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University of Dayton School of Law
Searcy, E. Dale

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

·         (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”