Table of Contents
Gross Income
v Basics of Gross Income
o Defined
o IRC § 61
o Net Worth and GI
o Receipts
§ Defined
§ Loans as GI à (Loans are not part of GI)
§ Assets and Liabilities
§ Receipts in Kind à FMV of receipt included in GI
· Cash Equivalent Doctrine
· Imputed Income à (excluded from tax unless GI from self-employment)
o Adjusted Gross Income
§ IRC § 62(a) [Adjusted GI Defined]
§ Computing Personal Income Tax
o Assignment of Income à from lesson #21
v Inclusions in GI Generally
o Differing Forms of Compensation for Services Rendered
§ Payment of an Employee’s Income Taxes à (Included in GI)
§ Reimbursements of Expenses Paid by and Employer à (Excluded, but look at employer’s motive)
§ Fringe Benefitsà (Included in GI, but see exceptions)
· Exceptions under IRC § 132 (1) through (8)
· Notes on Fringe Benefits
§ Treasury Code § 1.61-2(d)(1) (Additional forms of Compensation)
· Services Paid for in Property à (Included in GI)
· Services for Services à (Included in GI)
· Options received as Compensation à (maybe Included)
· Contributions made to an Employee’s Trust à (maybe Included)
o Criminal Gains as Receipts to GI à (Included as GI)
o Child Support/Alimony Payments and Divorce à (Spouse supp. = Included as GI to payee/Deductible by payor; Child supp. = Not GI to payee/Not deductible by payor)
v Exclusions from GI Generally
o Gifts and Inheritances à (Excluded from GI)
o Awards and Scholarships à (Awards = Included in GI, Scholarships = Excluded from GI usually)
o Contributions to Capital à (Excluded from GI)
o Life Insurance Benefits à (Excluded from GI)
o Annuities à (return of capital = Excluded from GI; interest = Included in GI)
o Interest on Local/State Bonds à (usually Excluded from GI)
o Government Benefits à (usually Excluded from GI)
o Medical Insurance/Disability Payments à (Excluded from GI)
o Damage Payments à (usually Excluded)
Exclusions, Exemptions, and Deductions
v Introduction to Exclusions and Deductions
v Personal Deductions Generally
o Introduction to Personal Deductions
o Personal Deductions from either GI or AGI
o Standardized or Itemized Deductions
§ Standardized
§ Itemized
v Gifts as Exemptions from Incomeà (Excluded from GI)
o General Rules about Gifts
o Determining Gift Status
o IRC § 102
o Examples of Gifts and Non-gifts
o Gift Basis and Holding Period
§ Gift Basis Generally
§ Holding Period
v Inheritance and Incomeà (Excluded from GI, usually)
o Introduction
o Gift or Compensation
§ Inheritance to Employees à (Included in GI)
§ Income Derived from Gifts à (gift Excluded from GI, income resulting therefrom is Included in GI)
o Property Acquired from a Decedent (Lesson #15)
§ Inheritance Basis
§ Holding Period
v Business Expenses à (generally deductible)
o Introduction à The
o Basic Business Deduction Provisions
§ IRC § 162 (Trade or Business)
§ IRC § 212 (Expenses for Production of Income)
o Ordinary and Necessary Refined
§ Defining Ordinary and Necessary (expense must be both to get business deduction under §§ 162 or 212)
§ Necessary (meaning Appropriate or helpful)
§ Ordinary (meaning Foreseeable in light of type of business)
o Capital Expenditures in Business à (not Deductible)
§ Introduction to Capital Expenditures
§ Difference b/t Expense and Capital Expenditure
§ Determining if an item is Expensed or Capitalized
v Non-Business (Personal) Expenses
Cost Basis, Gain, Loss, and Accounting Fundamentals
v Cost Basis
o Introduction to Cost Basis
o Amount Realized
v Accounting and Tax
o Introduction to Accounting
§ Timing of Inclusion/Deduction
§ Main Methods of Taxation
§ Accounting Method is Choice of TP
o Cash Method of Accounting à Income when “received”, deduction when “spent”
§ Introduction to Cash Method of Accounting
§ Cash Equivalent Doctrine under the Cash Basis Method
§ Doctrine of Constructive Receipt
· Deferred Compensation and Constructive Receipt
· Prepaid Income
o Accrual Method of Accounting à Income when “earned”, deduction when “incurred”
§ Introduction to Accrual Accounting Method
§ Some Taxpayers are Required to use Accrual Method
§ Deferred Income and Accrual Accounting
§ Prepaid Income and Accrual Accounting
§ Dividends and the Accrual Method
§ Deductions and the Accrual Method
v Gains and Losses
o Gains in Gross Income à Included in GI [IRC § 61(a)(3)]
§ Introduction to Gains
§ Doctrine of Constructive Receipt
§ Realization Principal
§ Non/Recognition Principle à From Lesson #22
§ Gains and Property
§ Personal Casualty Gains
o Losses à Deductible if (1) loss sustained during current tax year, (2) not paid by insurance, (3a) loss from T/B, or (3b) loss from transaction for trade/profit, or (3c) loss from casualty
§ Introduction to Losses
§ Trade or Business Losses à Deductible under IRC § 165(c)(1)
§ Investment and Profit-seeking Losses à Deductible under IRC § 165(c)(2)
§ Personal Casualty Losses à Deductible under IRC § 165(c)(3)
§ Hobby Losses à Not deductible, but if motivated by profit, maybe deductible under IRC § 162
v Capital Assets
o Introduction
o Is it a Capital Asset?
§ General Rule à all assets are capital unless excepted!
§ Major Exceptions
· Pr
taxpayer
· (2) Taxpayer must have dominion and control over it
· (3) The amount must be capable of valuation
· Determining if an item is “income”
o Factors to consider
§ Dominion and control (if employee has dominion and control à income)
§ Necessity (if necessary part of employment à excluded)
§ Requirements of employer (if “item” required by employer à excluded)
§ Basic Benefit (if basic benefit à excluded)
§ Accession to wealth (the more clearly item is accession to wealth à income)
§ Valuation (easier to value à income)
· Receive something that has a FMV (can be valued) but which we want to exclude from gross income because it’s value is very subjective to the person who receives it
· Relationship b/w recipient and the asset is such that it makes it hard to value in recipient’s eyes
o Excluded from income ß (factors) à Include in Income
§ Forms of Income
· Income does not have to be received in cash à the receipt of property/services/like-kind-exchanges are all treated as income
o Example: A is an employee of B-Corp, and receives a company car and housing as a fringe benefit of his employment. These additional (non-cash) benefits are taxable even though not received by A in cash form
· Under IRC § 61, all income from whatever source must be declared income even if the IRS would not otherwise know about it
o For example, IRS would not know if person found $2,000 on the ground, but, this is a windfall à taxable.
o Net Worth and GI
§ Today’s View on “What is GI?”
· Prevailing Rule Today à Gross income is anything that increases NET WORTH!
o Basically, if an item does not increase a TP’s net worth, it is not GI
§ Examples of Increases (and non-increases) in Net Worth
· Example 1 à Loan Repayment (not taxed)
o If you give someone a loan which they subsequently repay, your net worth would not increase, so excludible in GI
o This is called a “Return of Capital”, see next example…
· Example 2 à Return of Capital (not taxed)
o When you invest money, the amount you invested originally which returns to you is not taxable, but, gains over and above the amount you invested are taxable!!
§ A buys B stock for $50. A sells it for $55. Only $5 is taxable b/c $50 is a “return of capital”
