substantial additional costs (including foregone revenue) in providing such service or pursuant to such agreement.
b) Special Rules §132(j)(1) Discrimination pg 131: Exclusions under subsection (a)1 and (2) apply to highly compensated employees only if no discrimination. The fringe benefit must be available on substantially the same terms to each member of a group of employees which is defined under a reasonable classification set up by the employer which does not discriminate in favor of highly compensated employees
(1) If violated, the employees can’t use (a)(1) or (a)(2)
3. Spouse and dependent children are considered employees for (a)(1) and (a)(2)
4. Qualified employee discount calculation
a) Sales –cost of goods sold/sales=gross profit percentage
(1) Regular cost of item x gross profit percentage=amount that can be excluded
(2) Example: store has 1,000,000 in sales and 600,000 cost of goods sold. Employee buys 2,000 TV for 1,000.
(a) 1,000,000-600,000/1,000,000= 40%
(b) 2,000 x 40%= 800
(c) Take discount you gave employee (1,000) – gross profit percentage (800) = 200 included in gross income.
(d) If sold tv for 1200 then nothing would be included in gross income
IV. Imputed Income